Has e-commerce arrived in India?

(the original post appeared on the blog famous among the MBA fraternity; a link to the article - here. Co-authored by myself and Jinesh Vora (currently working with Amazon); almost 2 years ago during our MBA days)

(An interesting thing to note here is that this article was written in 2014 when e-commerce was still picking up by leaps and bounds and a whole lot of new sectors like hyperlocal delivery, hyperlocal services and food-tech hadn't come yet completely in the scene)

? Organized retail still forms a small portion of the total retail market.

? Online retailers are moving to the inventory-holding model from the consignment model.

? Online retailers are developing in-house logistics capabilities.

? Logistics players need to gear up their operating models to tap the huge opportunity presented by online retail.

? Complex tax structures are making decisions relating to warehouse locations difficult for online retailers.

? Organized retail players are faced with the big question of entering the online retail market.

? The share of apparels is expected to increase in online retail.

? Underpenetrated segments, such as online groceries, are expected to grow.

? COD has emerged as a preferred payment choice for customers.

The online retail sector can be broadly classified into two categories based on the players in the space - vertical focused players ( comprising of dealers in specific category of goods such as apparels, electronics and baby products ) and multi-category products( comprising of dealers in multiple categories of goods). One example of each would be bigbasket.com and flipkart respectively.

However, the new phase of emergence of e-commerce in India is promising, not only because of the unprecedented number of people buying online or the variety of products offered, but is also backed by the clear focus on customers.

Figure 1. Growth of e-commerce market in India (Source – Accel Partners)

With increasing competition among various companies to attract as many customers as possible, focus on delivery time is increasing. Customers favour companies that deliver goods in shortest time. One of the major offshoots of the growing competition and increased number of online shoppers is the concept of same day/one-day delivery of goods by these e-commerce companies. Today many companies in India like amazon, flipkart, snapdeal have started delivering the items on same day. This service is available in limited cities like - Delhi, Bangalore, Noida, Mumbai; and that too on limited range of products. The products available for same day delivery range from electronic gadgets & accessories, books, mobiles, apparels, white goods to food and groceries. It has also led to emergence of local e-commerce players specializing in a particular category like localbaniya.com and bigbasket which delivers food and groceries on same day.

Table 1: Same day delivery Schemes of different companies in India

SAME DAY DELIVERY – NEXT BIG THING OR FAD

The rate at which e-commerce is growing in India in addition to the FDI being allowed in e-commerce, it can be said with certainty that e-commerce is going to be the next big thing in Indian retail sector. The number of people shopping online is increasing due to convenience in shopping online, ease of payment options (like CoD), availability of variety of items, flexible delivery schedule etc. In case of same day delivery, the companies charge a premium of Rs 140 – 250/ delivery and because of which many customers don’t avail same day delivery. As a normal order takes 2 – 3 days for delivery, customer does’nt want to spend extra just to receive it on same day; because in India, customers prefer free shipping over fast shipping.

According to a recent survey by ASSOCHAM; Delhi, Mumbai and Bangalore are top 3 Indian cities in terms of no. of people shopping online. As far as Same day delivery model is concerned most of the companies have targeted this 3 cities only because of the no. of customers ordering online. Delhi being surrounded by – Noida, Gurgaon and Faridabad; it makes sense to cater to multiple cities located within a 100 km radius.

HOW ARE THEY DOING

One of the key decision points about managing such single-day delivery is about whether to maintain inventory or not. Two prevalent models emerge on this key issue:

Stock-and-sell model - Incorporates inventory risk and invests in warehouses and logistics and Consignment model - Involves shipping directly from the vendor to the customer with no investments in warehouses and logistics.

Few months back most of the companies used to follow Consignment model, but nowadays most of e-commerce companies are moving to inventory based model, where companies store anywhere between 50 – 80 % of the SKU they offer online as inventory. One of the reasons being, consignment model makes e-tailer highly dependent on product merchants. Also, e-commerce players get better bargains and quantity discounts as they procure fast moving and popular products in bulk which helps them to increase their profitability.

 Figure 2. Stock and Sell Model

ROADBLOCKS

Providing same day delivery in India is a challenging task for all the e-commerce companies. It needs a robust and highly efficient supply chain network to deliver delivery on same day. To ensure same day delivery companies have to transport goods by air, which increases their operating costs by half, because of inefficient and under developed road and rail infrastructure.

To reduce shipment by air, Flipkart is building regional warehouses and increasing the no. of suppliers to ensure the customer receives its order in shortest possible time.

Some of the challenges that companies face in order to provide same day delivery are -

1. Real time Inventory management - Companies should have real-time data about location of each SKU in order to deliver it in the fastest time

2. Optimize Fulfillment Centers - Once an order is placed for same day delivery, it is very important to decide which distribution center can satisfy the order. Selection of distribution center will depend on factors such as proximity to customers, inventory levels, staff capacity etc.

3. Robust Logistics - In order to deliver the goods on same day, companies either need to develop their own logistics arm or tie up with transportation companies that can deliver in one day. This is a very important factor as the cost of logistics in India is among the highest in the world due to lack of physical infrastructure. Amazon and its traders have chosen FedEx as their shipping partners as FedEx has got an extensive network and it delivers within 24 hrs. Similarly, Flipkart is developing its own logistics arm e-kart, opening warehouses at strategic locations to serve multiple cities.

THE WAY AHEAD

Well, the battle has already begun and many companies are trying innovative ways to provide same day delivery using their own models. Recently, Amazon has tied up with Mom and Pop Shops, gas station owners, cake shops and these places act as pick up points for customers. This helps to reduce delivery costs and also create more visibility for that shop. It is still early to say whether this is the next big thing or just a bubble that may burst.