Until last year, all of Bhanu Priya’s sales of laptop computers came from customers who climbed two floors to her store in a dilapidated New Delhi building. Now, she gets an additional 3,000 orders a month from the Internet and has hired 10 people to handle the new business.
Amazon.com Inc., eBay Inc., and local competitors
Flipkart.com and Snapdeal.com have built a $3 billion e-commerce market in
India because of traders like Priya. India doesn’t allow foreign-controlled
companies to sell products online. That’s led web retailers to a different
model than the one pioneered by Amazon: they operate online marketplaces and
local traders sell goods on them.
“If you run a shop, you can maybe get about 1,000 footfalls
a day,” Priya said one afternoon at the store in Delhi’s Nehru Place
electronics market. “With online there is no limit. Sitting in Delhi, you get customers
across India.”
“Greater profitability is another reason that all major web
retailers in India have embraced the so-called marketplace model popularized by
Alibaba Group Holding Ltd. Individual sellers bear the costs of inventory,
leaving website operators to focus on technology, marketing and logistics,”
said Mark Tanner, the founder of China Skinny, a Shanghai-based research and
marketing firm.
“Operating a marketplace effectively transfers almost all of
the costs, risk and responsibilities to the vendor,” Tanner said in a phone
interview. ‘It’s a pretty good position to be in for e-commerce companies.”
Sevenfold growth
The value of e-commerce in India is projected to grow
sevenfold to at least $22 billion by 2018, according to CLSA Asia-Pacific Markets,
fuelled by a doubling in the number of broadband subscribers and tens of
millions of people swapping basic-feature mobile phones for web-connected
smartphones.
Flipkart, India’s biggest e-commerce company by sales,
switched from being a retailer that sold goods on its own to a market in April
last year, according to Bloomberg. It now has 3,000 sellers on its system,
trailing domestic rivals including Snapdeal, which says it has about 30,000.
Amazon India has about 5,000 sellers.
Alibaba’s success with marketplaces has been another factor
in the adoption of the model in India.
Alibaba rode China’s emergence as an economic superpower
over the last 15 years to become a massive online market for everything from
kangaroo meat to sex toys. In May, China’s biggest e-commerce operator filed
for what may become the largest US initial public offering (IPO) ever.
Commissions
The company had a 57% operating margin for the nine months
ended 31 December, more than double that of eBay and far ahead of Amazon, which
had a margin of 1%, according to a report from Bloomberg Industries.
Seattle-based Amazon’s lower margin is explained partly because it sells much
of its own inventory, Bloomberg Industries said.
“Everyone has adopted the marketplace model, and that’s why
Amazon, us, and all the others are able to do business in India,” said Sachin
Bansal, co-founder and chief executive officer of Flipkart said in an interview
in Bengalore. “It’s more suited to India in the long term.”
“Indian e-commerce marketplaces get almost all their revenue
from commissions they charge buyers on transactions, unlike Alibaba which is
heavily reliant on advertising,” said Sandeep Ladda, who runs the Indian
technology practice of PricewaterhouseCoopers in Mumbai. “As the biggest Indian
web retailers become stronger, they are likely to generate increasing amounts
of revenue from advertising,” he said.
Smartphones
“Globally a lot of money comes from ads,” Ladda said in a
phone interview. “If you really want to make good money, you will need the ad
pie.”
Flipkart said it charges buyers commissions of 3% to 25%.
Snapdeal levies 5% to 20%, it said. Amazon charges 5% to 15%, according to its
website.
The number of Internet users in Asia’s third-biggest economy
is likely to grow by 60% to 282 million by 2017, according to Euromonitor
International, creating a wider pool of consumers willing to transact online.
Annual smartphone sales are also likely to triple in the same period.
“Competition in India’s e-commerce market is extremely
intense as companies regularly undercut each other’s prices on everything from
apparel to mobile phones,” said Ruchi Sally, head of retail advisory at
consultant Elargir Solutions Pvt. in Mumbai.
Below cost
“Web retailers are keen to get customers and often sell
goods for less than their cost,” said Vikas Saini, who runs a wholesale
business selling mobile phones and memory cards in Delhi’s Nehru Place. In one
instance, Saini’s store sold handsets produced by local device maker Karbonn
Mobiles India Pvt. for Rs.5,400 each to an e-commerce operator, which then
offered them to end users for Rs.4,400.
“I was selling some 1,700 to 1,800 phones each day that
week,” Saini said. “It was fantastic for me. These companies’ entire business
is being supported by foreign money, and as long as that keeps flowing, they
will be fine.”
Foreign investors hold stakes in all of the country’s
biggest e-commerce companies. Flipkart’s early backers include Silicon
Valley-based Accel Partners, which made the biggest profit of any venture firm
up to that time with its Facebook Inc. investment. EBay has a stake in
Snapdeal.
Narendra Modi
Competition among e-commerce operators may intensify
following the election of Narendra Modi as India’s prime minister last month.
During his campaign, Modi indicated he might open the sector directly to
foreign investment, which would allow overseas operators to sell their own
inventory, as Amazon does in most countries where it operates.
“Any such rule changes would give e-commerce companies
leeway to run a variety of business models, probably spurring investment in
their supply chains and warehouses,” PwC’s Ladda said. “It will surely give a
boost to the sector,” he said.
At Priya’s San Computech Pvt. store, cardboard boxes of
computers and peripherals ready for shipping are stacked from floor to ceiling,
leaving space for just one person to walk through. “More than half of the
nearly 1,000 electronics sellers in this complex now sell online,” Priya said.
“Online retail is growing too fast,” Priya said. “Less
people are coming to the stores now, so we have to be in this e-commerce
business.”
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