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  1. Column: Riding the e-commerce surge

Column: Riding the e-commerce surge

Time for e-commerce companies to tie-up with mobile wallet providers and banks.

By: | Published: June 11, 2015 12:26 AM

Fifteen years back, who would have thought that Indian e-commerce, with humble beginnings in online job portals and matrimonial sites, would one day be valued at $14 billion, and grow annually at 33 %? The e-commerce story so far has been remarkable in more ways than one. It is dominated by 20-30-year-olds, mostly pass-outs from hallowed institutions such as the IITs and the IIMs, and very few of the ventures have been in existence for more than five years. The billion-dollar dream finds resonance with these founders more than any other. Already, there are six companies which have a valuation of more than $1 billion. This sort of blitzkrieg strategy that most swear by, has not had too many parallels in the history of corporate India. Despite humongous growth and scintillating future prospects, the market remains skewed. On-line travel accounts for 70 %, and e-tailing, at 17%, is only a distant second, though its growth in the last five years has been as much as six times.

Last year, the global e-commerce market was valued at $1.5 trillion, with an annual growth rate of 20%, of which Americas have the largest share followed by Asia-Pacific. Fuelled by the Asian growth engine, this gap is closing very quickly. In terms of revenue, China and the US continue to remain perched at top spots. This phenomenal growth is driven by 300 million internet users, 950 million mobile connections, increased spectrum made available to the telcos, proliferation of affordable smartphones, competitive tariff plans, etc. Admittedly, internet penetration, at 20%, remains low. Mobile is driving internet penetration today, especially amongst the less affluent members of society. The Digital India initiative and its grand plans of connecting 2.5 lakh villages through NOFN, is going to be a very important lever for the industry’s growth in the future.

Growth of e-commerce relies heavily on mobile apps—yet another high-growth segment, with annual growth rates close to 27%. With reference to the net neutrality debate, it needs to be mentioned here that India houses some 2,000 start-ups that are purely in the business of developing apps. In toto, the number of start-ups in this country is 3,100, the third-highest globally. They need an unfettered access to the internet and cannot afford to be discriminated against, based on price or non-price parameters. The argument in favour of net neutrality, and its criticality, could not have found a more opportune time and relevance.

The payment landscape lacks maturity and is yet to evolve. Market penetration of debit and credit cards remains inadequate and cash-on-delivery, a rather cost-ineffective mode, is the preference. At wafer-thin margins, this burden should well be dispensed with. It is also an opportunity for e-commerce companies to tie-up with mobile wallet providers and banks, to come up with feasible products. Understandably, the eco-system is rather nascent and regulatory bodies must put in place a suitable framework.

The top firms today are flush with funds. Last year alone saw 53 deals worth $3.2 billion being secured, as against $587 million in the previous year. The slugfest between the likes of Amazon, Flipkart and Snapdeal—that is often showcased in the media—has been made possible because of this. The big boys are big not just in terms of volume, but equally in their propensity to burn cash. How long can this be sustained, and in addition, is there a rationale behind all those multi-billion dollar valuations? It is now clear that all cannot survive and as the end-game nears, we are seeing a swathe of M&As. In a bid to go horizontal and increase on service lines, firms will take this route to consolidate. The Flipkart-Myntra deal is a case in point—a strategy to enter the fashion segment of e-tailing. The speed at which expansion is happening can only be sustained through inorganic growth.

Presently, 100% FDI is allowed in the B2B segment, but not so in B2C. Even this limited dispensation has attracted widespread criticism from brick-and-mortar retailers, triggered by declining share values in the wake of deep discounts offered by e-tailers. A 100% FDI is possible through the “marketplace” model and such recurrent cash burns can only be set-off in the short- to medium-term through deep pockets. Arguably, domestic funding from PSU banks is harder to come by for this sector. Consequently, a strong representation for 100 % FDI in B2C has also been made, to enable tech-enabled e-commerce companies to expand their outreach, raise investment in infrastructure development and in general, accelerate the pace of migration to a digital economy.

As an aside, how real is the fear that FDI in retail would put mom-and-pop stores out of business? Despite the fact that FDI in multi-brand retail is already allowed to the extent of 51%, organised retail accounts for only 10 % of the total retail market even now. In the long run, a firm’s wherewithal to sustain low pricing and offer convenience, will be efficiency and data-driven. That’s where e-tailing comes in. The convenience, choice and price advantage that it offers makes it a sure-shot choice of customers. It is just competitive advantage. Trying to stop this inevitable trend is like King Canute bidding the waves to stop rolling in. In this game, data scientists—the modern-day generals—are the most prized of the lot who have been entrusted the job of churning out these numbers. In this war there are no PoWs, only capture of market share, but yet it is just as bloody!

The author is president, Nasscom. Views are personal

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