Briefing Online retailing in India

In the next 15 years, India will see more people come online than any other country. E-commerce firms are in a frenzied battle for their custom

IT IS a quiet morning on the outskirts of Mumbai, the air still mild. Dusty streets are dappled with sunlight, a stray dog rummages through some rubbish, the shutters are lifted on a few tiny shops. A man pushes a cart bearing a pyramid of oranges. And a delivery boy named Anil is already racing along his route on a motor bike borrowed from his uncle, his delivery backpack as large as he is. He has been up for hours, planning his route and carefully filling his bag with the packages to be dropped off first stacked near the top.
Anil enters a block of flats, squeezes his backpack into a narrow lift and delivers a shirt to a 21-year-old taxi driver. In a neigh- bouring tower he hands a smartphone case to a 16-year-old who uses several apps to do the shopping for his family. A short ride away, a 78-year-old grandmother is a particularly pleased customer—with help from her grandson, she has bought some clay pickling jars that she couldn’t find else- where and some high-quality saris at a knock-down price. For Anil, it is gruelling work. But he is betting that e-commerce in India has nowhere to go but up, and he wants to ride up with it.
In the next 15 years India will see more people come online than any other coun- try. Last year e-commerce sales were about $16 billion; by 2020, according to Morgan

Stanley, a bank, the online retail market could be more than seven times larger. Such sales are expected to grow faster in In- dia than in any other market. This has at- tracted a flood of investment in e-com- merce firms, the impact of which may go far beyond just displacing offline retail.
India’s small businesses have limited access to loans; most of its consumers do not have credit cards, or for that matter credit. The e-commerce companies are in- vesting in logistics, helping merchants bor- row and giving consumers new tools to pay for goods. Amit Agarwal, who runs Amazon.in, holds out the hope that “We could actually be a catalyst to transform In- dia: how India buys, how India sells, and even transform lives.”
The jewel in the crown
Amazon wants to make India its second- biggest market, after America. For the time being, though, with just 12% of the market, it lags behind the home-grown successes, Flipkart (45%) and Snapdeal (26%). All three, as well as some smaller competitors, are spending at a blistering rate. As global markets dip and Silicon Valley unicorns stumble, the international funding that makes this possible may dry up. Doubts about the sustainability of the companies’ present plans were underlined when, on February 26th, one of Morgan Stanley’s mutual funds marked down the value of its stake in Flipkart by 27%. If the prospect of changing India a billion deliveries at a time is a beguiling one, it is not for the faint- hearted.

India’s visionaries keep their spirits up by remembering the example of China. Chinese e-commerce grew by nearly 600% between 2010 and 2014, making the coun- try the biggest e-commerce market in the world today. It managed this largely through the growth of indigenous compa- nies: mighty Amazon merely nips at the heels of home-grown giants Alibaba and JD.com; eBay has all but left the stage. And in the process China’s top e-commerce firms came to offer an astonishing range of services.
Alibaba, founded by Jack Ma in 1999 and now valued at $184 billion, provides the best illustration. To calm anxieties about buying online Alibaba created Ali- pay, which holds a shopper’s payment in escrow until he receives his order. The tool has evolved into a financial-services com- pany, Ant Financial, which last year ser- viced more than 400m Alipay accounts and made over 2m loans to small business- es and entrepreneurs. To provide Chinese consumers with access to foreign goods the firm’s services include not just online listings but marketing, shipping and help with customs.
Alibaba is now building service centres in remote areas where shoppers can order, pick up and sell goods, as well as pay their bills. It is a further step in its attempts not merely to benefit from the growth in Chi- nese consumption, but to shape and accel- erate it. The degree to which it has succeeded  suggests that the earlier an e-commerce

company arrives in a country’s develop- ment, the wider its role might be.
India is in many ways a tougher market for e-commerce than China. Its population is poorer and its infrastructure worse. But its prospects look remarkable. Income per person, which in 2014 was $1,570, could be twice that by 2025. Two-thirds of Indians are younger than 35, and their phones give a huge number of them access to the inter- net. In December 2014 smartphones ac- counted for one in five Indian mobiles, ac- cording to Goldman Sachs. Just six months later, they accounted for one in four (see chart 1). Morgan Stanley expects internet penetration to rise from 32% in 2015 to 59% in 2020. By 2030, India is projected to be a one-billion-person digital market.
The prospect of a second market grow- ing to a near-Chinese size attracts those who made a packet the first time round. Bob van Dijk, the chief executive of Nasp- ers, a South African firm that backed JD.com and Tencent, China’s largest social- media company, says he looks for coun- tries with big populations, rising smart- phone use and few retail chains. India, where malls, supermarkets and branded chains, or what analysts call “organised re- tail”, account for just 10% or so of the total market, fits the bill perfectly.
The middlemen
Naspers owns a 17% stake in Flipkart; other JD.com investors, including Tiger Global Management, in New York, and DST Glo- bal, a Russian fund, have also backed the company. Japan’s SoftBank, a big investor in Alibaba, has backed Snapdeal since 2013, and Alibaba itself followed suit last August. Meanwhile Alibaba’s Ant Finan- cial owns a 20% stake in India’s Paytm, which began as a mobile-wallet company and now competes with Snapdeal and Flipkart as an online marketplace. The three firms have a combined valuation of almost $25 billion.
In contrast to those investors trying to recapitulate their Chinese success, Ama- zon is seeking to make up for its failure. Re- duced last year to the ignominy of having to open a shop on Alibaba’s Tmall site, Jeff Bezos is determined that this time, with more experience and in a more open mar- ket, things will be different.
When Flipkart was founded, in 2007, Amazon was obviously its model. The company began as a bookseller; the two engineers who started it, Sachin Bansal and Binny Bansal (not related), had worked for Amazon. Mr Bezos, though, is of the opinion that if anyone if going to be the Amazon of India, it should be Amazon. In 2014, shortly after Flipkart announced a $1 billion round of funding, Mr Bezos donned Indian clothes in Bangalore, hopped aboard a rainbow-coloured truck and handed Mr Agarwal a $2 billion cheque. A firm which earned over $100 bil- lion in 2015 and has shareholders content to see more or less nothing by way of pro- fits can afford such largesse.

Neither Flipkart, Amazon, nor any of the other big competitors are following the retail strategy that led to Amazon’s success in the West. Indian regulations bar foreign- backed e-commerce firms from owning in- ventory, and so acting as a straightforward retailer is not an option. As a result India’s top e-commerce companies look much more like Alibaba. Flipkart has become a marketplace where sellers offer everything from mobile phones to washing machines to handbags. Snapdeal, Amazon and Paytm run marketplaces too. The firms compete feverishly on price, offering dis- counts that chomp away their own mar- gins. In the long term, they must differen- tiate themselves by honing services for sellers and shoppers alike, and offering a better, broader range of products to more Indians than would have them otherwise.
The first step to that goal is to boost the number of sellers on the company’s plat- form—it is the sellers, after all, who pay commissions and shipping fees. So compa- nies offer a range of services to lure busi- nesses to their sites. Flipkart’s programmes range from teaching sellers how to manage peak sales during diwali to advising fash- ion brands on trends and production. In February Amazon announced a travelling studio-on-wheels, offering training, pho- tography and other services to help shop- owners come online.
But the most important help they offer is in easing access to credit. Small business- es, given their scarce financial statements and limited credit history, have long had trouble obtaining loans from India’s banks. They often rely on expensive loans from neighbours or family. The e-com- merce companies have strong incentives to make them better offers—and because they have access to online-sales data they are in a privileged position from which to help lenders judge credit risk.

Take Sumit Agarwal (no relation to Am- azon’s Mr Agarwal), a young entrepreneur who started an online shoe business in 2011. In his warehouse in New Delhi work-

ers pack and scan shipments among tow- ers of shoeboxes. The early days were un- certain; his family’s reaction when the firm started, he says, was “What the hell is this guy doing?” Now it is easier for such entre- preneurs to find the capital with which to grow. When Mr Agarwal logs into his sell- er’s account on Amazon.in his screen of- fers a column of short-term loans, their rates calculated using data from his tran- sactions. Other e-commerce firms have similar schemes. In January Snapdeal an- nounced that the State Bank of India would approve loans of up to $37,000 in- stantly if it liked the look of the data that Snapdeal provided on the borrower.
Once a site has sellers, the second chal- lenge is to help consumers buy their wares. Anil carries a clunky credit-card reader with him on his rounds, but most people pay cash. The e-commerce sites want to change that. Paytm lets customers add money to a digital wallet that can then be used to shop online, top up a mobile phone, lend money to a friend, pay a bill or use a service such as an Uber taxi. It has 120m digital-wallet accounts, nearly six times India’s number of credit cards. Snap deal bought its own mobile payments company in April. Amazon purchased an online-payments service in February.
A fine balance
If a consumer does buy a product, the next task is delivering it. Delivery itself is noth- ing new. Indians have long been able to have a delivery boy from the local kirana— the cornershops that dominate Indian re- tail—bring them a stick of butter. But being able to deliver on a larger scale is a chal- lenge. The country’s mail service, India Post, is ill-equipped to wait while a shop- per tries on a kurta and ponders returning it. So newcomers are building networks. But India’s traffic is hellish and its address- es vague.

A startup named Delhivery has hired more than 15,000 staff, from developers to executives poached from Facebook and posh consultancies. Its headquarters in Gurgaon are so packed that engineers spill onto an outdoor porch, tapping their key- boards furiously. Delhivery, which works with a number of e-commerce firms, is us- ing machine learning to subdivide India’s postcodes, the better to map idiosyncratic descriptions. “We’ll know the house with the yellow door next to the temple,” says Sandeep Barasia, the managing director. The company moves goods to 700 or so small distribution centres overnight to avoid congested main roads during busi- ness hours. Thousands of delivery boys then dash to and from the distribution cen- tres throughout the day, bearing more than 20 kilos on their bikes.

E-commerce companies are devising their own solutions, too. Some invest- ments, such as warehouses, are straightfor- ward. Others are less so. Flipkart last year began using Mumbai’s famous network of dabbawallas, or lunch-delivery men, to drop off packages when they picked up customers’ lunch tins. Amazon has a pilot programme that lets customers order gro- ceries online and have them delivered from the nearest kirana.
Together, e-commerce firms say, these experiments could create a new truly na- tional marketplace. Neelkanth Mishra of Credit Suisse, a bank, points out that road construction, electrification and mobile phones have stoked big increases in rural wages, and thus demand for goods (see chart 2 on previous page). Flipkart says that about half its sales come from outside In- dia’s big cities. Snapdeal claims more than 60%. It recently launched seven regional- language versions of its website.
As they build out their markets the firms trumpet their assistance to small businesses. “Some of the big sellers on Amazon only had a shop in a corner of Bangalore; they were happy selling to five kilometres around each shop,” declares Amazon’s Mr Agarwal. “Now they are shipping orders to Kashmir and eastern In- dia.” Amazon is helping more than 6,000 Indian businesses export, as well. Snap- deal’s Kunal Bahl is equally expansive: “Our ambition is to be a great social, eco- nomic and geographic equaliser for the small businesses of India as they scale up.”

All these bold plans are clouded by two obstinate facts. First, spending on dis-counts, marketing campaigns and new hires means none of the companies has yet made money. Visit any firm’s lobby and you will meet herds of job applicants. Delivery boys like Anil are in hot demand a top performer in his branch, he earns about 14,000 rupees ($200) each month.

Amazon is, predictably, outspending its competitors. Last year its sales were two- thirds the size of its losses. Mr Agarwal is not bothered by a lack of profit. “The priori- ty is growth,” he explains. Ankit Nagori, Flipkart’s chief business officer, says that the most important metrics for his com- pany are not margins but the number of new customers, how often they shop, how much they buy and the speed of delivery. “If you solve for these four things,” he con- tends, “then the top line and bottom line will fall in place.”
A billion deliveries more
The second problem is regulatory. Forbid- ding foreign-backed firms from owning inventory has costs. Companies have limited control over the quality of products on their sites, points out Morgan Stanley’s Pa- rag Gupta, and they can do little to stream- line the country’s fragmented supply chain. Flipkart has become a tangle of in- terlinked entities, including a holding com- pany in Singapore, in an attempt to obey India’s rules while maximising profits.
India’s government may nonetheless come under protectionist pressure. Traditional retailers allege that the online marketplaces flout rules against foreign direct investment. Facebook’s recently scuttled plan to offer Indians free internet services, including its own, sparked a furore over the risks of “digital colonialism”.
Offline retailers are watching all this in- tently. Kiranas are relatively protected, thanks to meagre tax bills and limited car- rying costs (they store little). Big shops and malls are another story (see chart 3). “What is remarkable for me is that in a very short time, e-commerce has become half of what the organised market is,” says Ab- heek Singhi of the Boston Consulting Group. “Two years down the line, three years down the line, the e-commerce mar- ket could be larger.”
Big foreign retailers—such as Ikea, a Swedish furniture company, which after years of kerfuffle may finally be opening an Indian store—cannot sell directly online. Matters are simpler for Indian retailers, but their course remains cloudy. Reliance Industries, a conglomerate with over 1m square meters of shop floor, is planning its own e- commerce venture. Future Group, which pioneered hypermarkets in he country, is outfitting small shop-owners and entrepreneurs with digital catalogues so that con- sumers can order Future Group products in places where there will never be a store. However the firm has scaled back some of its more ambitious plans for e- commerce. “The more sales you do, the more money you lose,” muses Kishore Bi- yani, Future Group’s founder. “You need to have continuous funding and someone to back you.”

For the time being, the big companies in the sector are having those needs met. “You have at least three, potentially four large players with deep enough pockets,” says Mr Singhi. “It’s going to play out at a very high cost.” Companies like Alibaba and Amazon see that cost as worth paying in part because, just as they applied what they learned in China to India, so they will use their Indian experience in the next markets they move into. Alibaba, not con- tent to back Paytm and Snapdeal, is also courting Indian businesses directly. In De- cember it said it would help Indian firms with financing and logistics so they might use Alibaba’s platforms to export to China and beyond. Eventually, Mr Ma likes to say, any consumer should be able to buy from any seller, anywhere in the world. The more of those purchases go through one of his firms, the better.
And everywhere these giants go, home- grown entrepreneurs will be hoping that their local acumen will give them an edge and looking for overseas investors to back them. Many of them will fail: India does not yet offer an example of how to make a profit, and it may be a long time before it does. But as long as some of these efforts survive, they will serve to speed progress, and innovation, in developing markets. As Amazon’s Mr Agarwal says, “If millions of small, medium enterprises out there, manufacturers and retailers, can...sell their product anywhere in the world hat’s transformational