Indian e-commerce user base to beat US numbers in two years

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The report revealed that the sustained e-retail growth is supported by strong underlying fundamentals: a large consumer base with rising affluence, albeit from low levels currently; growing Internet and smartphone penetration enabled by low data prices and low shipment costs.

The pandemic has been a crucial moment for online retail in India, driving a 12-month acceleration in market penetration (less than five per cent in 2022) and a robust market growth of 25 per cent, which takes the market to USD 50 billion in 2022.

Over the next five years, the e-retail market is estimated to increase to USD 150 to USD 170 billion (growing at 25 per cent to 30 per cent annually) which will double the market penetration to nine per cent to ten per cent.

E-commerce is very small currently and while it is growing, there is opportunity for everyone and all formats to grow. These are among the findings of the new report titled “How India Shops Online 2022”, released by Bain and Company in association with Flipkart.

The report revealed that the sustained e-retail growth is supported by strong underlying fundamentals: a large consumer base with rising affluence, albeit from low levels currently; growing Internet and smartphone penetration enabled by low data prices and low shipment costs.

India with its 180–190 million online shoppers in 2021 has the third-largest shopper base globally and is well poised to surpass the US as the second largest in one to two years. Majority of future e-retail shoppers are already in the digital funnel, with only 40 per cent of the social-media user base shopping online in 2021, stated the report.

Arpan Sheth, partner, Bain and Company said, “There are distinct micro-segments of online shoppers emerging across geographies, income segments and ages, that exhibit distinct shopping behavior online. For instance, shoppers from tier-two or smaller cities frequently use vernacular platform interfaces, low middle-income shoppers prefer free delivery over fast delivery, and shoppers belonging to the GenZ age group (less than 25 years) use social media and image search to discover products online.

“Brands and e-retail platforms will continue to innovate on business models to curate experiences for each cohort,” Sheth added.

The report mentioned that the category mix of online purchases will also evolve. In 2022, mobile phones, electronics, and appliances account for 45-50 per cent share of the e-retail market, stated the report.

Over the next five years, fashion, general merchandise (including personal care), and grocery, will grow disproportionately and account for two-thirds of the e-retail market, according to the report.

Fashion is a crucial category to onboard shoppers as more than 40 per cent of new shoppers bought fashion in their first online purchase, stated the report.

The report highlighted that while fashion continues to be the gateway category and is expected to see an annual growth of 30-35 per cent, general merchandise and grocery is expected to grow 35-40 per cent annually.

Shopper addition will continue to be at the heart of future e-retail growth, the report stated.

In 2021 alone, 40–50 million shoppers were added and in the next five years, the online shopper base is estimated to increase to 400–450 million. Most of these new shoppers (about 60 per cent) come from tier-three or smaller cities, the report revealed.

A new generation of digital natives—Gen Z (18–25 years of age)—has started transacting online with one in three shoppers being from this cohort and will become a critical cohort in the future, the report mentioned.

According to the report, India’s evolving e-retail market has been marked by multiple disruptions over the past 12 to 18 months.

The pandemic has steered India’s e-retail market into phase 3.0 of its evolution—an era of innovation and disruption. As per the report, this phase includes the emergence of shopper micro-segments; the introduction of novel business models; and the use of technology to deliver a bespoke, life-like customer experience to shoppers.

In this phase of growth, multiple disparate shopper cohorts—based on geography, income, and age—are coming online and each of these micro-segments exhibits distinct shopping behavior with exposure to technology-led disruptions that have enhanced the online shopper experience, the report stated.

Shyam Unnikrishnan, partner, Bain & Company said, “India is ushering in a new era of growth– what we’re calling Phase 3.0. In this post-pandemic phase, we will witness rapid growth in both the user base and spend per user. The shopper base will mature and transact more frequently, spending more time on platforms– and platforms will accelerate this through user experience innovations and new, disruptive business models.”

Alternate business models including, social-led commerce, video and live commerce, direct-to-consumer commerce and quick commerce, are also demonstrating tremendous potential, stated the report.

According to the report, the social-led commerce model, expected to grow approximately 50 per cent annually from 2021 to 2025 includes three models—social-network led, reseller-led and community buying.

The reseller model has facilitated wider e-retail reach and onboarded new shopper cohorts and is seeing two to three shoppers from tier-three or smaller cities, the fastest growing shopper segment, the report stated.

The report also mentioned that it also presents as a platform to onboard new shoppers online, 40 per cent being first time e-retail shoppers.

India has also witnessed a massive scale-up of online first brands across categories through Direct to consumer (D2C) commerce, the report highlighted.

Q-commerce, a recent disruption globally, has gained interest in India, with players having raised more than three billion USD in funding up to June 2022, the report stated.

However, long-term sustainability of these models is yet to be proven – players need to navigate challenges around scaling up sustainably, revealed the report.

Sustained e-retail growth has been accompanied by tremendous growth in the supplier and logistics ecosystem. India’s online seller base has grown 35 per cent annually over the past year, with approximately 40 per cent of new sellers coming from tier-two or smaller cities, according to the report.

Sankalp Mehrotra, vice president of monetisation at Flipkart said, “Growing online population, ubiquitous data and rising incomes are the primary drivers of the tremendous growth of ecommerce. And there is a huge headroom to grow from here on. Commerce Advertising as a consequence is already less than 15-20 per cent of the digital adex. We expect it to grow faster than digital and become a three to four billion USD opportunity by 2025.”

“The traditional marketing funnels are collapsing. All parts of consumer journeys from product discovery to product search, feature comparison and the eventual purchase are happening on singular platforms. This is also creating a verticalization of user searches. As users continue to migrate, so will the brands. Growing reach, opportunities across video, search, display, etc. – both on and off platform clubbed with full funnel measurement makes commerce advertising a compelling proposition for all marketers,” he added.

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