Online shopping a game changer for business in India
Companies like Amazon pouring billions of dollars into India's e-commerce industry
Finding a way into India's vast but vexing market has long frustrated foreign retailers. Now, overseas investors are pouring billions of dollars into e-commerce ventures. Allowing them get ahead of retail powers such as Wal-Mart and Ikea.
Some investors see India as the world's next big e-commerce opportunity.
Online shopping is still in its infancy in India at $2.3 billion US of an overall $421 billion retail market in 2013, according to research firm Crisil. But it is growing fast and the potential of reaching a mostly untapped market of 1.2 billion people has sparked a funding-and-expansion arms race.
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Flipkart, a Bangalore-based company founded in 2007 by two former Amazon employees, last month announced it had raised $1 billion in mostly foreign capital after building its registered users to 22 million.
A day later, Amazon raised the stakes with founder Jeff Bezos saying the company would pour $2 billion into developing its India business.
Snapdeal.com, whose investors include eBay Inc., has raised at least $234 million in the past year. Recently local media have reported that Rajan Tata of India's Tata Group conglomerate is considering a personal investment in the company.
Foreign e-businesses find loopholes
The flood of overseas capital comes even though foreign investment in online retailing is not permitted in India.
However, e-commerce businesses that are partly or wholly foreign owned have found a way to work around the rules to offer books, clothes and electronics on their sites.
Neither Flipkart nor Amazon technically engage in online retailing.
Instead, to get around the foreign investment ban, both companies serve as Internet-based hosts for thousands of third-party sellers, taking commissions in exchange for marketing and, often, arranging shipping of the products.
Even Amazon's Kindle e-reader is not sold directly by the company.
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On the Amazon.in site, the latest Kindle reader is sold by Infinity Retail Ltd., a subsidiary of Tata Group, which purchases the device from Amazon. Customers get the device but pay more for the extra layer of reselling.
The Kindle that sells for $119 on the U.S. online store goes for 9,999 rupees ($167) on the Indian website.
Government promises to slacken e-commerce
India's Finance Minister Arun Jaitley mentioned liberalizing e-commerce in his July budget speech, but so far the government has not taken any steps to change the foreign investment restrictions.
It may be a while before the big investment outlays translate into profits.
Financial muscle ensures you are able to withstand the initial few years when you are not going to be making money and you'll be burning cash.- Ajay Srinivasan, director of Crisil Research
Most of the billions raised by e-commerce businesses will be plowed back into building up the companies, from acquiring warehouses to developing shipping networks and also offering deep discounts to squeeze smaller players out of the market, said Ajay Srinivasan, director of Crisil Research, which is majority funded by Standard & Poor's.
"Financial muscle ensures you are able to withstand the initial few years when you are not going to be making money and you'll be burning cash," Srinivasan said. "It also allows you to offer better deals to customers to build market share."
The battle is playing out on TV and in newspapers.
Snapdeal has a television ad with a put-upon housemaid unpacking all the purchases a happy middle class family has made online and complaining that with all the money they are saving, she should get a raise.
Massive growth of online shopping
Online sales are growing at more than 50 per cent annually and are on track to reach $8.3 billion by 2016, Crisil estimates.
KPMG estimates that e-commerce could contribute four per cent of India's GDP by 2020, compared to a projected 10 per cent for the country's IT and call-centre outsourcing industry.
Such big potential for online retail is made possible in part by India's continued restrictions on big box retailers that have Indians starved for choice.
Protecting the mom-and-pop shops
Despite approving 51 per cent foreign investment in retail businesses in 2012, India has set stringent regulations intended to protect small manufacturers and mom-and-pop shops that still make up 93 per cent of the country's retail sales.
As a result, big players such as Wal-Mart and IKEA have put opening their own retail stores on hold. India has a few large retail chains, Tata Group's Croma for electronics and department store chain Big Bazaar, but they are mostly limited to major cities.
Is India ready for online shopping?
Still, India's e-commerce businesses face several other challenges.
Fewer than 12 per cent of Indians have credit or debit cards, meaning that to expand, Amazon, Flipkart and Snapdeal have had to accommodate cumbersome cash payments.
"Cash-on-delivery is very important. It's a very Indian concept," said Ashwin Vellody, an information technology expert at KPMG. "But that is inefficient and expensive for companies."
The companies must also develop logistics and distribution systems in a country notorious for creaking infrastructure and inefficient transport.
The biggest challenge, though, will likely be price wars in the fierce fight for market share, said Srinivasan, the Crisil director.
"From a consumer perspective, it means better days to come," he said. "I think the bargains they will be able to get online will only get better."