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India E-Commerce Growth Spilling into Ecosystem

March 26th, 2016

India eCommerce ecosystemThe growth in e-commerce in India is also giving a boost to a wide array of players that are directly or indirectly part of the e-commerce ecosystem. These include manufacturers of packaging material, 3PL (third-party logistics) providers that provide tailor-made solutions for e-commerce, IT companies that help retailers in transitioning from offline to online or provide digital marketing / data analytics services to e-commerce players and traditional media companies that are benefiting from the rising advertising spending of Internet businesses.

Logistics is where the promise of online gets the offline reality check. The challenges of catering to geographically diverse customers and an inadequate and underdeveloped logistics infrastructure are further compounded by complex tax regulations. Given these complexities, some e-commerce players have built inhouse logistics companies (e.g., E-Kart of Flipkart and Amazon Logistics of Amazon) for superior service delivery to their customers. However, due to a significant increase in the number and geographical diversity (expense) of orders, coupled with the fact that captive logistics are 10-20% more expensive than using 3PLs, the latter are also benefitting from the growth.

The rising demand for warehousing presents a significant opportunity. Real estate players could build warehouses and lease to e-commerce companies. In China, the share of area leased by e-commerce companies currently stands at 25% of the total leased area, from just 4% in 2010. If India broadly follows the trajectory set by China, the potential for growth in space leased by e-commerce players is substantial. Specialist e-commerce logistics providers can also capitalize on this opportunity by offering warehousing and fulfillment services to e-commerce companies. The signs of things to come are already visible. Snapdeal already has 40 fulfillment centers spread over 15 cities. Amazon recently doubled its storage capacity to 0.5m sq ft by adding 5 more fulfillment centers (in Delhi, Chennai, Jaipur, Ahmedabad and Tauru (outskirts of Gurgaon)), to its existing centers in Mumbai and Bangalore. Flipkart, which recently raised $1bn, intends to expand and upgrade its warehousing capacity.

E-commerce companies are spending a significant amount of money on Advertisements. According to media reports, top e-tail players like Flipkart, Myntra and Jabong have ad budgets ranging from Rs250-750m per year, while Amazon is reported to have earmarked Rs1-1.5bn for ad spending in FY15. These numbers look even starker when compared with their recent history. In FY11, the average ad spend of key e-commerce companies was only ~Rs1m. In
the last one year alone, cumulative ad spending for the e-commerce category has increased 3-4x, from Rs2-2bn to Rs10bn. Zenith Optimedia (a media firm) expects this spending to double in a year’s time.

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