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why investors are investing in Indian e-commerce over brick & mortar retail?

In India, 2015s ecommerce sales were approximately $16 billion with chances of market expanding up to seven times higher.

Tags: eretail, investors, investment, ecommerce

BY Guest author  |  Apr 29, 2017  |  comments ( 0 )  | 
why investors are investing in Indian e-commerce over brick & mortar retail?

Has e-commerce guzzled brick-and-mortar? To answer this, let’s start with a brief history. Amazon India exploded onto the scene in a big way in the 1990s and challenged some very long-held beliefs - Would people trust online commerce? You bet they did! People not only trusted e-commerce, but devoured it. E-commerce tools proliferated and suddenly, businesses of every size were swept up in fierce online competition.

And it is only getting bigger by the day. According to a study by Forrester Research, approximately 1/5th of total retail sales will take place online by 2021 in Asia Pacific, with 78% of that coming from mobile, up from 63% in 2016. The study adds that online retail via mobile will grow at a CAGR of 15.6%, to reach $1 trillion in 2020, up from $539 billion in 2016. Numbers to think about right?

In India, 2015s ecommerce sales were approximately $16 billion with chances of market expanding up to seven times higher. Channelized by this robust investment in the sector and swift increase in the number of netizens, various agencies predict that Indian e-commerce sales are expected to reach US$ 120 billion by 2020. Three of the main driving factors to supplement this rise would be the inculcation of niche players, role of FDI and GST and how e-retail is changing the face of food and grocery for good. Data also shows that with $681 billion in online retail sales in 2016, China is the largest market for e-commerce globally, followed by US; but it is India that is the fastest-growing e-commerce market.

Now, investors in general like stories with high success rates and venture capitalists are no different. E-commerce and online businesses in general deliver high growth stories - profitability may be a matter of discussion worldwide not just in India but the broad bet from VC perspective is:
 
 1) Invest to create a brand 
 2) Scale to it millions in revenues in 3 to 5 years
 3) Get an attractive valuation - get more investors
 4) Exit using an IPO or acquisition
  
Largely, this looks like a pretty decent strategy and for most VCs it has worked in several parts of the globe like China and the same notion that this will work in India was perceived. However there are certain obstacles which have the potential to spoil the party for VCs:
 
1) Indian stock markets do not allow non-profitable companies to do an IPO – Thus exits are tough
2) India has a 2-step forward 2-step backward FDI policy - FDI in retail is acceptable, FDI in ecommerce is not - however if it’s a marketplace model, it is good to go. So legally and according to the Indian government guidelines, there are big question marks in such scenarios.
3) Apart from a miniscule percentage, Indians are not highly comfortable transacting online and choices like cash-on-delivery come with their own set of restrictions.

However, this hasn’t stopped VCs from investing in Indian e-commerce. Only earlier this week, Flipkart announced that it had raised $1.4 billion investment from global technology firms, including Tencent, Microsoft and eBay, Flipkart’s largest ever fundraising in their last 10 years of existence and directly challenging Amazon’s ambitions in India. The funding is a good thing for vertical players as there will now be more firepower in the ecosystem. eBay has invested a significant amount of VC funds into Flipkart and have acquired a small stake in Flipkart by selling eBay India to the latter. According to PwC /CB Insights MoneyTree Report Q1 2017, post Flipkart’s funding, the quarterly venture capital funding in Asia topped $9 billion for the first time since the fourth quarter of 2015. Talk about the tides turning!

Together with this, the recent rise in digital literacy has also led to an influx of investment in e-commerce firms, levelling the market for new players to set up their base, while churn out innovative patterns to disrupt old functioning. Online retailing has had a heady impact on the sales turnover of brick and mortar stores, urging market pundits and VCs to rethink business on the terms of investment and product innovation.

I was reading an extract by Satish Meena, Forecast Analyst at Forrester Research in which he says, “In India, pace has been faster with users getting comfortable buying clothes and footwear more easily than they did in other countries only owing to the fact that they get CoD options, no-questions-asked return policies and most importantly due to huge VC investment in the e-commerce sector. Amazon did not have this sort of funding when they started off in the US in 1990s.”

The recent announcement of GST rollout, another significant reform will also help e-retail competitors streamline their supply chain and simplify their tax structure, while rationalizing seamless integration of goods and services across the country. Moreover, it will eliminate the dual taxes being imposed on the current ecommerce eco system. The incorporation of GST ensures absolute clarity in regards to application of direct taxes on transactions undertaken by online businesses. It is the first step taken by the Government in clearing laws for e-commerce, in-turn providing a stable environment to harness growth and development.

 But maturity is yet to happen in payment mechanisms. A majority of Indian online shoppers still prefer CoD to online payment -- despite the latest currency ban that troubled businesses. However as opposed to the previous years that witnessed venture capital funding drying, an upturn is likely to happen in late 2017 and VCs will be left with a few good assets to back them further. All in all, we should expect more positive funding by the end of 2017 and healthier business metrics in e-commerce. Let’s wait and watch how the tide really turns.

 

Has e-commerce guzzled brick-and-mortar? To answer this, let’s start with a brief history. Amazon India exploded onto the scene in a big way in the 1990s and challenged some very long-held beliefs - Would people trust online commerce? You bet they did! People not only trusted e-commerce, but devoured it. E-commerce tools proliferated and suddenly, businesses of every size were swept up in fierce online competition.

And it is only getting bigger by the day. According to a study by Forrester Research, approximately 1/5th of total retail sales will take place online by 2021 in Asia Pacific, with 78% of that coming from mobile, up from 63% in 2016. The study adds that online retail via mobile will grow at a CAGR of 15.6%, to reach $1 trillion in 2020, up from $539 billion in 2016. Numbers to think about right?

In India, 2015s ecommerce sales were approximately $16 billion with chances of market expanding up to seven times higher. Channelized by this robust investment in the sector and swift increase in the number of netizens, various agencies predict that Indian e-commerce sales are expected to reach US$ 120 billion by 2020. Three of the main driving factors to supplement this rise would be the inculcation of niche players, role of FDI and GST and how e-retail is changing the face of food and grocery for good. Data also shows that with $681 billion in online retail sales in 2016, China is the largest market for e-commerce globally, followed by US; but it is India that is the fastest-growing e-commerce market.

Now, investors in general like stories with high success rates and venture capitalists are no different. E-commerce and online businesses in general deliver high growth stories - profitability may be a matter of discussion worldwide not just in India but the broad bet from VC perspective is:
 
 1) Invest to create a brand 
 2) Scale to it millions in revenues in 3 to 5 years
 3) Get an attractive valuation - get more investors
 4) Exit using an IPO or acquisition
  
Largely, this looks like a pretty decent strategy and for most VCs it has worked in several parts of the globe like China and the same notion that this will work in India was perceived. However there are certain obstacles which have the potential to spoil the party for VCs:
 
1) Indian stock markets do not allow non-profitable companies to do an IPO – Thus exits are tough
2) India has a 2-step forward 2-step backward FDI policy - FDI in retail is acceptable, FDI in ecommerce is not - however if it’s a marketplace model, it is good to go. So legally and according to the Indian government guidelines, there are big question marks in such scenarios.
3) Apart from a miniscule percentage, Indians are not highly comfortable transacting online and choices like cash-on-delivery come with their own set of restrictions.

However, this hasn’t stopped VCs from investing in Indian e-commerce. Only earlier this week, Flipkart announced that it had raised $1.4 billion investment from global technology firms, including Tencent, Microsoft and eBay, Flipkart’s largest ever fundraising in their last 10 years of existence and directly challenging Amazon’s ambitions in India. The funding is a good thing for vertical players as there will now be more firepower in the ecosystem. eBay has invested a significant amount of VC funds into Flipkart and have acquired a small stake in Flipkart by selling eBay India to the latter. According to PwC /CB Insights MoneyTree Report Q1 2017, post Flipkart’s funding, the quarterly venture capital funding in Asia topped $9 billion for the first time since the fourth quarter of 2015. Talk about the tides turning!

Together with this, the recent rise in digital literacy has also led to an influx of investment in e-commerce firms, levelling the market for new players to set up their base, while churn out innovative patterns to disrupt old functioning. Online retailing has had a heady impact on the sales turnover of brick and mortar stores, urging market pundits and VCs to rethink business on the terms of investment and product innovation.

I was reading an extract by Satish Meena, Forecast Analyst at Forrester Research in which he says, “In India, pace has been faster with users getting comfortable buying clothes and footwear more easily than they did in other countries only owing to the fact that they get CoD options, no-questions-asked return policies and most importantly due to huge VC investment in the e-commerce sector. Amazon did not have this sort of funding when they started off in the US in 1990s.”

The recent announcement of GST rollout, another significant reform will also help e-retail competitors streamline their supply chain and simplify their tax structure, while rationalizing seamless integration of goods and services across the country. Moreover, it will eliminate the dual taxes being imposed on the current ecommerce eco system. The incorporation of GST ensures absolute clarity in regards to application of direct taxes on transactions undertaken by online businesses. It is the first step taken by the Government in clearing laws for e-commerce, in-turn providing a stable environment to harness growth and development.

 But maturity is yet to happen in payment mechanisms. A majority of Indian online shoppers still prefer CoD to online payment -- despite the latest currency ban that troubled businesses. However as opposed to the previous years that witnessed venture capital funding drying, an upturn is likely to happen in late 2017 and VCs will be left with a few good assets to back them further. All in all, we should expect more positive funding by the end of 2017 and healthier business metrics in e-commerce. Let’s wait and watch how the tide really turns.

The article has been penned down by Dr. Somdutta Singh, Co-Chair Nasscom Product Council, a serial Women Entrepreneur, Angel Investor and Founder of Unspun Group. 

 





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