Should enthusiasm for India’s e-commerce be curbed?

Should enthusiasm for India’s e-commerce be curbed?

Recent investments in Indian e-commerce have excited the business community, and reports suggest that the industry will grow from $2 billion to $23 billion by 2018. But there are reasons to worry.

India’s e-commerce is booming. India’s largest e-tailer, Flipkart, recently received $1 billion in funding from its existing investors, a sum that allegedly gives it an astounding valuation of $7 billion. India’s second largest e-commerce firm, Snapdeal, has announced that an icon of Indian business has invested a large sum in the firm. Not to be left behind, the American internet retailing giant Amazon announced a $2 billion  investment for building warehouses and improving service delivery in India.

Such significant investments in e-commerce have excited the Indian business community, domestic funders and foreign private equity firms about growth prospects of Indian internet retailers. A Nomura report suggests that products bought online in India will grow from the current $2 billion to $23 billion by 2018. But is this enthusiasm justified?

At present, there are many pitfalls in Indian e-commerce that are bound to cause investors consternation and significant pain. Plenty of caution and due diligence is warranted before making an investment in Indian e-commerce entities. First, the country is still in its infancy in terms of internet reach, and technological infrastructure is sporadic and inconsistent. Second, payment gateways are error prone. Third, most of India’s e-commerce is in travel while the product business, yet to find its feet, is facing severe competition. Fourth, and most importantly, the customer service of most Indian e-commerce entities is inadequate.

Online firms operating in India can be divided into three distinct categories – public sector firms like Indian Railways, private domestic players, and foreign companies that have set up operations in India.

IRCTC, the internet ticketing arm of Indian Railways, is the towering giant of Indian e-commerce and is well ahead of competition both in terms of service and volume. Founded in 1999, it took the company over a decade to improve its backend technology and offer customers an excellent user experience and efficient service delivery. Monopoly over railways and government funding made its success possible.

Foreign firms like Amazon and Expedia, who have plenty of operational experience in their home countries, are slowly making foray and are beginning to attract customers.

On the other hand, private Indian e-commerce players are struggling to surmount the myriad of service issues. To overcome chronic power shortages that lead to frequent disruptions for shoppers, companies have introduced mobile websites. To address payment gateway problems, customers are offered a “cash on delivery” option.

But addressing customer service issues has been no easy task for Indian e-tailers. Processing refunds can take several phone calls and weeks to resolve. Moreover, taking a cue from customers in developed nations, Indian shoppers, too, expect good deals along with free shipment. They want returns to be made easy and quick processing of refunds. But improving the user experience so that customers return is proving a daunting task for many of the Indian e-commerce firms.

All of these factors suggest that the outlook may not be so rosy — and investors should take heed.

Flipkart provides a cautionary tale. Founded in 2007, now with an average transaction size of$30, it is yet to make an operating profit and will continue to incur losses for the foreseeable future. In search of profits, it changed its business model last year from seller of goods to a marketplace that matches buyers and sellers.The company has 22 million registered users, about 10 percent of the market share, and delivers 5 million packages every month. But an expected listing in the United States in 2015 might have been the main reason behind the company’s astronomical valuation of $7 billion.

The gestation period for current investors will be a long one. For e-commerce to successfully evolve in India, it is critical for the new government to increase power generation and solve the electricity woes, complete its Digital India project that will transform the country into a connected conglomerate of villages, towns, and cities and award additional spectrum to telecom operators in a timely fashion. All three are wrought with high risks. It will be a decade before winners and losers in the Indian e-commerce arena emerge. Investors must be forewarned that the path during this period will be treacherous.

About Author

N V Krishnakumar

N. V. Krishnakumar is an investor and ardent follower of economic and political developments in India and United States. After graduating from New York University’s Robert F. Wagner Graduate School of Public Service with a Masters in Public Finance and Policy, he returned to his hometown of Bangalore. During his time in New York, he was a consultant at the United Nations Development Program.