Marketing in India: Ecommerce Sector Still Feeling the Fallout from Demonetization
In November 2016, India’s government stopped recognizing two large-denomination cash notes as part of an effort to crack down on fraud and tax evaders. The move had a pronounced effect on the country's ecommerce sector, largely because cash on delivery (COD) remained a highly popular payment method among digital buyers. eMarketer’s David Green spoke with Vivek Pathak, engagement manager of Bangalore-based research and advisory firm RedSeer Consulting, on the state of ecommerce in India and what the sector looks like post-demonetization.
eMarketer: In India, ecommerce is still a relatively small proportion of total retail sales, about 3% to 4% as opposed to 17% or so in China. What are the major factors driving ecommerce growth, and what’s holding it back?
Vivek Pathak: In 2015, the total gross merchandise value [GMV] of the etailing industry was $13 billion, and it moved up 12% to $14.5 billion in 2016. That’s not a lot of growth compared with the 180% expansion we saw in 2014 and 2015 due to increased adoption of the internet, a lot of discounting, as well as higher employment levels and salaries among consumers.
Now we have large online user bases with a lot of purchasing power who are largely located in India’s larger cities. But in the Tier 2, 3 and 4-plus cities the penetration of etailing is not so good. That’s because of a lack of infrastructure in terms of shipping. So the next growth driver would be an improvement in infrastructure, primarily in the lower-tier cities.
“Now we have large online user bases with a lot of purchasing power who are largely located in India’s larger cities. But in the Tier 2, 3 and 4-plus cities the penetration of etailing is not so good.”
eMarketer: So as an overseas brand, let’s say in fashion, seeking to enter India’s ecommerce market, which platforms should I be taking into account when planning my digital strategy?
Pathak: Flipkart has been doing really well when it comes to fashion. [Fashion-focused ecommerce platforms] Myntra and Jabong enjoy about 60% to 80% of market share when it comes to fashion.
Myntra has a strong focus on brands; they only work with leading domestic and international brands, and they have their own very good brands coming up. I would advise any brand coming to India to look at Myntra and Flipkart.
eMarketer: How has last fall’s demonetization efforts in India affected ecommerce?
Pathak: In October, we generally have a sales season with everyone—including Flipkart, Amazon and Snapdeal—announcing promotions, so we saw a good spike in the GMV that month. But as soon as demonetization was announced in November, that whole momentum was lost. Obviously, there was a lack of cash and people paying online retail companies with cash was down to 30%, with 70% preferring prepaid orders.
eMarketer: Usually cash on delivery would account for about 60% to 70% of payments overall, so that’s a complete reversal in payment behavior. Did that trend affect any category in particular?
Pathak: The lack of cash definitely brought down the spend on luxury items. Why? Because with the limited cash supply, people had to use it for basic needs. Also, what we saw in grocery and other sectors—online and offline—was a huge adoption of credit card mechanisms. So even the small mom and pop shops in India started using credit card machines. Prepaid, credit card and debit card adoption were pretty huge.
eMarketer: Has the reduction in COD payments helped or hindered any particular player? Or are they all adjusting in much the same way?
Pathak: The effect demonetization had was largely only for that one month of November. Since then, Flipkart, Amazon and other players have been doing really well month by month, better when compared with last year. But people have also become aware about other payment channels. Paytm, for example, is now something that even people in the most remote part of the country know about and are using. There are other similar services people have started using because of demonetization.
“Paytm, for example, is now something that even people in the most remote part of the country know about and are using.”
eMarketer: Paytm recently said they had attracted 200 million users to their digital wallet service. That announcement coincided with the launch of their own ecommerce platform, consisting of 140,000 vendors, and their own logistics centers and couriers. Is it the right time for them to be building out?
Pathak: I think it’s the right move because they have so much traffic on the website and from people shopping and paying through the Paytm app. There are now clearly three players: Flipkart, Amazon and now Paytm, which has spun off its ecommerce offering from its payments business and is 40% backed by Alibaba. The only thing is that they have to be careful with delivery speeds and improving customer experience, which might be lacking right now.
eMarketer: When the ecommerce market was in its nascent stages of growth, there was a lot of discounting going on as players competed for market share. Is that still going on?
Pathak: There’s a lot less burn happening now on discounting compared with 2015 and the start of 2016. More is being spent now on reaching out to customers or marketing expenses.
Investors are looking towards consolidation because the quality of service that Flipkart and Amazon have been providing, and their net promoter scores [NPS, a measure of customer satisfaction] have been really good for the past year. Flipkart has been able to improve its NPS in the last six or seven months and almost matched that of Amazon. If you can’t provide customers with a good service, you’re not going to survive very long.