Opportunities and Challenges in the Ecommerce Sector in India

Analysts believe that online shopper penetration could grow to 20 per cent by 2017

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With a citizenry of 1.25 billion that includes a large young, mobile-first generation—many of whom share English as a common language—plus an emerging middle class, India presents significant growth opportunities for retailers from across the world. Following the recent news that the Indian government's Department of Industrial Policy and Promotion would officially allow up to 100 per cent foreign ownership of e-commerce marketplaces, both offline and online retailers operating there have amassed some decisive new advantages.

That "marketplace" facet is important, however. Indian administrators have also decided that e-commerce companies capitalizing on the new rules must be in the business of providing technology platforms that facilitate trade between buyers and sellers, as opposed to an old-fashioned, "inventory-led model" where a retailer owns the goods he sells.

The Opportunity:

Even prior to the new guidelines, India posed a doubtlessly intriguing opportunity. The nation's "modern trade" (including mall-based stores, chain stores and brands) is increasing 15 per cent to 20 per cent each year (though countrywide, it enjoys a lower organized retail penetration of 8 per cent).

While it's still a small fraction of the overall Indian retail market—just 4 per cent to 6 per cent—it's growing rapidly and expected to scale up exponentially in coming years: India's top 25 retail websites already account for some 62 per cent of all web traffic nationwide and around 12 per cent of all Internet users in India are online shoppers, according to the Economic Times. Analysts believe that online shopper penetration could grow to 20 per cent by 2017.

Looking further into the future, overall retail sales in India is projected to double to $1 trillion by 2020 from $600 billion last year, according to the Boston Consulting Group, which adds that e-commerce sales there are projected to quadruple in the next five years, to $60 billion or $70 billion.

The Challenges:

There are also several practical considerations that challenge e-commerce retailers in India. One is a suppressed logistics infrastructure that can make delivery difficult. Another related problem: A dearth of less-skilled workers that can handle customer service and fulfilment.

Competition in India is vicious. For instance- Bengaluru-based Flipkart is India's largest homegrown e-retailer, with a gross merchandise value of $10 billion and a track record of raising $3.15 billion in venture financing. But Amazon India has given Flipkart a run for its money since arriving in 2013. India is providing Amazon with its largest number of new customers after the U.S., and Amazon India's Q4 2015 sales were equal to its total 2014 sales.

It can be difficult for marketplaces to find sellers who are ready for primetime. Many marketplaces in India provide financing because so few sellers have access to traditional financing from banks.

In a nutshell, it seems to be good for the India retail industry at large, providing much overdue clarity on investments, probably providing a level playing field for offline retailers, and nudging e-commerce players to build profitable businesses.