Why E-commerce is a Sector Worth Watching in 2016

Something unusual happened in 2015. It was almost as if everybody around the world discovered a new-found love for the same thing, well, around the same time: e-commerce.

Like a Mexican wave, the e-commerce culture swept the world off its feet, opening up a trunkful of possibilities. To put it digitally, e-commerce had gone viral.

Consider this: About 1,200 startups sprang up in India in 2015, out of which over 50 percent belong to the e-commerce sector, according to a study by Nasscom and Zinnov. Now that’s a lot.

It’s not hard to understand why so many startups came to life in no time. For one, it’s fairly easy to set up a new business, especially in the e-commerce space, all you really need is a great idea that’s sellable. There’s no dearth of those.

That’s evident from the fact that in 2015 alone, Indian startups have received over $5 billion in investment from 490 investors, according to the Nasscom-Zinnov study.

With everybody making a mad dash to get onto the e-commerce bandwagon, it seems like the universe is suffering from FOMO or the Fear of Missing Out syndrome.

There’s a lot of money floating around and the obsession with e-commerce is almost bordering on fanaticism. Be it the rise of Unicorns in the sector, or venture capitalists swearing by it, or big names like Ratan Tata investing in it, they are clear indicators that the industry has boomed—and in no time.

With everybody–from entrepreneurs to venture capitalists and from new-age consumers to digital converts–making a mad dash to get onto the e-commerce bandwagon, it seems like the universe is suffering from FOMO or the Fear of Missing Out syndrome. So much so that there’s no control over how much money is being thrown into the sector breaking VC records—at a time when not even one company is profitable.

In an interview to Firstpost, Bharat Ramnani, AVP-Valuation and Advisory Services, Aranca, a global research and analytics firm, said that there are about 142 companies in the Unicorn Club, nearly 50 percent of which are 2015 entrants, making it a new normal in the VC space.

“The Indian start up and e-commerce sector has witnessed a phenomenal year of growth in business and valuations as well as funding. The size of the funding raised by some of the large players has been bigger than ever and valuations have grown rapidly,” says Sharat Dhall, president, Yatra.com.

While that was the story in 2015, things could take a drastic turn next year. It could all come crashing and e-commerce’s dream run might just come to an abrupt halt. Or it could become even more formidable in 2016. Which side of the fence would it fall?

Moving to the E-commerce Cart

It wouldn’t be wrong to call e-commerce a people pleaser. It has converted skeptic shoppers to online freaks, big firms that smirked at the idea of e-commerce to investors, and naysayers to e-commerce champions.

The promise that the sector holds in terms of growth is pulling in the crowd. According to TechSci Research, the Indian e-commerce sector will grow by 36 percent from 2015 to 2020. That’s something that Gartner agrees with.

“The e-commerce sector in India is growing and it will continue to grow. India is at its early stages when it comes to maturity of the sector. That’s quite normal when you have a smaller base. You can expect double to triple digit growth in the coming years,” says Sandy Shen, research director, e-commerce, Gartner.

That optimism is widespread. And why wouldn’t it be? According to UBS AG, the Indian e-tail market will grow 10 times by 2020 to $50 billion. That’s encouraging for e-commerce players. And that makes the sector an exciting place to be in.

$50 billion The amount Indian e-tail market will touch in 2020—10 times more than current growth rate.  Source: UBS AG 

“This is an unprecedented time in the e-commerce sector and as a CIO you get to witness this first hand. There’s no other sector that’s challenging and exciting at the same time,” Shamik Sharma, CTO and CPO, Myntra, said in an interview to CIO in June this year.

CIOs aside, the sector is also witnessing increased interest from top executives of other organizations. In the last six months, a slew of high flying executives have quit their cushy jobs and moved to startups. For example, Infosys’ CFO Rajiv Bansal joined Ola, Marico’s Chief Sales Officer Samardeep Subandh moved to Flipkart as its CMO, and Aircel’s CFO joined Snapdeal as Finance head. These are just a few instances that are making a case for e-commerce.

And if that’s not enough to tilt the scales in e-commerce’s favor, all you need to do is consider these figures. According to UBS AG, online retail could increase to anywhere between $48 billion and $60 billion by 2020 from $4.47 billion in 2014.

That growth will piggyback on a few factors. One of them is the mobile revolution and a majority of youngsters with disposable income, according to Myntra’s Sharma.

“Smartphone penetration is growing in India. Bandwidth is affordable. People are getting addicted to Internet-based services and shopping. As a result, consumption of branded goods is going up in India. India is a young country with a lot of disposable income. These factors are causing a boom in the e-commerce space,” says Sharma.

All of these factors, in turn, are boosting the business of mobile wallet players like Paypal. “The Indian e-commerce space is experiencing an exciting time where innovation is the key,” said Vikram Narayan, Country Manager and Managing Director, PayPal India, in a press release.

Heading to a Stock-Out?

With every boom—especially those that are insanely fast—there’s always a sword hanging, ready to fall. And e-commerce fits right in the middle of this conundrum.

There’s no denying the fact that increased competition is breaking the back of the e-commerce sector.  Too many players selling the same service to the same target audience is a challenge that’s only going to get more daunting. After all, you are only as good as your last idea.

Consumers are spoilt for choice and the only differentiator is the quality of customer service. It’s a tightrope walk. On the one hand, e-commerce companies need to balance business requirements, and on the other, customer demands. Shift weight and you will go down.

India’s e-commerce market is expected to breach the $100-billion mark by 2020, thanks to increasing Internet usage, discounting and investment. 

Over the last couple of years, the rise of mobile technologies and social media has accelerated the business of e-commerce companies. But at the same time, it has also given customers enormous power.

According to a study by Akamai and Gomez.com, 57 percent users won’t recommend and 40 percent will shift to a competitor if they have a bad shopping experience on mobiles. That’s not it. They will not wait more than four seconds for a page to load, and the conversion rate goes down by seven percent for every second delay in page load time.

That means, the customer is now playing God. And there’s enormous competition out there that’s giving customers offers that they can’t refuse.

Now that’s pushing e-commerce companies to play the discounts game to entice customers. That might not always be a smart idea. According to a PwC report in February this year, e-commerce companies incurred combined losses of Rs 1,000 crore due to heavy discounting. The report stated that in the long run, this strategy won’t help e-commerce companies to retain customers. Losing customers is the last thing that e-commerce companies want.

Another problem is connectivity. Only 19 percent of Indians use the Internet, compared to 46 percent in China according to PwC’s E-Commerce in India study.

That’s how fragile the e-commerce market is right now. But these are just a few of the many challenges that threaten to break the rhythm of e-commerce companies. “The e-commerce market is young, you need to get people into the habit of online shopping. E-commerce players are also young, they need to develop expertise and skills in this market. All of this needs to be addressed,” says Gartner’s Shen.

That aside, a major challenge that e-commerce industry watchers have constantly raised is the fact that none of the big ticket e-commerce companies have been profitable. How long can they sustain this?

“Depends on how long investors are interested in putting money into e-commerce and how much patience they have. But putting that into perspective, it’s also important to note that some Chinese companies who have been around for seven to eight years aren’t profitable yet,” says Shen.

Shen also believes that e-commerce is not a business that can make you money quickly. “It’s not a quick business where you get in, make money and get out. If you want to make quick money, e-commerce is not the sector,” she adds.

2016: New Year Season Sale

Despite everything that’s working against the sector, experts say there’s a lot to cheer about, going forward.

And all that’s working in its favor will act like a shield that will prevent the bubble from bursting in 2016. One of those things, according to Shen, is India’s population. She says the sector holds a lot of promise because it has a large population and the market is currently so small. This gives the sector mileage to grow. “The e-commerce bubble will not burst in 2016 because the sector has just begun to grow. It will get bigger, and more players will come into the market. The user base and transaction volume will grow. The top leaders will open up to include all product categories,” she says.

That’s something that Myntra’s Sharma agrees with. He doesn’t believe there’s a bubble and hence there’s no question of it bursting. Sharma feels the e-commerce companies will continue to grow for the next five years. “There’s no bubble so I don’t think anything is going to burst. In 2016, e-commerce revenue growth will increase. This will drive customer acquisition and the number of orders they serve in a day. There’s YOY growth of 50 to 100 percent and that’s not going to slowdown anytime soon. E-commerce companies will continue growing for the next five years,” says Myntra’s Sharma.

According to Goldman Sachs, India’s ecommerce market is expected to breach the $100-billion mark by 2020, thanks to increasing Internet usage, discounting and investment. The faith in the potential of the e-commerce segment is remarkable and that’s evident from the fact that Goldman Sachs revised its previous estimate.

“The size of the funding raised by some of the large players has been bigger than ever before and valuations have grown rapidly, leading some people to believe that it is a bubble that will soon burst. On the positive side, there are a number of reasons why these valuations are very justifiable. There are a lot of very strong e-commerce businesses being built across sectors where the valuations are only likely to rise from here,” says Yatra.com’s Dhall.

That’s encouraging. At the same time, industry watchers say the argument that e-commerce firms aren’t profitable yet doesn’t hold water. That’s because it’s just a matter of time before these companies start getting into the black zone. According to UBS AG, the sector will start making operating profits by 2020.

“In the short-term, the leading players are investing in growth, customer adoption and building scale with the clear thought that over a longer period of time, the need for further investment in customer acquisition will lead to profitability,” says Dhall.

Another myth that Gartner’s Shen is busting is: Discount sales strategy is pulling the sector down. “I don’t think discounts is a bad idea. Even Chinese players use discounts as a strategy. Competitive pricing is attracting customers. This is a strategy. They don’t want to make money in the short-term but increase user base and scale to get a leadership position in the market,” says Shen.

According to UBS AG, the sector will start making operating profits by 2020.

That’s something that CIOs in the e-commerce sector agree with. They believe profitability is a matter of time and right now they are just focusing on creating their brand image and value and increasing user base. “Discounts are just one way to attract customers. But across the industry, discounts have been actually coming down. However, I don’t think they will disappear completely. They are an important part of the retail business, both online and offline. And they are now at a healthy level for both customers and e-commerce firms,” says Sharma.

While that’s a strategy, it’s also important to acknowledge the role that technology will play in helping the sector grow in 2016. Shen believes technology will be leveraged to enhance user experience and add more features and functionalities. This will increase conversion rate and build customer loyalty.

“The India online growth story remains strong with the key drivers being increasing Internet users, increasing smartphone penetration, faster connectivity, greater online penetration and a young demographic, and all this points to continued growth for companies in the online space in 2016,” says Dhall.

That just goes to prove that no matter what challenges come in the way of the e-commerce sector, it’s clear that the bubble isn’t bursting in 2016. Far from it.