Home >Opinion >Online-views >The $50 billion Indian e-commerce prize

A much-debated question doing the rounds these days is this—when will the e-commerce bubble burst? For many entrepreneurs who have shut shop or sold out, it may have happened already. But for those going strong, there is still scope for scaling greater heights.

In February, the Boston Consulting Group (BCG) released a report titled Decoding Digital @ Retail, published in collaboration with the Retailers Association of India. The report estimated the size of the online retail opportunity (goods only) to be $50 billion. What followed was a lively debate among the likes of Sachin Bansal of Flipkart, Kishore Biyani of Future Group and the inimitable investor, Rakesh Jhunjhunwala.

While everyone agreed with the underlying trends and opportunities, half the panel thought that the estimate was seriously under-reported and the other half refused to believe a number so high. That tells us that the estimate will probably be spot on!

The discomfort of the naysayers flows from the belief that a lot of the growth achieved so far has been driven by heavy discounting, mostly funded by investors looking to build scale. So, the critical question is whether this is true and what will happen if and when the plug is pulled. We tried to get to the heart of this matter, supported by data.

Of course, discounts play a very important role and have been fuelling growth. In proprietary research carried out by BCG, discounts have been cited as the primary driver of the purchase decision for more than 40% of the purchases. This is somewhat natural. However, this research also points to several other factors that also drive the decision to purchase online.

For instance, 23% of the respondents cited a wider, relevant assortment with greater variety as their primary driver of online purchase. This becomes even more important in tier-II and tier-III towns where the choice is minimal in brick-and-mortar retail. To illustrate a case, a young college student we met in Panipat bought her party dresses online not because of discounts but because the variety of options was just not available in her town and she could not make the trip to New Delhi that often.

In some categories and consumer demographics, convenience becomes very important. For instance, for a double-income nuclear family that is time-starved, the ease of buying supersedes many other factors, especially in categories that are not prone to impulse purchase and brand choice is relatively clear, for example, personal care or beauty products. In addition, there are several niches. In categories such as sexual wellness/hygiene, online buying offers a purchase experience that consumers are more comfortable with.

Despite all these other factors, the fact remains that discounts are still the dominant reason for people buying online. There is already talk of investor funding getting tighter and “path to profitability" suddenly coming back in vogue. In that context, will these models collapse without the discounting?

The answer is yes and no. Our belief is that businesses with a consumer proposition that is hinged only on discounts will struggle. But those that have or create other advantages will not only survive, but probably flourish.

The most obvious thing to do is to create a consumer pull based on other factors such as variety, personalized offerings and greater convenience. Unfortunately, this is easier said than done. It requires significantly enhanced category management and supply-chain capabilities—areas that require depth of capability in the online world as much as they do in the offline world.

Retail businesses churn out volumes of data. The trick lies not just in having the data, but having a set of sharp hypotheses that can be proven or disproven with the data and which drive action. As an example, a top global quick-service restaurant has created capabilities to mine its data and create offers that are highly contextualized like triggering a purchase by sending a delicious picture of a latte and a modest discount on it when it is raining or looking at patterns of thousands of consumers to offer discounts on the most relevant accompaniments to drive cross-selling. Online firms gather even more data and the key is in being able to put it to good use.

The best performing online firms build high levels of consumer involvement through investments in user-friendly interfaces and powerful recommendation engines. Taking a consumer lifecycle management approach versus driving an immediate sale can help immensely in driving frequency of purchases, and higher number of replacements and upgrades.

These opportunities are not the turn of online firms alone. The digital world order warrants ‘new-age’ capabilities across multiple faculties such as analytics, IT systems, supply chain and category management. This not only sounds like a mouthful on paper but is also tough in real life. One of the solutions is to selectively assess the “option" value of interesting ideas or ventures that can be incubated with a “test-and-learn approach" or outsourced.

Coming back to the question worth “billions of dollars"… is this a bubble waiting to burst? If you are an investor, there are probably anxious moments ahead as the good and the bad get sifted by a ruthless market. But if you are a business backed by strong investors, this is the best time to rethink your business model and build sustainable consumer value rather than short-term shareholder value.

Amitabh Mall is partner and director, and Namit Puri is principal at the Boston Consulting Group.

This is the final part of a three-part series about the digital economy. All views are personal.

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