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When the pair of branded boots arrived at Brynhild D’Souza’s door, she did not react with quite the same excitement as when she had clicked “buy” on the online shopping website.
“They just were not what they had looked like online … and I returned them,” says the 34-year-old Mumbai resident. “I used to shop a lot online but now I’ve cut it down to two or three purchases a month because what happens is, you don’t know what the products look like.”
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Yet despite frequent complaints about products, long delivery times, or the refund process, Indian consumers continue to be enticed by the access to goods and brands that the e-commerce industry has brought the emerging market.
Though an annus horribilis for the Indian economy and markets, 2011 was anything but for the country’s online retail sector. As entrepreneurs and investors lined up to launch web portals peddling everything from travel tickets and books to electronics and daily deals to India’s masses, companies saw valuations climb to highs last seen during the dotcom bubble over a decade ago.
But as retailers look to keep up with an increasing appetite for online shopping among India’s swelling numbers of internet users, operational issues still pose hurdles.
Analysts say these start-ups, not unlike other ventures in India, are scrambling to overcome poor infrastructure and logistical networks, low brand loyalty, and recurring problems with payment options in a country where less than half the population has bank accounts.
“The euphoria surrounding this sector last year was reminiscent of the 2000 dotcom boom,” says Abheek Singhi, managing director at Boston Consulting Group in Mumbai. “Now, the market sentiment is much more muted as people are realising the true cost and complexity” of marketing and growth in the online retail business.
Analysts reckon online retail accounts for only 1 per cent of India’s $450bn consumer market, but they project growth of 14 per cent over the next decade as millions of young, tech-savvy Indians adapt to the virtual shopping experience.
The number of internet users in India is expected to triple to 300m by 2015, with online transactions doubling to 50m, according to Boston Consulting Group.
As e-commerce start-ups mushroom, early birds like Flipkart face fierce competition from local companies. Bangalore-based Flipkart began on 2007 as an online book retailer, but has since expanded into electronic goods and other products. US-based Amazon remains its biggest rival, recently launching a push into India with its price aggregating website Junglee.
Much of the optimism about the online sector is based on the immense popularity of the cash-on-delivery model, which caters to customers without bank accounts or credit cards. Avendus Capital says up to 80 per cent of online purchases rely on this method of payment.
The downside emerges when customers refuse to pay due to delays in delivery or simply a change of heart, causing up to 30 per cent of goods to be returned, says Aashish Bhinde, executive director at Avendus Capital.
“Besides the incremental cost, [the cash on delivery model] is often indicative of lower buyer commitment, and … managing the reverse logistics significantly adds to the cost,” says Mr Bhinde.
In addition, the convenience and choice that such a model offers customers comes at the expense of working capital that companies could otherwise pump into improving and expanding delivery networks or much-needed advertising to build a loyal customer base.
Companies such as daily deals website Snapdeal.com and Redbus.com, an intercity travel website, have also seen their revenues grow more than 200 times in three years on the back of a growing culture of shopping online, not just in Mumbai or Delhi, but also in mid-tier cities like Hyderabad and Jaipur.
But having to rely on third-party logistics, poor road transportation, and sometimes a lack of addresses poses difficulties in delivering to more remote cities, while millions of potential customers go untapped due to minimal financing for broader marketing.
“It is fairly easy to operate in one city but to reach mid-tier cities is far more problematic,” says Pradeep Tagare of IntelCapital, a venture capital fund for technology start-ups. “Many of these companies will see some sort of consolidation because they will not be able to raise money as easily as last year or meet projections.”
Industry members remain confident about the sector given rapidly increasing internet usage in India, especially via cheap smartphones, and as the government stalls on reforming India’s largely unorganised physical retail space.
“It’s true we’re facing evolutionary issues because there isn’t much of a legacy of internet usage. But internet penetration is about to boom here in India,” says Kunal Bahl, co-founder of Snapdeal.com. That means “the opportunity is immense and the space to expand is here and now”.