Deep Dive: India Rising - Coresight Research is the second report in our India Rising series, which looks at the startup ecosystem in India. In this report, we examine four companies

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DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

ThisisthesecondreportinourIndiaRisingseriesfocusingontheIndianstartupecosystem.WeidentifythefollowingfourretailersasthemaindisruptorsinIndiane-commerce:Flipkart,Snapdeal,QuikrandBigbasket.TherearefiveprimaryfactorsthathaveshapedtheIndiane-commercesector:

1) Apaucityofmodernretailstoreshasboosteddemandforproductsandbrandssoldonline.

2) Stronglyprice-competitivee-commercemarketplacesarewellpositionedtoattractshopperswithlimitedincomes,whoconstitutealargepartofIndia’sconsumerpopulation.

3) Offeringcashondelivery(COD)asapaymentoptionallowsmoreIndianconsumerstobuyonline.

4) Indiahasoneoftheworld’slargestInternetuserbases,andIndianconsumers’disposableincomesareincreasing.

5) GovernmentrestrictionsonforeigninvestmentinIndia’sretailsectorandAmazon’sandAlibaba’srelativelylateentriesinthecountryhavehelpeddomesticstartupsgainastrongfoothold.

Deep Dive: India Rising

Part 2— E-Commerce

Disruptors in India

Deborah Weinswig

Managing Director

Fung Global Retail & Technology

[email protected]

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016

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TableofContents

ExecutiveSummary.........................................................................................................................................3

AnIntroductiontoRetailandE-CommerceinIndia.........................................................................................4

RetailandE-CommerceinIndia.......................................................................................................................5

FactorsthatHaveShapedE-CommerceinIndia...............................................................................................51. LackofModernInfrastructure............................................................................................................................52. Less-AffluentConsumersLookforLowPrices.....................................................................................................63. TheOptionofUsingCODasaPaymentMethodinCash-CentricIndia..............................................................74. TheScaleandYouthoftheInternetUserBaseBoostsE-Commerce..................................................................85. FDIRestrictionsandtheRelativelyLateEntryofAmazoninIndia......................................................................9

NotableDisruptorsinIndianE-Commerce......................................................................................................10Flipkart....................................................................................................................................................................10

WhatMadeFlipkartSuccessful?.......................................................................................................................10ChallengesFlipkartFaced..................................................................................................................................11RecentDevelopments.......................................................................................................................................11

Snapdeal.................................................................................................................................................................11WhatMadeSnapdealSuccesful?......................................................................................................................12ChallengesSnapdealFaced...............................................................................................................................12RecentDevelopments.......................................................................................................................................13

Quikr.......................................................................................................................................................................13WhatMadeQuikrSuccesful?............................................................................................................................14ChallengesQuikrFaced.....................................................................................................................................14RecentDevelopments.......................................................................................................................................14

Bigbasket................................................................................................................................................................14WhatMadeBigbasketSuccessful?....................................................................................................................14ChallengesBigbasketFaced..............................................................................................................................15RecentDevelopments.......................................................................................................................................15

TheIndianE-CommerceBubbleandtheRisingThreatfromAmazonandAlibaba..........................................16

WhatWeThink..............................................................................................................................................18

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ExecutiveSummaryThisisthesecondreportinourIndiaRisingseries,whichlooksatthestartupecosysteminIndia.Inthisreport,weexaminefourcompaniesthataresignificantdisruptorsinIndiane-commerce—Flipkart,Snapdeal,QuikrandBigbasket—andidentifyfivefactorsthathaveshapede-commerceinthecountry:

1. Apaucityofmodernretailstoreshasboosteddemandforproductsandbrandssoldonline.TotalsalesmadethroughmodernretailchannelsareverylowinIndia,andthecountryrankslowestintermsofmodernizationoftheretailindustryandinternationaltradeamongmajordevelopednationsandtheotherBRICcountries,accordingtoKnightFrankGlobalResearch.

2. DespitethefactthatIndia’seconomyisgrowing,manyconsumersinthecountryhavelimitedincomes.Stronglyprice-competitivee-commercemarketplacesarewellpositionedtoattractIndianshoppers.

3. ManyIndiane-commercesitesofferacash-on-delivery(COD)paymentoption,enablingmoreshopperstobuyonlineinacountrywheremorethantwo-thirdsoftransactionsaremadeincash.

4. IndiahasoneofthelargestInternetuserbasesintheworld;some462.1millionpeopleaccessedtheInternetinthecountryinJanuary2017.AgrowingpopulationofyoungInternetuserswithincreasingdisposableincomeshascontributedtothegrowthofthefourcompaniesweprofileinthisreport.

5. Governmentrestrictionsonforeigndirectinvestment(FDI)inIndia’sretailsectorandAmazon’srelativelylateentryinthecountryhelpeddomesticstartupsgainastrongfoothold.

Amazonisamajornewthreattodomestice-commerceoperatorsinIndia.TheUSgianthasbeenexpandingitsofferingintonewcategoriesandisnowtryingtomuscleinonthegrocerymarket.WithnearlyathirdofconsumerspendinginIndiadedicatedtofood,Amazonislookingataverylucrativegrocerymarketinthecountry.Recently,AlibabaalsoclearlyindicatedthatitisreadytocompeteformarketshareintheIndianonlineretailsector.

Unlesshomegrownrivalsprovidetrulyinnovativeofferingsratherthanjustattemptingtograbmarketsharewithpromotionaldealsduringfestiveperiods,therewillbelittlestoppingAmazonfromstealingsharefromlocalplayers.

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AnIntroductiontoRetailandE-CommerceinIndiaOfflineretailismuchlessdevelopedinIndiathanitisinWesterncountries.Yetthereisnoshortageoftech-drivendisruptorsbringingmorechoice,greaterconvenienceandlowerpricestoIndianconsumersthroughe-commerce.Infact,ratherlikeChina,Indiaseemstobealmostleapfroggingtheintermediarystagesofretailande-commercedevelopmentandmovingdirectlytowardmobile-centered,marketplace-focusedretailing.

ThecountryappearstobeskippingovertheretailstagesseenintheUSandEurope,whereleadingnationalchainsemergedbyestablishingasmuchphysicalretailspaceaspossibleandwheree-commercewassubsequentlyestablishedthroughdesktopshoppingatretailers’websites.ThetablebelowillustratesourviewofhowIndiaisshortcuttingthetraditionalmodelofretailevolution.

Figure1.WesternRetailDevelopmentvs.IndianRetailDevelopment

WesternRetail IndianRetail

Predigitalraceforphysicalspacebynationalbrick-and-mortarchains

Adoptionofe-commercealongsidetheexpansionofmodernchains

E-commercefocusedondirectretailing(retailerholdsinventory)

E-commerceledbymarketplacecompanies(websiteisanintermediary)

E-commerceestablishedasadesktopactivity

Mobile-firste-commerceadoption

Source:FungGlobalRetail&Technology

Inthisreport,thesecondinourIndiaRisingseries,whichlooksatthestartupecosysteminIndia,weexaminefourcompaniesthataremajordisruptersinIndiane-commerce—Flipkart,Snapdeal,QuikrandBigbasket.Weconsiderthefactorsthatshapede-commerceinIndiaandwelookatwhythesecompanieshavebeenparticularlysuccessful.

E-commerceisthesubjectofournextreportinthisseries,too.Theemergenceandexponentialgrowthofe-commerceinIndiahasledtothedevelopmentofancillaryfirms,suchasITsolutionsprovidersandcourierdeliverybusinesses,thatsupportthevariousfunctionsofonlineretail.These“e-commerceenablers”arethesubjectofthethirdreportinthisseries,whichwewillpublishshortly.

ThefirstreportinthisserieslookedatthefactorsthatmakeIndiaaburgeoningstartupdestination,thetopstartupsbyfunding,themainaccelerators,themajorinvestorsandtheroleofthegovernment.Readerscanfindthatreportonourwebsite.

Here,wefirstlookatthesizeofIndia’sretailande-commercesectorsandsomeofthekeyfactorsthatshapede-commerceinthecountryandpavedthewayforthedisruptorsweoutlinelater.

Inthisreport,welookatfourcompaniesthataremajordisruptorsinIndiane-commerce—Flipkart,Snapdeal,QuikrandBigbasket.

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RetailandE-CommerceinIndiaIndiaistheworld’ssecond-largestcountrybypopulationandithasthefourth-fastest-growingeconomy.Itsretailmarketwasworthsome$600billionin2015,accordingtotheIndiaBrandEquityFoundation(IBEF),anditisexpectedtotouch$1trillionby2020.E-commerceaccountedfor5%ofIndianretailin2015,equivalentto$30billion.Thatshareisexpectedtogrowto12%,orabout$120billion,in2020,accordingtotheIBEF.

Figure2.India:EstimatedOnlineandOfflineRetailSales(USDBil.)

Source:IBEF

FactorsthatHaveShapedE-CommerceinIndiaSeveralfactorsuniquetoIndiahavehelpedshapee-commerceinthecountry:

1. LackofModernInfrastructureApaucityofmodernretailstoresinIndiahasboosteddemandforproductsandbrandssoldonline.TheIndianretailindustryisoverwhelminglyunorganized(i.e.,traditional)andhighlyfragmented,withthemajorityoftheIndianpopulationbuyingfrominformalretailchannelssuchastinykiranastores.Thismeansthataverylargeportionofthecountry’sretailsectorremainstobecapturedbymodernretailers.

DespitethesizeandeconomicgrowthofIndia,mallandmodernstorepenetrationisstilllow.Variousestimatessuggestthatorganizedretail(moderntrade)constitutesonly6%–8%oftotalretailinIndia.Salespercapitathataremadethroughmodernretailformatstotaledjust$793in2015,whilethosesamesalesineachoftheothermajoremergingmarkets—Brazil,RussiaandChina(whichtogetherwithIndiaconstitutetheBRICnations)—totaledatleastafewthousanddollars.Amongthecountrieslistedinthetablebelow,whichincludestheBRICnationsandmajordevelopedmarkets,Indiaalsoranksthelowestintermsofmodernizationoftheretailindustry(asrepresentedbye-commerce),shopunitsandshoppingmalls(comparedwithbazaarsandmarketsintraditionaltrade),andininternationaltrade.

Variousestimatessuggestthatorganizedretail,ormoderntrade,constitutesmerely6%–8%oftotalretailinIndia.

$30 $120

$570

$880

2015 2020EE-Commerce OfflineRetail

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Figure3.SelectedCountries:RetailSectorIndicators,2015

Country TotalRetailSalesperCapita(USD) TraditionalTrade ModernTrade Domestic International

India $793 89% 11% 98% 2%

China $2,238 78% 22% 97% 3%

Brazil $2,388 46% 54% 87% 13%

Russia $3,252 52% 48% 93% 7%

Germany $7,167 3% 97% 85% 15%

Japan $7,398 16% 84% 96% 4%

UK $8,014 3% 97% 78% 22%

France $8,056 7% 93% 86% 14%

Australia $8,560 8% 92% 89% 11%

US $11,687 6% 94% 96% 4%

Source:KnightFrankGlobalResearch

ThepaucityofmodernphysicalretailformatsinIndiameantthatconsumerswereareadymarketfore-commerceplayers:shoppersflockedtositessuchasFlipkartandSnapdealtobuyproductsandbrandsthatwerenoteasilyaccessibleinphysicalstores.Peoplefromeventheremotestareasarenowabletoshopformodernproductsandinternationalbrandsattheclickofabutton,andincreasedmobileandInternetpenetrationhashelpedbooste-commerceretailersinthecountryfurther.

2. Less-AffluentConsumersLookforLowPricesEvenwiththeeconomygrowing,manyIndianconsumersstillhaveonlylimitedincomes,whichspursdemandforlow-pricemarketplaces.Itisageneralrulethatconsumersinlesseconomicallydevelopedcountriesdirectagreatershareoftheirspendingtobasicretailcategoriesthandoconsumersinmoreeconomicallydevelopedcountries.And,asweshowinthetablebelow,foodandbeveragesaccountedfor33%ofIndians’totalconsumerspendingonvariousmajorcategoriesin2014(latest).Bycomparison,foodandbeveragesaccountedforjust7%ofAmericans’consumerspendingonmajorcategoriesin2016.

TheaverageIndianhaslittleleftovertospendondiscretionaryitemseachyear:leisuregoodsandservices(listedas“recreationandculture”inthetablebelow)captureonlyatinyshareofIndians’totalconsumerspending.

E-commercemarketplacesthatofferbothlowpricesandtheabilitytocomparepricesresonatewithless-affluentshoppers.Formany,itisanecessitytoshopforthelowestpricesondiscretionarygoods.Reflectingthis,theelectronicscategoryhasastrongpresenceonline:attheendof2014,mobilephonesandrelatedaccessoriescontributedfully41%ofallonlinesalesinIndia,accordingtotheInternetandMobileAssociationofIndia(IAMAI).Theorganizationalsonotedthatothermajorelectronicsitemsandapparelaccountedformostoftheremainderofonlinespending.Thiskindofdemandbooststrafficandsalesonvalue-drivenmarketplacessuchFlipkartandSnapdealandonclassifiedswebsiteQuikr.

E-commercemarketplacesthatofferlowprices,widerchoiceandtheabilitytocomparepricesresonatewithless-affluentshoppers.

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Figure4.India:ConsumptionExpenditure,byCategory,2011–2014

ConsumptionExpenditureCategory 2011–2012 2012–2013 2013–2014

Foodandnonalcoholicbeverages 29% 29% 30%

Alcoholicbeverages,tobaccoandnarcotics 3% 3% 3%

Clothingandfootwear 7% 7% 7%

Housing,water,electricity,gasandotherfuels 15% 15% 15%

Furnishings,householdequipmentandroutinehouseholdmaintenance 4% 4% 4%

Health 4% 4% 4%

Transport 15% 14% 14%

Communication 2% 2% 2%

Recreationandculture 1% 1% 1%

Education 3% 3% 3%

Restaurantsandhotels 2% 2% 2%

Miscellaneousgoodsandservices 16% 16% 16%

Source:MinistryofStatisticsandProgrammeImplementation

3. TheOptionofUsingCODasaPaymentMethodinCash-CentricIndiaIndiaisacash-centriceconomywheresome68%oftransactionsaremadewithcash,accordingtobrokeragefirmCLSA.WorldBankdataindicatethatbankaccountpenetrationinIndiawasonly53%in2014.CODpaymentallowsmoreshopperstobuyonlineandisafundamentalfeatureofe-commerceretailinIndia.A2015surveybyA.T.Kearney,GoogleandGfKfoundthat57%ofonlineshoppersinIndiacitedCODastheirpreferredpaymentoption.Thatpercentageisforecasttodeclineto45%by2020,when15%ofshoppersareexpectedtoprefertomakepaymentsthroughmobilewallets,anoptionpreferredbyonly8%ofthosesurveyedin2015.

Figure5.India:PreferredPaymentMethodsinOnlineRetail

Base=3,000onlineshoppersSource:A.T.Kearney/Google/GfK

57%

15%11% 9% 8%

45%

17%13%

10%15%

COD DebitCard CreditCard OnlineBanking MobileWallet

2015 2020E

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4. TheScaleandYouthoftheInternetUserBaseBoostsE-CommerceThesheersizeandyouthfulnessoftheIndianInternetuserandshopperbasehasalsopoweredgrowthate-commercestartups.IndiahasoneofthelargestInternetuserbasesintheworld:accordingtobrandagencyWeAreSocial,some462.1millionIndiansaccessedtheInternetinJanuary2017.ButintermsofInternetpenetration,thecountryrankslow,asthisbaseconstitutesonlyabout25%ofIndia’s2016population.

Lowincomelevelshavealsomadehigh-tech,expensivegadgetsthatprovideaccesstotheInternetunaffordableinIndia.ThishasledtothemajorityoftheuserbaseaccessingtheInternetthroughsmartphones.MobileInternetusersrepresentfully96%oftotalInternetusersinthecountry.

FlipkartandSnapdealhavesoughttocatertotheseconsumerswithfaster-loadingmobileversionsoftheirwebsitesandwithmobileapps.Lately,moreretailershavebeeninvestinginenhancingtheirmobilecapabilitiesinordertoattractshopperswhorelyonsmartphones.

Figure6.India:InternetUsers,January2017(Mil.)

Source:WeAreSocial/Worldometers/UnitedNations/IAMAI/Facebook/Cisco

TheAssociatedChambersofCommerceandIndustryofIndia,knownasASSOCHAM,reportsthatIndiahadoneoftheyoungestInternetuserbasesamongtheBRICnationsin2015,withabout52%ofthoseonlinebeingbetweentheagesof26and35.

Agrowingyoungandtech-savvypopulationwithincreasingdisposableincomeswelcomedthechoiceandconveniencethate-commercesitessuchasFlipkart,Snapdeal,QuikrandBigbasketprovided.Thefourfirmsalsomadestrategicmovesthatappealedtoyoungconsumers,andthesewerekeytothefirms’growth.OneexampleisFlipkart’sacquisitionofonlinefashionretailerMyntra,whichoffersfast-fashionWesternclothingbrandsthatarehardtocomebyatlocalapparelstoresinIndia.AnotherexampleisQuikr’sadvertising,whichhaseffectivelyconveyedtheconveniencethesiteofferstothosewhowanttobuyorsellusedgoods,therebycapturingtheattentionofyoung,urbanIndians.

462.1 442.7

191167

AcpveInternetUsers

AcpveMobileInternetUsers

AcpveSocialMediaUsers

AcpveMobileSocialMediaUsers

IndiahasoneofthelargestInternetuserbasesintheworld:some462.1millionIndiansaccessedtheInternetinJanuary2017.

In2015,IndiahadoneoftheyoungestInternetuserbasesamongtheBRICnations,withabout52%ofthoseonlinebeingbetweentheagesof26and35.

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Figure7.India:RegularInternetShoppers,byAge,2015

Source:ASSOCHAM

5. FDIRestrictionsandtheRelativelyLateEntryofAmazoninIndiaDomesticdisruptorshavebenefitedfromgovernmentpoliciesthatrestrictedFDIinIndianretail.ThegovernmentofIndiaoperatedasomewhatclosedeconomyuntilthelastdecadeorso.In2006,itundertookoneofitsfirstmovestoopenuptheeconomyandimplementedapolicythatallowedFDIofupto51%insingle-brandretail,subjecttogovernmentapproval.ThismeantthatretailerssuchasGapandZara,whichsoldonlytheirown-brandproducts,wereallowedtoopenshopsinpartnershipwithalocalcompanyinIndia,withamaximumownershipstakeof51%.

In2012,thegovernmentremovedthiscapandincreasedthepermissibleinvestmentbyaforeignentityinsingle-brandretailto100%.Inaddition,itallowedFDIofupto51%inmultibrandretail(whichincludesdepartmentstoresandsupermarketsthatstockandsellproductsofvariousbrands),subjecttogovernmentapproval.MarketplacesiteswereeffectivelyexemptedbecauseFDIwaspermittedinbusiness-to-businesse-commerce,andmarketplacesaretechnicallytechnologyplatformsthatfacilitatetradebetweenbuyersandsellers.Thishelpedexistinge-commercemarketplacesinIndiaraiselargeramountsofforeignfunding,thusmakingthemarketplacethepredominantbusinessmodelforonlineretailandpavingthewayforAmazontooperateamarketplaceusingdomesticsellersinIndiabeginningin2013.

In2016,thegovernmentindicatedthatitwillallow100%FDIinfood-onlyretailaslongasthefoodisproducedandpackagedinIndia.However,retailersstillneedclarificationfromthegovernmentonthis,asmostgrocerstendtosellnonfoodproductsaswellasfood.

Inthenextsection,weprofilethenotabledisruptorsinIndiane-commerceandexaminesomeofthereasonsfortheirsuccess.

3%

52%

8%

2%

18–25 26–35 36–45 45–60

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NotableDisruptorsinIndianE-CommerceWefocusouranalysisonthefoure-commercecompaniesthathavereceivedthegreatestfunding:Flipkart,Snapdeal,QuikrandBigbasket.E-commercemarketplacesFlipkartandSnapdealhaveprovedhugelypopular;Amazonandthesetwofirmscomprisethethreemost-visitedshoppingwebsitesinIndia,accordingtoa2015surveybyMasterCard.

Flipkart

Figure8.FlipkartSummary

Category E-commercemarketplace

DisclosedFundingThrough2016 $3.2billion

NotableInvestors Naspers,TigerGlobalandAccelPartners

KeyCompetitors Amazon,Snapdealandbrick-and-mortarretailers

RevenueforFYEndedMarch31,2016 INR131.8billionorabout$2.0billionSource:Crunchbase.com/BusinessStandard/TheEconomicTimes

PrivatelyheldFlipkartwasestablishedasanonlinebookretailerin2007byformerAmazonemployeesSachinBansalandBinnyBansal,withinitialstartupcapitalofapproximately$6,000.Nearlyadecadelater,ithasbecometheundisputedhomegrownleaderinIndiane-commerce.MorganStanleyvaluedthecompanyatasizable$5.6billionasofNovember29,2016,althoughthatfigurewasdownfromapeakvaluationof$15.2billionin2015.Thecompanyattained“unicorn”statusin2012,whenitraisedsome$150millionthroughafundingroundledbySouthAfricanInternetcompanyNaspers.

Source:Flipkart.com

WhatMadeFlipkartSuccessful?Knownforflashsales,heavydiscountsandattractivedealsduringfestiveseasons,FlipkarthasmadestrategicacquisitionsofspecialistInternetretailerssuchasMyntrainordertobolsteritsmarketpositionand,indoingso,hasprovedaworthycompetitortoglobalonlineretailgiantAmazon.

E-commercemarketplacefirmsFlipkart,SnapdealandAmazonarethethreemost-visitedshoppingwebsitesinIndia.

AsofNovember29,2016,Flipkartwasvaluedat$5.6billion.

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However,whileAmazonandotherleadingpureplaysintheWeststartedwithtraditionaldirect-retailingmodels(meaningtheyownedthestocktheywereselling),Flipkartlaunchedwithaconsignmentformat.Itprocuredstockondemand,basedontheordersitreceived,andsoldthattoitscustomers.Flipkartlaterimplementedtheinventorymodel(i.e.,itbeganholdingthestockitsold)andnowoperatesasane-commercemarketplace.LikeglobalplayerssuchasAlibabaGroup,Flipkartdoesnotowntheinventorysoldviaitsplatform.

ChallengesFlipkartFacedInits10yearsofexistence,Flipkarthashadaturbulentfinancialjourney.LossesswelleduntilitsMarch31,2015,fiscalyear-end.Thecompanyfinallypostedarecoveryinitsmostrecentfinancialyear,withrevenuesofINR131.8billion,or$2.0billion(ayear-over-yearincreaseofnearly43%),andanetlossofINR5.4billion,or$79.8million(adecreaseofsome38%),accordingtoareportbyIndiannewspaperBusinessStandard.

Duetoitsmarketplaceformat,Flipkart’sreportedrevenuesarenotadirectindicatorofthevalueofgoodssoldonitssite—forthat,welookatgrossmerchandisevalue(GMV).InMarch2014,Flipkart’sGMVwasestimatedtobeapproximately$4billion,andthecompanynotedthatitaimedtoachieve$10–$12inbillioninGMVoverthenext12months.ButthecompanyannouncedinMay2016thatitwasgoingtostopdisclosingGMVandreplacethemetricwithitsnetpromoterscore,whichisusedtomeasurecustomerloyalty.

RecentDevelopmentsInJanuary2017,KalyanKrishnamurthy,aformerseniorexecutiveatFlipkartinvestorTigerGlobal,wasappointedCEOofFlipkart.Thiswasseenasunusual,asfoundersofIndianstartupsseldomconcedepowertoanoutsider.WeexpectFlipkarttomakemoresuchpragmaticdecisions,evenifitmeansbuckingthetrend,asitfightstoretainaleadingmarketposition.

FlipkartfacesnewthreatsfromAmazon,whichisgrowingmarketshare,andfromAlibaba’srecentadvancesintoIndiane-commerceviathenewlyspun-offPaytmMall,amarketplacethatwasformerlypartofIndia’slargestmobilewallet,Paytm.Tocounterthesechallenges,Flipkartisreportedlyseekingfundingof$1.5billionfrommarketplaceeBayandTencent,theownerofmessagingappWeChat.ThefundswouldprovideFlipkartamuch-neededstimulusthatwouldgiveitastrongfootinginthemarket.

Snapdeal

Figure9.SnapdealSummary

Category E-commercemarketplace

DisclosedFundingThrough2016 $1.7billion

NotableInvestors Alibaba,FoxconnTechnologyGroup,eBayandSoftBank

KeyCompetitors Amazon,Flipkartandbrick-and-mortarretailers

RevenueforFYEndedMarch31,2016 INR14.6billionorabout$216million

Source:Crunchbase.com/Livemint.com

InMarch2014,Flipkart’sGMVwasestimatedtobeapproximately$4billion.

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SnapdealisIndia’ssecond-biggeste-commerceplayer—and,tellingly,likeFlipkart,itisamarketplaceratherthanaretailer.Snapdealwasestablishedin2010andhasreceivedenormousamountsoffundingfrommanyprominentinvestors,includingAlibaba,SoftBankandeBay.

Source:Snapdeal.com

WhatMadeSnapdealSuccesful?SimilartoFlipkartandAmazon,Snapdealrunsflashsales,dealsofthedayandsalesduringholidayseasons.Snapdealhasmadeanumberofacquisitions,includinganonlinemarketplacefordesignerhandmadegoodscalledShopo(whichceasedoperationsonFebruary10,2017)anddigitalpaymentsappFreecharge.

Snapdealachievedearlysuccessbecauseitlaunchedasamarketplaceanddidnotexperimentwithotherbusinessmodels.AsoneofthefirstcompaniestopioneerabusinessmodelthatfewonlineretailersinIndiaused,SnapdealprovidedgreaterchoicetoconsumersthanFlipkartandothere-commercecompaniesdid,whichhelpeditgarnerasubstantialshareofthemarket.Italsousedthird-partyvendorstofulfillbusinessfunctions,suchaslogisticsanddelivery,insteadofsettingupallbusinessfunctionsin-house.Thishelpeditfocusthemajorityofitsresourcesonitsmarketplace.

ChallengesSnapdealFacedDespitebeingamarketleaderandgarneringtheattentionoflargeinternationalcompanies,Snapdeal’snetlossintheyearendedMarch31,2016,swelledby150%yearoveryear,toINR33.2billion,or$490.8million.Thelosswasmorethantwicetherevenueitgeneratedduringtheperiod,whichtotaledINR14.6billion,or$216million.

ThoughSnapdealdidnotdiscloseGMVfigures,peoplefamiliarwiththefirmtoldfinancialnewspaperLivemintthatSnapdeal’sGMVwouldhaveamountedtoabout$2billioninMarch2016.InApril2016,Snapdeal’sCEO,KunalBahl,announcedthatthefirmwouldnotgiveoutofficialestimatesforthemetric(SnapdealrivalFlipkartsoonthereaftermadethedecisiontonotannounceitsownGMV).

Snapdeal’sGMVinMarch2016wasestimatedtobe$2billion.

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InaFebruary2017interviewwiththeReutersnewsagency,BahlacknowledgedthattheIndianmarketisintenselycompetitiveandthatitisdominatedbyAmazonandFlipkart.HeaddedthatSnapdealcouldpotentiallymakeaprofitintwoyears,asitisresolutelyworkingtodrivedowncostsandincreaseefficiency.

RecentDevelopmentsJustdaysafterthatinterviewwithReuters,Snapdealannouncedthatitwouldlayoffhundredsofitsemployees.Thefirmhasalsoseenmanytop-levelexitsoverthelastsixmonths.Inaletteraddressedtoemployees,bothBahlandthecompany’scofounderadmittedtomaking“mistakes”andsaidthattheywouldeach“takea100%salarycut.”

Thefirmhopestoraisefreshfundingfrominvestorsasitstrugglestopaythemorethan$180,000itowesvendors.

• Forfurtherdiscussionofglobale-commercemarketplacesthataredisruptingretail,pleaseseeourearlierreportonthetopiconourwebsite.

Quikr

Figure10.QuikrSummary

Category Onlineclassifiedsandcommunitywebsite

DisclosedFundingThrough2016 $350millionNotableInvestors Kinnevik,TigerGlobal,WarburgPincus

andeBayKeyCompetitors OLXRevenueforFYEndedMarch31,2016 INR945millionorapproximately$14

millionSource:Crunchbase.com/VCCircle.com

QuikrwasoneofthefirstwebsitesinIndiatofunctionasanonlineclassifiedsplatformconnectinglocalbuyersandsellersacrossvariouscategories.Itwasestablishedin2008andhasattractedfundingfromKinnevikandTigerGlobal,whichareitslargestinvestors,aswellasfromWarburgPincusandeBay.

Source:Quikr.com

QuikrwasoneofthefirstwebsitesinIndiatofunctionasanonlineclassifiedsplatformconnectinglocalbuyersandsellersacrossvariouscategories.

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WhatMadeQuikrSuccesful?Tostrengthenitsposition,Quikrhasmadeseveralstrategicacquisitions,themainonesbeingStepni,whichconnectsvehicleownerswithserviceproviders;Grabhouse,ahomerentalfirm;andZapLukandSalosa,whicharebeautyandwellnessservicesproviders.

ChallengesQuikrFacedDespitepostingrevenuegrowthof44%inits2016fiscalyear,whenrevenuereachedINR945million,or$14.0million,Quikr’slossesgrewby20%,toINR5.3billion,or$78.4million,whichwasnearlyfivetimesitsrevenue.

Ina2015fundingroundledbyTigerGlobalandKinnevik,Quikrraisedover$150million,butithasstillnotmanagedtodissipateitslossesintheincreasinglycompetitiveIndianclassifiedsspaceduetotheemergenceofrivalssuchasOLXandCraigslist.

RecentDevelopmentsQuikrreportedthatitdoubleditsrevenueinitsfiscalthirdquarterendedDecember31,2016.InaninterviewwithForbesinFebruary2017,CEOPranayChuletsaidthatthecompany’sfocusistostrengthenitspositionanddrivefinancialgrowthacrosstheverticalsinwhichitoperates.

Bigbasket

Figure11.BigbasketSummary

Category Grocerye-commerceDisclosedFundingThrough2016 $247million

NotableInvestors AbraajGroup,HelionVenturePartnersandBessemerVenturePartners

KeyCompetitors Amazonandlocalonlineandbrick-and-mortargrocers

RevenueforFYEndedMarch31,2016 INR5.6billionoraround$83millionSource:Crunchbase.com/TheEconomicTimes

InternetgroceryretailerBigbasketlaunchedin2011asoneofthefirstonlinegrocerystoresinIndia.Itisnowthelargestonlinegroceryretailerinthecountry,andofferssome18,000productsandmorethan1,000brandsacrossnearly30ofIndia’slargestcities.

WhatMadeBigbasketSuccessful?Auniquefeatureofthewebsiteisthatshopperscanlookforfreshfoodandfoodproductsusingthoseproducts’localorethnicnames,suchasbhindiforokraanddalforlentils.Shopperscanalsobuyproductsfrominternationalbrandsonthewebsite.

Bigbasket,thelargestonlinegroceryretailerinIndia,offerssome18,000productsandmorethan1,000brandsacrossnearly30cities.

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Source:Bigbasket.com

Bigbasket’soperatingmodelsetsitapartfromFlipkartandSnapdeal.Itisnotamarketplace,whichmeansitownsitsinventory,warehousesanddeliveryfleet.

TogetaroundtheFDIrestrictionsindirectonlineretailandtheinventory-lede-commercemodel,theowneroftheBigbasketbrand,SupermarketGrocerySupplies,sourcestheproductsandsellsthemtoInnovativeRetailConcepts,thecompanythatisresponsibleforthewebsite,logisticsanddelivery.So,ineffect,thebusiness-to-businessfirmSupermarketGrocerySupplies,ratherthanthebusiness-to-consumercompanyInnovativeRetailConcepts,receivesinvestmentfromforeignfirms.

AccordingtoTheEconomicTimes,BigbasketreportedrevenuesofINR5.6billion,or$82.8million,infiscalyear2016,almosttripleitsrevenuesfromtheyearbefore.However,thecompany’slossesquadrupledyearoveryear,toINR2.8billion,or$41.4million,whichCEOandCofounderHariMenonattributedtoincreasedoperatingcosts,investmentsinmobileappsandbuildingwarehousesinthecitiesinwhichthefirmoperates.CofounderVipulParekhtoldthepressthatthefirmhopestotripleitsrevenuestoINR20billion,or$296.0million,infiscal2017.

ChallengesBigbasketFacedInaninterviewwithLivemintinOctober2016,Menonsaidthatoneofthechallengesthecompanyfacesisemployeeretention,asitemploysmorethan12,000people,two-thirdsofwhichworkinblue-collarroles.MenonsaidthatBigbaskethasinstitutedatrustfundthatsupportstheworkers’familiesinordertoprovideanincentiveforworkerstoremainwiththecompany.

RecentDevelopmentsBigbasketrecentlyannouncedthatithasplanstoexpanditsprivate-labelmixtoincludenonfoodproducts.Itsprivate-labelportfoliocurrentlycontributes33%ofthecompany’stotalrevenue,accordingtostartupnewswebsiteVCCircle.com,andthefirmhopestopushthisupto45%bytheendofthecurrentfiscalyear.

Bigbasket’sprivate-labelportfoliocurrentlycontributes33%ofthecompany’stotalrevenue.

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Followingthegovernment’sindicationlastyearthatitwillallow100%FDIinfoodretail,BigbasketisseekingapprovalforFDIindirect-to-consumerfoodretail,asareAmazonandIndiane-grocerGrofers.

Source:Shutterstock

Homegrownonlineretailershadasatisfactoryrununtillastyear,butitseemslikethee-commercesectorinIndiaissettoundergoaseachangeoverthenextfewmonths.Inthefollowingsection,weoutlinetheevolutionofIndia’sprotectionistregimeintoamoreopenretailmarketandexaminehowthishelpeddomesticretailers,andthendiscussthethreatimpliedbyAmazonandAlibabaasthemarketopenedup.

TheIndianE-CommerceBubbleandtheRisingThreatfromAmazonandAlibabaGovernmentrestrictionsonFDIinIndiancompaniesinselectedsectorsconstrainednon-Indianretailersfromsellingdirectlytoconsumers.Aswediscussedearlier,priorto2012,FDIwasforbiddeninmultibrandretail.After2012,foreignownershipwaslimitedtoamaximum51%ofsuchfirms.

HavingamarketplacemodelhelpedfirmssuchasFlipkartandSnapdealattractlargeamountsoffundingfromforeigninvestorsandallowedforeignretailerstosellthroughtheirplatforms.Non-Indianretailerswerenotpermittedtoselldirectlythroughe-commerce,eveniftheyhadinvestedinphysicalstoresinthecountrythroughtheFDIroute.However,marketplacesiteswereeffectivelyexemptedthroughaloopholethatallowedFDIinbusiness-to-businesse-commerce,andthiscontributedtotheirgrowth.UntiltheliberalizationofFDIrulesin2012,direct-retailwebsitesthatcompetedwithmarketplaceswouldnothavebeenabletoattractforeigninvestment.

WhenFlipkartwasestablishedin2007,itfacedfewdirectrivals—andmostofthosedidnotevolvewithconsumerneedsandeventuallycloseddown.Snapdealenteredthemarketin2010withahighlypromotionalsalesstrategythatincludedattractivedealsanddeepdiscountsacrossnumerouscategories,somethingthatmanyofitsonlineretailrivalsdidnotofferatthetime.

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Similarly,Quikrdidnothaveanycompetitorsofthesamescalewhenitlaunched;itsmaincompetitorswerenewspapersthatranclassifiedadvertisements.Meanwhile,Bigbasketwasthefirstonlinegroceryretailerthatthrivedwhileothersfailed.ItwassuccessfultotheextentthatitexpandedtoservemanycitiesacrossIndiaatatimewhenmodern,large-formatsupermarketswerestillnewinthecountry.

Therelativeabsenceofcompetitionallowedthesefourcompaniestoestablishthemselvesasthedominantplayersintheirrespectivesectors.

Source:Amazon.in

Amazon’slateentryintoIndiaandthelimitationsitfacedduetogovernmentpolicyallowedhomegrowne-commerceretailersinthecountrytoestablishthemselves,butitappearsthattheyunderestimatedthethreatposedbytheglobalgiantintheirdomesticmarket.

AmazonworkedaroundFDIrestrictionsthroughcomplexjointventurestructureswithlocalplayers.OnesuchventurewithIndiantechnologyfirmInfosysformedanelectronicsandfashionvendorcalledCloudtailthatisthelargestselleronAmazon’sIndianplatform.Thus,AmazonmanagestobebothamarketplaceandasellerinIndia.Thecompanyhasundertakenmanysuchstrategicmoves,thelatestofwhichwasapplyingforgovernmentapprovaltosellfoodonlineinIndia.

GivenAmazon’sglobalscaleofoperations,itsexpertiseanditsstrongcapitalbase,itdidnothavetostriveforverylongbeforeovertakingdomesticrivalsandbecomingoneoftheleadingplayersinIndiane-commerce.

TheambitionsofglobalrivalAlibabawerelessclear,asitheldonlyminoritystakesinSnapdealandPaytmuntilrecently.InFebruary2017,itinvestedsome$177millioninPaytmMall,takingitsstakeinthefirmtoover60%andsignalingitsreadinesstocontendforaleadingshareinIndiane-commerce.

UnlesstheypossessthebreadthofoperationsthatAmazonandAlibabado,moste-commercemarketplacesthatcompetetoretaincustomersthrough

Amazon’sjointventurewithInfosysenabledtheformationofelectronicsandfashionvendorCloudtail,whichisthelargestvendoronAmazon’smarketplaceinIndia.

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deepdiscountsandattractivedealstendtostruggletosustainthestrategyinthelongrun.

WhatWeThinkInthisreport,wehavenotedthetailwindsthathavebenefitedmajordomesticonlineplayersinIndia.Thesuccessofthesefirmsandthegrowthofe-commerceingeneralhavealsobeenhelpedbytheexpansionoffirmsthatprovidesupplementaryservices.Thosecompaniesarethefocusofthenextreportinthisseries.

Forthebusiness-to-consumere-commercefirmswefocusedoninthisreport,aneasingofrestrictionsonFDIandAmazon’sandAlibaba’seffortstoclaimgreatershareoftheIndianmarketmeanthattherearenewthreatstoface.WhileAlibabahaspubliclyindicateditseagernesstogainshareonlyrecently,AmazonhasgraduallybeenexpandingitsofferingintonewcategoriesandisnowtryingtomuscleinontheIndiangrocerymarket.WithnearlyathirdofconsumerspendinginIndiadedicatedtofood,Amazonislookingataverylucrativegrocerymarketinthecountry.

Inordertoheadoffthethreatfromthemajorglobalplayers,domestice-commercecompanieshavemadeanumberofstrategicmoves,includingrunningaspateofdiscountsanddeals,makingacquisitions,andspinningoffunviabledivisions.Meanwhile,Amazonfaceschallengesintermsofbeingaforeigncompanythatisstillfindingitsfootinginculture-sensitiveIndia.

AmazonrecentlyfacedcontroversywhenitsCanadiansitefeaturedadoormatforsalethatresembledtheIndianflag.ManyIndianshopperstookoffense,andthegovernmenteventuallyintervened.Suchmisstepsmaytemporarilymartheretailer’sgrowthtrajectory.However,aslongasAmazondealswithIndianculturalissueswithsensitivityandswiftness,thereislittletostopitfromstealingsharefromlocalplayers.

Tomaintaintheirstanding,domesticrivalsmustprovidetrulyinnovativeofferingsorforgestrategicpartnershipsratherthanjustattemptingtooutpaceeachotherwithpromotionaldealsduringholidayperiods.

ThemajorIndiane-commercedisruptorshaveenjoyedtremendoussuccess—butitlookslikethedisruptorsareabouttobedisrupted.

FormanyIndiane-commercecompanies,includingthedisruptorsdiscussedinthisreport,thepresenceofAmazoninIndiaposesathreat.

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DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comSwaroopraniMuralidharResearchAssistantHongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

FungGlobalRetailTech.com

Documents

Deep Dive: India Rising - Coresight Research is the second report in our India Rising series, which looks at the startup ecosystem in India. In this report, we examine four companies