June 10, 2013
Coca-Cola recently announced that it is jumping into the red-hot Indian online retail arena by selling directly to consumers and small businesses, a first for a FMCG (CPG) company in India. While the Indian online retail story is still being written and Forrester is bullish about the long-term prospects for this channel, the immediate challenges need to be managed effectively.
Logistics and fulfillment are the largest challenges of them all in India, with more than half of all online retail sales being done using cash on delivery (COD). While COD is essential in a nascent eCommerce market, it can have a large negative impact on business margins. This is exacerbated in a nascent market where consumers are testing this new medium of ordering goods, as the return rates can be quite high. In India, reportedly, the return rates can vary from 5% to more than 25%, depending on the category, the demographics of the online buyers, and their online tenure (experience with the Internet).
Given the challenges of high return rates and fraud, especially for COD goods, Flipkart recently announced that it was not going to be fulfilling orders of more than Rs 10,000 (approximately $175) in certain areas of Uttar Pradesh, a state in India. It has not publicly admitted whether this is due to returns or simply fraud, but a quick gut check indicates the following:
- This high average order value is generally possible when ordering consumer electronics and mobile phones, which generally have low-single-digit margins for the retailer.
- Consumer electronics and mobile phones are popular with a younger population.
- Internet connectivity in the state of Uttar Pradesh is probably lower compared with metropolitan markets in India, given its lower state GDP/capita.
- The younger age profile of online buyers and the fact that Internet penetration in Uttar Pradesh has been lower in the past indicates that the online tenure of these buyers is also lower compared with metropolitan markets.
- And, in a 2011 report, Uttar Pradesh had the highest number of registered police complaints.
I believe Flipkart’s decision to stop delivering goods worth more than Rs. 10,000 in certain areas of India is the right strategy for Flipkart, as it looks to manage this challenge while ramping up its top-line (revenue) growth.