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Will Indian e-commerce's major players be able to sustain the booming business?st
Sunday, February 26, 2012 - The Economic Timesa
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It's deja vu again, especially for those who have been tracking the internet business in India. As e-commerce becomes the new buzzword, many would be wondering why it feels like the old days. The huge venture capital investments, the hefty growth projections, the acquisitions & mergers.

And, the niggling doubts of what will really work with buyers. Rewind to 1999-2001 - when the Indian online space saw an explosion, triggered by Satyam Infoway's takeover of Rajesh Jain's IndiaWorld for Rs 499 crore. A plethora of start-ups blew up venture capital funds in the race to create a brand identity and ramp up valuations. Within a couple of months, though, they were history.

While the scenario doesn't seem as drastic as that now, most analysts feel the sector is definitely headed towards consolidation. And those who will survive would be those with staying power. Prashant Agarwal, senior principal at the Boston Consulting Group, says consolidation will happen as many of the companies are flush with venture-capital cash and those that aren't will look for exits.

"Even strong companies will try and form alliances. The US example is telling. For the last 15 years, people have been in two minds about Amazon. Yet, today its market cap is almost as much as Costco and Target, America's no. 2 and no. 3 retailer combined."

PRETTY PROJECTIONS
A look at the numbers reveals what is at stake in India. The country's e-commerce market - that includes travel sites as well as online retailers - is estimated to be worth Rs 50,000 crore currently and expected to grow to almost Rs 120,000 crore by 2015.

The main factors fueling this growth are better internet connectivity (3G & 4G are touted as the game-changers) and the increasing number of people slowly getting comfortable with the idea of purchasing on the web. According to a report by financial services firm, Avendus Capital, about 11 % of the total online population in India, which would be 8 to 10 million people, uses the internet for e-commerce.

Their number is expected to grow to 39 million by 2015. On this premise, investments in the sector have been ramping up over the past one year. From $ 110 million dollars in 2010, funding has zoomed to upwards of $ 800 million.

This, according to Sandeep Krishnamurthy, director, business program, University of Washington Bothell, is because India is the last big untapped market when it comes to e-commerce. "For a long time, the financial and supply chain infrastructure were big detractors. Now, there is hope that there has been more-than-adequate progress on these fronts."

CAN I TRUST YOU?
But a number of nagging bottlenecks remain. Most of the people transacting online are doing so on travel sites - where delivery of physical merchandise is not required - while the percentage of sales on non-travel e-commerce portals is still comparatively low.

This reflects the Indian shopper's reluctance to take to shopping for physical products which can't be "touched and felt". Although e-tailers are compensating for this by offering more discounts, the major categories selling online are still books, gifts and electronics.

Sachin Bansal, founder of Flipkart, which recently acquired its competitor Letsbuy for almost Rs 125 crore, says that in the future customers would shed their inhibitions towards other products, too. "We ourselves are looking to add more categories and are considering different options. Everything, except for groceries and automobiles, is fair game for us. Soon, one would be able to purchase almost anything under the sun on the internet."

If and when that happens, would the payment and delivery mechanism be robust enough to support it? Indians are still not comfortable with the idea of using credit cards to pay online. E-tailers have countered this by introducing options like cash on delivery and payment through cheque.

In order to address the issue of reliable delivery, quite a few online shops are following the Amazon model of controlling the supply chain - from the warehouse to the last-mile delivery. This has ramped up costs, although many feel it will pay off in the long run. "Pretty much all the internet retailers in the US are companies with a strong offline presence. The winners are few but they win big," says Agarwal.

BHARAT BECKONS
Most companies are also betting that a large chunk of the online retail growth would come from small town India. Muralikrishnan B, country manager of virtual marketplace eBay India, says that customers in cities where modern retail has not yet penetrated are a huge opportunity.

"India has 3,311 e-commerce hubs from where consumers buy and sell. Out of this, 1,267 are rural hubs," he says. "Non-metro consumers increasingly aspire to consume brands and lifestyle products. They have the spending power, but no access. We see these aspiring consumers latching onto online shopping like never before."

PADDING UP FOR BATTLE
The opportunity may exist, but internet retailers are still figuring out how to tap it effectively. As of now, most companies are in the cash-spending mode, as they take decisions on whether to invest in infrastructure, supply chain or branding. A few, like Letsbuy, have decided to sell out; more may follow suit as competition gets more intense.

Gautam Sinha, CTO and head (e-commerce), Indiatimes.com, predicts that this year will be all about acquisitions, mergers and consolidation. "Ventures who are well capitalized and with a long term strategy will emerge as leaders. It is a capital intensive industry, so companies must have deep pockets."

That, and a realization of what the customer needs. Govind Setlur of enStage, which provides payment solutions to e-commerce websites, says that companies should ensure that the mistakes of last time are not repeated.

"Earlier, the e-commerce services got ahead of real market needs," he says. "Without strong value propositions in their offerings, these companies lost steam. This time, they must be cautious. As long as the focus is on services that meet real needs, growth will continue."
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