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Is the Indian e-commerce sector ready for the next level of consolidation?

The Indian e-commerce sector was abuzz with the conversations of a probable merger between two of India’s biggest e-commerce players – Flipkart and Myntra, perhaps one of the biggest developments after the arrival of Amazon in India. Even as the merger is unlikely to happen now, with Myntra opting out and going for a fundraising deal, the development itself signifies that the Indian e-commerce sector may be ready for some consolidation.

In the past few quarters, Flipkart, reportedly valued at USD 1.6 billion, has raised USD 540 million so far. On the other hand, Myntra is as of now in the final stages of sealing the funding of USD 50-million from PremjiInvest, with its valuation standing at USD 130 million.

Sachin Oswal, Infibeam

Sachin Oswal, Infibeam

Consolidation in Indian e-commerce: An imminent reality?
India’s e-commerce market stands at nearly USD 3.1 billion (excluding online travel industry), but it is expected to grow by over seven times to reach USD 22 billion in five years, according to a report published in November 2013 by Crédit Lyonnais Securities Asia (CLSA). The sudden shooting up of the e-commerce space has seen several repercussions, right from soaring sales, to dropping valuations and quick consolidations, such that the conversation between Myntra and Flipkart. “It is imminent for the big players in the e-commerce race to consider consolidation for the customers’ as well as the industry’s sake. While consolidation will give more choice to consumers and open up the market, thus building trust in online retail; the industry as a whole will benefit out of technology development and innovation,” said Sachin Oswal,Co Founder and COO, Infibeam.com, an e-commerce player in India.

But given the current size and high potential of online shopping in India, the effects of consolidation can be huge. “Indian e-commerce is far from consolidation. With only less than 0.5 per cent of total retail that happens online today, the market presents a very compelling and secular growth of opportunities. However, if consolidations happen too quickly, it can limit innovations, entrepreneurship and flow of capital to start-ups,” opined Radhika Agarwal, Co-Founder & Corporate VP –Marketing & Merchandising, ShopClues.com, a multi-category e-commerce player in India.

With regulations hanging around Foreign Direct Investment in Indian e-commerce, it is only a matter of time that Amazon aggressively starts its India expansion, having already studied Indian e-commerce trends and consumer behaviour with Junglee.com (Read what Amazon India’s Amit Agarwal has to say here) This is the right time for Indian e-commerce players to lay strategic moves. So what lies ahead for Indian e-commerce space?

Radhika Agarwal, ShopClues

Radhika Agarwal, ShopClues

#1: Horizontal e-commerce players acquiring category firms: 2012 and 2013 have seen many e-commerce players acquiring and consolidating. Flipkart acquired electronics retail firm Letsbuy.com for USD 25 million. Apparel retailer Zovi bought another player in the same category – Inkfruit. Also, lifestyle retailer Fashionandyou.com acquired cosmetics retailer Urban Touch. E-commerce portal Yebhi bought lifestyle and fashion retailer Stylishyou.in, and Myntra acquired online fashion brand SherSingh. And another big news was that of eBay buying stake in deals e-retailer Snapdeal.

According to data, there are close to 10 million e-commerce users in India, and a large number of players are vying for a pie of this. The sheer number of of multi category players has created a huge ‘me-too’ proposition, with little differentiation among them. Some of the existing players are thus acquiring niche companies to expand into other categories, which they have not been able to do so organically. For instance, with the acquisition of Letsbuy.in, Flipkart was able to have a strong hold in electronics e-retail.

Pratik Kumar, Zivame

Pratik Kumar, Zivame

#2: Greater emphasis on building differentiation: Maintaining differentiation in this competitive market will be the go-to strategy for players in the space, right from customer experience to visuals on the site. “Device independent websites (responsive design) will see a dramatic shift towards mobile and tablets. The content will become more visual and interactive. Using big data & data science effectively will help to deliver personalised offerings, predict trends and conduct segmented marketing through various digital channels,” said Pratik Kumar, Director – Digital Marketing, Zivame.com, a niche e-commerce player in India, which recently received USD 6 million in funding via UTV’s Ronnie Screwvala.

“Offering a wide selection (category players) or extensive, unique choices (niche players in e-commerce), strategic pricing, and not discounting; and concentrating on on-time deliveries will transform into emergence of stronger e-commerce players,” adds Mr Oswal.

#3: Customer acquisition and retention in smaller towns: After having developed a trust factor in the urban areas, the Indian e-commerce biggies are now fully concentrating on acquiring and retaining buyers from smaller towns in India. A very prominent move in this direction is the investment in mainstream TV and print advertising by these firms, thus reaching out to the masses. Most e-retailers agree that around 60 per cent of their orders are placed from the top 10 cities and as high as 40 per cent come from smaller towns. This ratio was 80:20 five years back. “India witnessed e-commerce boom in the last five years, however, the past two years have seen sales shoot up in a big way. Interestingly, even Tier II markets are showing close to 50 per cent of our sales. And for a platform like ours, we see many brands embracing this channel,” said Sandeep Komaravelly, Vice President – Marketing, Snapdeal.com.

Sandeep Komaravelly, Snapdeal

Sandeep Komaravelly, Snapdeal

#4: Greater investments in technology and logistics: Now, with higher frequency of consolidation in this space, there will be added impetus to reach out to more customers, and as a result, investments in technology and logistics are poised to grow. “Product discovery through personalisation will change the dynamics of this industry in a big way. However, the challenge will be to make the product discovery relevant to each customer. Here is one of the areas where investment in technology will take place,” said Mr Kumar.

Another investment area will be into logistics. Most of the e-commerce biggies in India have their own logistics network. However, it is to be noted that only 10,000 out of more than 150,000 pin codes in India are covered by courier companies, while over 50 per cent of the logistics cost for e- commerce companies is attributed to last-mile delivery.

#5: Already a cash-crunched industry, now fighting for more funds? E-commerce was the ‘poster boy’ for Venture Capital (VC) companies in early 2010s. However, investors are choosy about companies they fund. As per reports, over the past three years, 52 e-commerce companies in India have managed to raise about USD 700 million in VC funding. It has to be noted that a large portion of this funding has gone into one company – Flipkart. Multi-category, large inventory-driven e-commerce companies such as Myntra, Flipkart, Yebhi and Jabong may require funding to the tune of USD 200 million to embrace profitability. E-commerce companies having common investors are those to watch out for in 2014, as they are most likely to see consolidation.

Especially when one of the companies funded by VCs is not doing too well, a merger/buyout may be on the cards, a trend going ahead. Also, investors are extensively looking for companies that are not capital intensive, as seen by the recent rounds of funding in India. The Myntra-Flipkart conversation may have forced the industry to reckon with an e-commerce giant but the more important takeaway is that this is not the last we have heard of such developments.

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