Key imperatives in the Indian e-tailing value chain

Updated: November 25, 2016 11:15 AM

The e-tailing value chain consists of multiple mainstream and niche players and each player brings specialized skills and capabilities such as generation of demand, sourcing of products...

e-commerce industrye-tailers can leverage digital marketing and data analytics enabling them to anticipate customer needs while providing the right product assortment to the right customer at the right time.

The e-tailing value chain consists of multiple mainstream and niche players and each player brings specialized skills and capabilities such as generation of demand, sourcing of products and services, payments, and delivery to customers.

The e-tailing model is not very different from the traditional brick and mortar retail – The key differences between online and physical retail include lack of proximity with the customer, dependence on technology, quick anticipation and fulfillment of customer demand, and, managing complexity of delivery logistics. These differences create a new set of imperatives for India’s e-tailers to consider in order to succeed in this fast growing market.

Today customers find a lot more product information online to help them in the decision making process. The ability to address the need for ‘instant, comprehensive and unbiased information’ anytime and anywhere acts as an important differentiator, both, amongst the online retailers, as well as, from the physical retailers. While physical stores allow customers to ‘touch and feel’ the product at a physical store, e-tailers have to depend on information they can provide on the web to attract and retain customers. However, e-tailers can leverage digital marketing and data analytics enabling them to anticipate customer needs while providing the right product assortment to the right customer at the right time, along with the expected information through either developed or crowdsourced content.

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Another challenge for e-tailers is that not many Indian customers trust online payments. This has led to the growth of alternate payment solutions including cash-on-delivery (COD) and two step payments (payment is held in a central account and transferred to the vendor on confirmation of product received by the customer). While COD has contributed significantly to growth of e-commerce in India, it is a particularly expensive option for e-tailers. This is due to high working capital requirements and the risk of order cancellation or the customer’s refusal to accept the product. A recent Nielsen report suggests that COD accounts for almost 15 per cent of transactions globally. However, in India, COD accounts for almost 80 per cent of the transactions. Clearly, there is a need to build customer confidence in online payments, either at the time of order or delivery, to reduce the percentage of COD transactions in the payment mix.

In a physical store, the purchase is handed over to customers in real time leading to instant gratification. However, online retailers have to find ways to minimize this lack of instant gratification and the associated costs in the form of last minute cancellations and product returns. The key imperatives for online retailers are minimizing the lead time (often same day or next day delivery) and looking at means of keeping the customer positively engaged in the time between order placement and delivery.

As per industry analysts, product returns are usually a reflection of challenges in other parts of the value chain such as poor product quality, inadequate product description on the site and inadequacies in delivery leading to damaged products. “Reverse pick-up” costs are 40-50 percent higher than forward shipment costs. Hence, e-tailers need strong strategies to minimize product returns and reduce these costs.

As e-tailing grows, there is tremendous potential for associated value chain activities to grow. Setting up of Assisted Outlets is an interesting value proposition which will open up the online retail market further by satisfying needs of currently undeserved customers. Here, customers can browse through online catalogues, ask questions and place orders over the counter. These can help e-tailers access two new customer segments – those who have internet access but are wary of online shopping and those who do not have internet access but aspire to buy. In a successful example, eBay has tied up with Argos in the UK, wherein eBay buyers could pick up their purchase from a nearby Argos store. Another interesting function of these outlets would be to act as ‘common’ reverse pick up points where customers can return products of multiple e-tailers. These pickup outlets can act as the first point of claim validation and serve as a reverse pick up aggregator; thereby reducing the costs associated with product returns.

There is also a significant room for growth of innovative and technologically advanced payment solution providers. Payment success rate is the single largest critical success factor for use of online payments. For most sites, the success rate of payments on purchases is not more than 60-65 per cent. It is estimated that even a 1 per cent improvement in success rates can add Rs 20 crores to the topline of large e-tailers. eWallets, relative newcomers to this space, are now challenging well established aggregators such as BillDesk and CCAvenue on the back of better and seamless technology, and merchant friendly analytics & reporting. ‘Wallet on Delivery’ is another solution some of the market leaders are working on to get rid of their working capital woes and problems in handling Cash.

Logistics is the most crucial link in the e-tailing value chain and is currently the single largest strategic challenge faced by Indian e-tailers today. One of the critical success factors in logistics is to have an agile supply chain, which can provide reliability and speed; often – same day or next day delivery, anywhere in the country. According to the World Bank, India ranks 54th out of 160 countries on the Logistics Performance Index – indicating severe inefficiencies in the logistics chain in India. Many logistics companies have sprung up to rise to this challenge. Even e-commerce companies such as Flipkart and Jabong that have made investments in this space. However, these efforts are largely focused on Metros and Tier I cities. Cracking the logistics business model in Tier II and III cities represents a huge opportunity. There is a need to build reach in Tier II and III cities which are pegged to be the next frontiers of e-tailing growth. This calls for innovation, as standard models are not applicable to small towns due to low volume and scattered nature of pick up / delivery points. The key here will be the ability to drive costs down and maximize revenue from a single trip. Logistics providers could look at a model where they provide multiple services – for example delivery, returns pick up, warehousing, cash on delivery, to multiple e-tailers so that they are able to maximize revenue from a single run.

Clearly, there is a need for having multiple partners catering to pick up, warehousing and last mile delivery in different parts of the country, managing seamless integration between the e-tailers and their systems. Also, it is critical to ensure that the customer is always informed real-time about the whereabouts of the order. Customers seem to be more amenable to accepting delays in order fulfillment if they are kept informed in advance.

Warehousing is also a challenge due to the presence of a large number of promoter run, stand-alone warehouses, with limited IT enablement leading to stock outs / delays in delivery. The warehousing challenge may be solved by the entry of specialized third party warehousing providers / warehousing space aggregators. The service providers will need to enter into agreements with existing warehousing space owners and provide managed services – bringing in standardized IT systems and trained manpower to provide flexible warehousing to a spectrum of e-tailers including large and upcoming small e-entrepreneurs.

To conclude, the developing e-tailing sector in India is going to play host to an abundance of new opportunities. This will be supported by both demand side drivers as well as positive regulatory changes. While some potential white-spaces and corresponding opportunities have been outlined, multiple others will arise as the e-commerce space evolves in India. When evaluating the opportunities in detail; businesses will need to ask themselves multiple questions to arrive at an optimal business model. These include strategic questions of where will they play, what will be the scope of their services, which revenue models will be best suited as well as operational decisions on processes, IT enablement, skill sets and capabilities.

Prabhjit Didyala is Managing Director, Strategy for Accenture in India. Kiranjyot Kaur is Manager, Strategy for Accenture in India. The views expressed here are personal.

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