RIDING ON THE WAVES
An indepth EY report on the trends in E-commerce in Hyperlocal, EdTech and B2B sectors
The Indian E-commerce and consumer internet sector has had multiple waves of entrepreneurship but it was in the last decade when the inflow of large amounts of capital from marquee global investors made its way to Indian shores and cemented itself as one of the most exciting destination and area for innovation and disruption.
The factors fuelling this digital economy over the last decade are manifold such as sustained growth in disposable income, the rise of internet penetration, availability of affordable smartphone, low mobile data tariffs, improved digital literacy, creation of digital payment acceptance infrastructure, continued support
and stimulus provided by the Government through programmes (Start Up India, Stand Up India, Make in India). With an ecosystem and systematic enablers in place, companies have taken to the challenge to solve relatively mundane problems that have also had significant disruption in traditional industries. India currently has over 430 million internet users, however digital transactions is still low and this provides for a massive opportunity for growth and expansion for e-commerce and consumer internet companies.
The sector is expected to reach $200 Bn by 2027, and is a significant avenue to provide employment and building micro-entrepreneurship in the country.
In 2018, 7 companies in the sector reached unicorn status proving investor confidence and willingness to back innovative products and services. Early 2019, has also continued to witness big early stage investments across sub-segments of E-commerce and consumer internet companies like Softbank’s investment in Delhivery and Firstcry, Sachin Bansal’s investment Ola; other companies like 1mg, Zolostays and Medplus have also successfully raised investments. A surge in their offerings by helping not only solve issues but also help in onboarding new customers to the digital arena.
Vernacular: One of the major barriers for adoption of digital services is the availability of content in local Indian languages. By 2021, the number of internet users in India using local languages will be 536 Mn, exceeding the number of internet users using English. With a growing base of Indian language users from both urban and tier 2/3 cities, it is essential that companies provide full stack of services available in the users’ language of choosing. Voice search is another important access point that needs to be enabled and optimized by industry players, which will certainly make for a convenient shopping experience and also keep bringing more consumers online.
Omni-channel strategy: Offline-online play for retail chains and online companies provides for a much broader interaction touch-points with customers. We have seen a series of new models that are being deployed such as ‘shop & drop’, ‘brick to click’, ‘click to brick’, ‘Manless stores’, ‘Integrated buying’, omnichannel, etc all with a target of increasing sales and gaining customers while keeping convenience at its very core. Companies are now pivoting their ‘brick and mortar’ stores to experience centres.
Data driven personalization: Providing customers product of choice based on past preferences or current searches have reaped rewards in terms of repeat customers across formats. This ‘Digital Gold’ allows for business to understand user behaviour and will continue to play a key role in shaping go to- market strategies. With the demographic diversity of India, and the volume of customers’ onboarding services steadily increasing, harnessing relevant data to provide granular level personalisation will not only help customers but also provide an effective feedback loop for companies to tailor their process to the targeted customer base.
Another key development impacting this sector has been an evolving regulatory environment. Government regulations according to the Press Note 2 and recently released draft E-commerce policy have significant impact on companies in this segment. In order to comply with the current direction of the policy, companies need to adopt various strategies including change current operating model which would lead to increased cash burn, and stress on current supply chain network. In addition to the above, the draft policy also focuses on data and associated ownership as it suggests to treat data as a ‘national asset’ which needs to be regulated in terms of cross-border data flows, access / storage of data etc.
THE GROWING DIGITAL ECONOMY COUPLED WITH RISING PER CAPITA INCOME, AND CHANGING DEMOGRAPHICS PRESENTS A HUGE MARKET POTENTIAL THAT START-UPS ARE TARGETING WITH TECHNOLOGY-LED DISRUPTIONS. THE HIGH GROWTH POTENTIAL AND THE SIZE OF THE MARKET IS ATTRACTING SIGNIFICANT INTEREST FROM PRIVATE EQUITY (PE) AND VENTURE CAPITAL (VC) FUNDS TO INVEST IN INDIA’S E-COMMERCE AND CONSUMER INTERNET SECTOR — Padmanabh Sinha, Chairman IVCA Managing Partner, Tata Opportunities Fund
OYO, Swiggy, Byjus, PayTm Mall, Pine Labs, Zomato, Udaan, PolicyBazaar, CureFit have collectively raised a lion’s share ($4.6b in 2018) of the total investments into this segment. Majority of funding is towards building supply chain; expanding into new segments; global expansion; acquisition or consolidation; bring innovative product offerings to the market.
Further, the recent exits recorded by the investors in the recent past have also proved the trust is well placed by the PE / VC community in the start-up ecosystem. The Walmart-Flipkart deal is one of the largest deals in 2018, with the $16 billion acquisition, big investors have made 60% return on investment and has bolstered potential of the sector growth indicators. This deal inspires other companies to expand and grow and has also provides stimulus to new and existing investors who have made significant gains in this transaction. In addition to this there has been US$1.7 billion M&A/strategic Investments in the sector. Other key investments made to help consolidation in the marketplace and/or secondary transitions are Alibaba’s investment in BigBasket and PayTm, Tencent’s investment in Dream11, Naspers investment in Byjus and Swiggy, have shown that Indian start-up ecosystem is thriving and is poised for next level of growth.
IN ORDER TO COMPLY WITH THE CURRENT DIRECTION OF THE POLICY, COMPANIES NEED TO ADOPT VARIOUS STRATEGIES INCLUDING CHANGE CURRENT OPERATING MODEL WHICH WOULD LEAD TO INCREASED CASH BURN, AND STRESS ON CURRENT SUPPLY CHAIN NETWORK — Ankur Pahwa, Partner and National Leader, E-commerce and Consumer Internet, Ernst & Young
The growth projected in the sector, certainly augurs well for not only companies but also investors. There is also a new class of angel investors comprising experienced professionals and successful entrepreneurs who are investing alongside institutional investors, which helps investee companies source talent, gain operational and strategic benefits. Looking at this space, execution of strategies for better operational management and unit economics as well as greater control on the cash burn are important; but companies also need to constantly innovate and engage consumers more effectively to continue on the journey of keeping them online.
This section has been contributed by Ankur Pahwa, Partner & National Leader , E-commerce & Consumer Internet, Ernst & Young. Hyperlocal There has been a paradigm shift in terms of the lifestyle preferences and buying trends among Indian consumers over the last decade. Urban India has gradually embraced consumerism and is increasingly opting for seamless services. The “near me” concept is catching up with the consumers with more and more large and small players entering the “hyperlocal” space.
Growing internet penetration, rise in the number of people using smartphones and increasing disposable incomes have acted as a catalyst for the hyperlocal sector while reshaping customer behaviour and expectations. Hyperlocal E-commerce industry in India has been significantly driven by growing numbers of start-ups, enhanced investments in last couple of years and “on-demand delivery” preference.
The services delivered through hyperlocal business models have always had a large market, be it concierge, grocery, food or pharma. Though the sector witnessed a temporary slump in terms of deal activity as scale became a challenge with the pressure on unit economics, any optimization of logistics cost would have a direct impact on customer experience. The PE/VC interest in hyperlocal delivery was revived with Google investment in Dunzo. Companies like Swiggy, Zomato, Grofers, Milkbasket, Dailyninja, etc. were able to raise funds for expansion. Companies focused on improving unit economics by improving order densities, frequency of delivery to achieve operating efficiencies and use technology to optimise operations and improve customer experience. Latest fund raised by Swiggy has also been made to enable the company to launch operations into newer territories, acquire satellite kitchen companies/brands in order to improve unit economics. While hyperlocal delivery has been primarily associated with grocery and food delivery services, there are also other areas of applications including E-pharmacy, concierge services etc. Subscription services providing regular customer engagement are also strong enablers, this is only a small fraction of the potential market.
Considering the recent developments and market trends, hyperlocal space will see more companies, including big players like Ola, Swiggy, Bigbasket etc.,
to foray into different services like medicines, milk, cleaning, other personalized services.
With low entry barriers, companies in this segment will always have a looming fear of newer players coming in. Those who offer seamless services will carve their niche in this sector and survive in the long run. The existing players would look at bolstering volume through horizontal services and adding customer touch points. As the market expands, there will be consolidation in the segment; while there is certainly depth in the market, but unit economics will be difficult to achieve beyond two or three large scaled players. The companies will continue to use ML and AI capabilities to focus on solving the key issues of the sector like route planning, order consolidation, estimating optimum time slots and overall servicing costs.
Education in India is one of the most aspirational spend categories and integral for growth and progress of the country. While a lot is said about India’s huge demographic dividend with one third of the population being less than 20 years, what is equally important in balance is the shortfall in the number of schools, colleges and universities as the shortage on the skills development side. In this backdrop, Edtech has tremendous potential in bridging the gap and it can be a game changer in disseminating of knowledge across the spectrum.
Companies operating in the space have witnessed a slew of developments in the recent years with each version making progressive improvements in the UI/UX of their interface using learnings, user behaviour and user adoption of new methodologies. The biggest advantage of this space is that it moves away from the one-size fits all methods of teaching into a more adaptive learning and personalisation and most importantly, the convenience of whenever, wherever and however the user would like to learn. This has been one of the key factors in uptake of this technology. This sector has also been a key adaptor of deep-tech such as AI, VR and Analytics to allow for better content and value-add. While it not meant to replace traditional classroom teaching, it is increasingly becoming a good supportive structure to the eco-system. PE/VC firms have been keen to invest in the space not only in the K-12 segment but also open online courses, consumer and corporate focused, reskilling/upskilling program generators. There is also a burgeoning digital skill divide in our country and Edtech companies are starting to step in to reduce the gap. The lifetime value of a customer (in this case, students) once comfortable on a platform can be quite high if there is quality content driven engagement, along with low cost of content creation – crucial for Edtech firms to achieve success.
India is an underpenetrated market in the Edtech space and ripe for disruption and investments. India has the one of the largest school going population and parents are willing to invest in their child’s educational requirements. Traditional educational institutions are unable to service all the needs of students, thus providing Edtech companies a vast marketplace to tap into. While the biggest investment in 2018 belonged to Byju’s raising US$540m from Naspers, CIPPIB and General Atlantic making it the first Indian unicorn in the Edtech industry, close to US$100m was raised by competitors such as Toppr, Vedantu, Unacademy and Thinkzone.
The high growth potential for the sector will continue to attract more investors going forward. The sector is growing rapidly and is likely to be US$2b market in the next three years. The impact that Edtech has had on education is evident as many traditional offline players are working to add online as an important part of their offline content and hence becoming more omni-channel. Given the continuous learning experience that are needed to build skill/upskill, this certainly creates significant potential across all segments including primary/secondary higher education, test preparation, re-skilling courses and interest based casual learning programmes.
In the coming years, some emerging trends that are likely to see an uptick are: a) Greater use of emerging technologies like AI, ML,AR,VR, etc. to provide a more immersive and engaging learning experience. b) Designing of content and delivery mechanism based
on principles of game theory c) Drive greater engagement through gamification d) Local language content curation which will broaden
the base e) Overseas expansion across geographies
While there are significant opportunities, companies will continue to focus on bringing down their cost of acquisitions, improving engagement therefore retention and most significantly quality of content and delivery with growing scale.
While B2C E-commerce has hogged all the headlines, B2B continued to silently scale rapidly. The potential of B2B is in fact reflective in the B2C only being 3% of the retail spend; and that too organized retail is only 12% 15% of the total retail spend. It is no surprise then that B2B is globally 2x of B2C and India is following a similar trajectory.
B2B adds a significant value to the supply chain especially in tier II and tier III cities where access to products, inventory holdings and pricing is always a challenge. The B2B (2C) segment is driven by consumer durables (mobile and mobile accessories), apparels, home furnishings and more recently FMCG products. Industrial supplies and construction materials are a focused segment where some players have carved a niche for themselves. It is largely B2B and used for institutional consumption. Technology has made the supply chain more digital across the entire ecosystem, from retailers to wholesalers and distributors. All this digitalisation improves serviceability, stickiness and personalisation, ultimately improving earnings and working capital for retailers.
The B2B market represents a large untapped opportunity and many companies are building local solutions to serve this under carved market. While B2C players have struggled with unit economics given their lower average order value (AOV) and high transaction costs; B2B on the other hand has better unit economics by higher AOV and volumes despite lower average transactional costs. The unit economics also comes with the advantage of higher lifetime value given the stickiness and higher order velocities, which ultimately help in faster payback. The high growth potential and faster path to profitability make this an attractive sector from an investment perspective.
The significance of this sector has been validated when B2B E-commerce startup “Udaan” raised US$225m in series C funding by DST Global and Lightspeed Venture Partners becoming the fastest-ever Indian start-up to reach unicorn status. Another big investment deal done in the space is ShopX raising US$35m from Fung Strategic Holdings to further fuel their expansion plans. The B2B e-commerce business provides a massive opportunity considering the negligible online presence of the sector, providing great opportunity for both players and investors.
While the early days of B2B have been focused on the digital supply chain, onboarding retailers and changing buying behaviour, the future will be driven by improved logistics efficiency, data driven demand generation and therefore shorter consumption cycles and better working capital.
Growth opportunities for players in this segment would include improving distributed logistics and larger product catalogues and discovery. In the future, there may be opportunities for players to introduce private label products to feed the existing supply chain and also look at opportunities of direct manufacturing tie-ups to improve unit economics and assortments. Another opportunity for B2B players will be leveraging their networks to support the B2C players who don’t compete with them.
Ultimately, as the ecosystem builds, B2B users will become comfortable to transact on B2C side as well and the B2B players can support data driven tie-ups with B2C players. Omni-channel in B2B is also a reality given the multiple segments it can operate in but given SMEs are the drivers of consumerisation, B2B (bottom line and offers) are significant to the ecosystem. Supply chain financing and credit financing are catching the attention of players to leverage on. This is likely to help them building a larger B2B business given the lack of credit in these markets and possibly also open other avenues to feed the supply chain pipe with service offerings, including insurance, health services, digital payments, etc. This full stack model certainly makes for a compelling opportunity.