As smartphone penetration is increasing in Indian tier 2 and 3 cities, e-commerce companies are witnessing growth being driven by rising aspirations
New Delhi: Nearly half the $12 billion in yearly online sales in India takes place through mobile phones, which are set to overtake PC-based sales in 2016 and reach $51 billion by 2020, according to a recent report by research firm Forrester.
Online retail in India, which is the smallest, but fastest growing e-commerce market among China, Japan, South Korea and Australia, is projected to grow from $12 billion in 2015 to $75 billion in 2020, at a compounded annual growth rate of 44% (CAGR), the report said.
Based on online survey in July 2015 of 9,000 individuals in Australia, Japan, South Korea, China and India, Forrester’s report said just 13% of online users—or 3% of the population (36 million)—made an online purchase in 2014. However, India’s online buyer population will grow at a 28% CAGR over the next five years.
Mobiles will play a major role in driving this growth. At present, mobile commerce represents nearly 50% of online retail sales in India, compared with around 48% in China and 34% in the US.
Major e-commerce firms, including Snapdeal and Flipkart, are already seeing more than half of their sales coming from mobile.
Myntra, a fashion retailer owned by Flipkart, saw 90% of its traffic and 70% of its sales from mobiles before famously abandoning its PC-based site altogether, the report noted. Flipkart, which derives 70% of its sales through mobiles, has also been steadily migrating to a mobile app-only strategy, shutting down its mobile website and promoting app-only promotions in its website.
As smartphone penetration is increasing in Indian tier 2 and 3 cities, e-commerce companies are witnessing growth being driven by rising aspirations of the population residing in these areas.
“One unique component of India’s e-commerce market is just how quickly it expanded to tier 2 and tier 3 cities across the country," the report said. “Only 8% of the 1.3 billion populace lives in the top eight tier 1 cities (Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata, Mumbai and Pune), where e-commerce penetration is already high. Today, leading online retailers Jabong, Myntra and Amazon report half their revenues from tier 2 and tier 3 cities. While the tier 2 and 3 cities have low PC and broadband penetration, they also have fewer brick-and-mortar stores, giving e-commerce a chance to fill the gap," it said.
However, researchers at Forrester have cautioned that there are significant challenges for e-commerce firms going forward.
These include India’s current restrictions on foreign investment in e-commerce for multibrand retailers like Amazon and Wal-Mart, who have been unable to enter the market with their standard online retail business models, in addition to underdeveloped logistics and challenging last-mile connectivity.
“Numerous global mono-brand retailers operate in India, although the majority falls into early adopter categories such as consumer electronics and computer hardware," the report said. “By contrast, most global apparel and beauty brands selling direct online have not yet prioritized India, choosing instead to focus on other markets as points of entry into e-commerce in the region. However, more brands are opting to sell via local retailer marketplaces."
India’s cash-on-delivery (COD) culture, which led to the rise of e-commerce in the country and still remains a key e-commerce payment method, also poses a challenge for e-commerce firms.
“While COD assuages consumer concerns about package delivery and product quality, it has significant implications for online retailers: costlier order fulfilment, greater chance of returns (one Ernst & Young study cited return rates averaged at 40% for COD online purchases in the market), and the risk of fraud by cash collection agents," the report noted.
Online shoppers in India, said Forrester, will eventually rely less on COD as the e-commerce market matures and credit-card penetration improves.
Asia Pacific countries are expected to drive growth of the global e-commerce industry. Total online retail revenue in China, Japan, South Korea, India and Australia will nearly double from $733 billion in 2015 to $1.4 trillion in 2020.
“These countries in Asia Pacific will be some of the biggest drivers of global e-commerce growth going forward," said Forrester analyst Lily Varon.
“The Asia Pacific region encompasses online retail markets that span varying sizes, maturity levels, and industry dynamics."
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