Things  should be known about industry : Source : business – standard newspaper

In a report on e-commerce, however, broking firm Motilal Oswal says that this is just the start of a multi-year growth for the e-commerce sector in India. Indian retailers, therefore, do not have to be too concerned as despite strong growth in USA and China, e-tailing is still only 5-6% of total retail sales there.

Here are five interesting insights from the report.

  1. India is almost 10 years behind China in the e-commerce space. China’s inflection point was reached in 2005 when its size was similar to India’s current market size. Thankfully for India the dynamics currently are similar to what existed in China then – growing broadband penetration, acceptance of online marketplaces, and lack of physical retail infrastructure in many places.
  2. Forget the Flipkarts, Snapdeals and Amazons. Travel is where the real money in India’s e-commerce is. Online travel accounts for nearly 71% of e-commerce business in India. This business has grown at a compounded annual growth rate (CAGR) of 32% over 2009-13. E-tailing, on the other hand, accounts for only 8.7% of organised retail and a minuscule 0.3% of total retail sales. Even within sales of physical goods, books are a mere 7% of total book sales, mobile phones are 2% of all handsets sold, and fashion goods sold online are just 1%. Online jewellery sales account for only 0.2 per cent of all jewellery sold. Motilal Oswal, however, expects e-tailing to pick up with a focus on fashion.
  3. Alibaba is an outlier when it comes to margins and making money in the e-commerce ecosystem. The Chinese company makes an operating profit of 40% compared to industry standard (US and China) of 8-10%. Travel sites typically make 2.3%. Amazon, the industry pioneer, is yet to achieve healthy profitability even after two decades of dominance. Indian players, the report points out, are not even thinking of profitability yet. It’s a game of market share and market penetration, causing all serious players to have a war chest ready for when the industry scales multiple times.
  4. For every Rs 100 spent on e-tailing, Rs 35 is spent on supporting services like warehousing, payment gateways, and logistics, among others. Delivery costs a platform owner 8-10% implying significant burn. Though 50-60% of delivery logistics today are handled by large e-tailers themselves, this proportion may reduce going forward as the participation of lower tier cities picks up. Presently, aggressive pricing in India is leading to e-tailers making losses on every segment. For a Rs 100 sale of a book, the e-tailer incurs a loss of Rs 24, a loss of Rs 13 in mobiles, and Rs 8 in apparel.
  5. Demand in India exists across 4,000-5,000 towns and cities, but there is no significant presence of physical retail in almost 95% of these. High real estate cost is one of the main reasons why organised retail is unable to expand at speeds expected earlier. Real estate as a percentage of sales is 14 times higher than in the US. For large retailers in India, it is 7% of sales as compared to 0.5% for Walmart.

Source : Crisil Report on e-tailing

Online retailing shadow over physical retailer financials

The rapid growth of online retail is, in a sense, reflected in the deteriorating financials of physical retailers over the past 3 years. At an aggregate level, operating and net margins of companies such as Shoppers Stop, Cantabil, Kewal Kiran, Provogue, and Trent have all shown a declining trend. Even operating parameters such as same-store sales growth, conversion ratio and sales per square feet have been on a decline. For example, in the case of Shoppers Stop, sales per square feet have declined from Rs 8,518 in 2010-11 to Rs 7,837 in 2012-13, while the conversion ratio has come down from 24 per cent to 22 per cent over the same period.

Traditional retailers being forced to move online

To stay in the game, traditional retailers have been working on their internet strategy. For instance, Shoppers Stop, which started its online store in 2008, has boosted presence and improved features and user interface to bring its online visage on a par with leading e-commerce websites. The company is also trying to leverage its physical network by giving customers the option to return products at its stores. Apart from Shoppers Stop, Croma has an online store with options such as store pickup and cash on delivery. Even manufacturers of retail products such as Titan Industries (watches, jewellery, eyewear, etc) and Aditya Birla Nuvo (apparel – Allen Solly, Louis Philippe, Peter England, etc) have set up beachheads in cyberspace. Going ahead, we believe more and more traditional retailers will board the online bandwagon.

Ample proof traditional retailers can compete well online

What we are witnessing in India today played out in the US about a decade-and-a-half back. That was when today’s big daddies such as eBay and Amazon debuted. In the next 4-5 years, by the turn of the century, they had become big enough to pose a threat to traditional retailers such as Wal-Mart, forcing them to come up with online strategies of their own. Today, after nearly a decade since the seismic shift began, some traditional retailers boast of a large online presence.

Similarly, physical retailers in India will have to establish their presence online quickly. And, with the rightstrategies, they can even compete effectively. For instance, to tackle the queue problem at its stores, Wal- Mart allows customers to shop online and opt for either home delivery or store pick-up. Today, Wal-Mart is among the top 5 online retailers in the US with estimated revenues of USD 10 billion in 2013 from the online segment alone. There are other examples as well, such as BestBuy and Toys“R”Us, which have developed a significant online presence over the past decade and are now among the top online retailers in the US.