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E-commerce Spotlight: India's booming e-commerce sector faces range of challenges

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E-commerce Spotlight: India's booming e-commerce sector faces range of challenges

This is part 3 of a 4-partseries about different e-commerce markets around the world. covered Europe and focused on China, while is about South Korea.

E-commercein India has the potential to achieve record growth, if theindustry manages to put its house in order, analysts have said.

E-commercerevenue streams are expected to jump to $120 billion in 2020, from $30 billionthis year, growing at an annual rate of 51%, the highest in the world,according to a recent joint-study by Forresterand The Associated Chambers of Commerce & Industry of India.

Thegrowth is being driven by the country's rapid uptake of smartphones. India,which is set to become the world's most populouscountry in 2022, is currently the second-largestsmartphone market in the world.

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Accordingto a study by CII-Deloitte, 41% of e-commerce transactions in India in 2015were carried out via mobile devices. E-commerce companies reportedthat close to 75% of their online traffic comes from mobile phones and,subsequently, mobile applications are driving their revenues. It is thereforeno surprise that mobile technology startups are currently among the mostsought-after acquisition targets.

However,the desktop should not be underestimated.

Lastyear, India's leading e-commerce retailer Flipkart moved its fashion retailbrand Myntra to an app-only platform. The move soon backfired and Flipkart andMyntra relaunched their mobile websites within months.

PavelNaiya, an analyst at Counterpoint Technology Market Research, said Flipkartmoved "too early" into the mobile-only strategy and ended upalienating a number of its desktop users.

Heexplained in an interview that particularly young people use their officecomputers to surf fashion retail websites like Myntra as it allows them to keepmultiple windows open so they can compare different options.

"Bygoing app-only, Myntra took away that option and failed to convert its desktopusers to the app," Naiya said.

ForIndian consumers it does make sense to compare different offers: India's topthree e-commerce platforms – Flipkart, Amazon.com Inc.'s Amazon.in and Snapdeal –have been using deep discounting as a way to gain customers. As a result,losses have started to pile up and valuations are taking a hit.

"Recentcorrections in valuations are a sign that investors not only want continuousmarket penetration but also want e-commerce companies to focus on profitablegrowth," according to Chaitanya Prabhu, director at Deloitte ToucheTohmatsu India LLP.

SoonIndian e-commerce companies may have to compete with another global e-commerceleader – Alibaba Group HoldingLtd., which is reportedlyplanning to enter India this year. Alibaba's arrival is set to open the marketeven further.

TheChinese e-commerce giant, which already owns a stake in Snapdeal and Paytm, islikely to force the big players to "rethink" their operationalstrategies, not only in terms of customer acquisitions, but also in managingoperational costs, Prabhu said.

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Thiswill inevitably lead to consolidation in the sector. In fact, that process hasalready begun.

"Largere-commerce companies [are] acquiring smaller companies, to either diversifytheir offerings or to enhance their business operational efficiencies, to driveprofitable growth," Prabhu said.

Headded that, last year, 259 deals worth $2.43 billion pertained to thee-commerce industry, mainly in logistics, payment solutions and digitaladvertising spaces.

AshvinVellody, a partner in e-commerce & startups at KPMG, welcomed the increasedM&A activity as it has been some "much needed correction" thatwill strengthen the strong players and force some of the weaker players to dropoff.

"Companieswill have a 'path to profitability' on top of their minds; new models andchallenges will emerge. It will be a fascinating year," Vellody said.

Despitean expanding, consolidating market with many platforms to choose from,consumers' online sales experience is often affected by poor wireless broadbandquality. India still ranks among the lowest in Asia when it comes to fastinternet speed.

Vellodysaid that even though customers do expect a higher quality of service, such asspeed, network quality along with wider access to cellular services, this iscurrently still limited in India.

Giventhe infrastructure and connectivity challenges, most large e-commerce companieshave traditionally focused on India's better-connected metropoles. The focus isshifting though, to smaller, regional cities and towns as that is where themajority of India's population resides. Many of these regions experience majorinfrastructure challenges, especially in the final-leg of the supply chain,also known as the last-mile delivery.

E-commerceplayers are therefore teaming up with companies that serve theseharder-to-reach customers. India Post, which has an existing footprint ofnearly 154,725 post offices in 19,000 pin codes across India, has emerged as afavored player for last mile deliveries. In fact, the state-owned postal serviceis undergoing an upgrade to meet the sudden rise in demand of e-commerceservices, Prabhu said.

"IndiaPost is putting in place advanced disaster management and data recoverysystems, mechanizing its post offices and integrating its systems with those ofe-commerce players, to support the adoption of online buying behavior inhinterland India," he added.

Amazonseems to capitalize the most on the resurgence of India Post. According to aDeloitte report, India Post handled 300,000 Amazon parcels a month during thefinancial year 2015-2016.

Analysts said that although the challenges are enormous,e-commerce potential in India is immense. The government has put in place aclear regulation, companies are shifting focus to profitability from volumes,and broadband infrastructure is set to receive an overhaul in 2016.

Things are expected to improve this year, and asinfrastructure improves, growth will follow, Vellody concluded.