Over the next five years, the e-retail market is estimated to increase to $150–$170 billion (growing at 25%–30% annually) which will double the market penetration to 9%–10%, according to a new report titled ‘How India Shops Online 2022’, released by Bain & Company in association with Flipkart. The sustained e-retail growth is supported by strong underlying fundamentals, a large consumer base with rising affluence, albeit from low levels currently; growing Internet and smartphone penetration enabled by low data prices; and low shipment costs. As per the report, the pandemic has been a crucible moment for online retail in India, driving a 12-month acceleration in market penetration (~5% in 2022) and a market growth of 25%, which takes the market to $50 billion in 2022.
There are distinct micro-segments of online shoppers emerging across geographies, income segments and ages, that exhibit distinct shopping behavior online, Arpan Sheth, partner, Bain & Company, said. “For instance, shoppers from tier-2 or smaller cities frequently use vernacular platform interfaces, low middle-income shoppers prefer free delivery over fast delivery, and shoppers belonging to the GenZ age group (less than 25 years) use social media and image search to discover products online. Brands and e-retail platforms will continue to innovate on business models to curate experiences for each cohort,” Sheth added.
The report further revealed that India with its 180–190 million online shoppers in 2021 has the third-largest shopper base globally and is well poised to surpass the US as the second largest in one to two years. It added that majority of future e-retail shoppers are already in the digital funnel, with only 40% of social-media user base shopping online in 2021.
It further added that the category mix of online purchases will also evolve. In 2022, mobile phones, electronics, and appliances account for 45-50% share of the e-retail market. Over the next five years, fashion, general merchandise (including personal care), and grocery, will grow disproportionately and account for two-thirds of the e-retail market. Fashion is a crucial category to onboard shoppers as more than 40% of new shoppers bought fashion in their first online purchase. While fashion continues to be the gateway category and is expected to see an annual growth of 30-35%, general merchandise and grocery is expected to grow 35-40% annually.
Interestingly, in 2021 alone, 40–50 million shoppers were added and in the next five years, the online shopper base is estimated to increase to 400–450 million. Most of these new shoppers (about 60%) come from tier-3 or smaller cities. A new generation of digital natives—Gen Z (18–25 years of age)—has started transacting online with one in three shoppers being from this cohort and will become a critical cohort in the future.
India’s evolving e-retail market has been marked by multiple disruptions over the past 12 to 18 months. The pandemic has steered India’s e-retail market into phase 3.0 of its evolution—an era of innovation and disruption. This phase includes the emergence of shopper micro-segments; the introduction of novel business models; and the use of technology to deliver a bespoke, life-like customer experience to shoppers.
In this phase of growth, multiple disparate shopper cohorts—based on geography, income, and age—are coming online and each of these micro-segments exhibits distinct shopping behavior with exposure to technology-led disruptions that have enhanced the online shopper experience, the report highlighted.
In tier-3 or smaller cities, Made-for-Bharat innovations such as voice- and vernacular-based search have continued to gain traction, with more than two-thirds of vocie and vernacular users hailing from these towns. Other customer experience innovations such as AR/VR and AI are bringing the offline store experience to customers to make shopping easier. Metro/tier-1 cities are driving adoption of AR with 60% shoppers from this segment and is used primarily for large-sized products such as furniture, large appliances. One in three shoppers in 2021 belong to low-to-middle income segments and seek easy discovery and rely more on image-based search. They also prefer free delivery over fast delivery. Gen Z shoppers frequently use wish lists to shortlist products before adding items to the cart.
Growing online population, ubiquitous data and rising incomes are the primary drivers of the tremendous growth of ecommerce, Sankalp Mehrotra, vice president, monetisation, Flipkart, said. “And there is a huge headroom to grow from here on. Commerce advertising as a consequence is already ~15-20% of the digital adex. We expect it to grow faster than digital and become a $3-$4 billion opportunity by 2025. The traditional marketing funnels are collapsing. All parts of consumer journeys from product discovery to product search, feature comparison and the eventual purchase are happening on singular platforms. This is also creating a verticalisation of user searches. As users continue to migrate, so will the brands. Growing reach, opportunities across video, search, display, etc. – both on and off platform clubbed with full funnel measurement makes commerce advertising a compelling proposition for all marketers.”
The central government is also playing an important role in this space through the creation of the Open Network for Digital Commerce (ONDC) which aims to create an interoperable network for digital commerce akin to Unified Payment Interface (UPI) network for payments, the report said. “Although a nascent initiative, its successful and full-scale execution could provide a fillip to the Indian e-retail ecosystem,” it added.
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