October 7, 2016
The first week of October witnessed the start of the holiday sales season in India as the big three online retailers — Flipkart, Amazon, and Snapdeal — launched high-profile sales. Originally started by Flipkart in 2014 as Big Billions day, this week witnessed a discount-driven war among the top three players.
Online retail in India has witnessed significant growth during the past five years, powered by highly funded online retail companies that bought growth through discounts. This gross market value (GMV)-led growth led to very high valuations and burn rates for retailers, leading some investors to question their long-term profitability. This has led to a slowdown in funding as well as cost cutting by online retailers in the past six months. Before the start of the festive season, Flipkart was looking to maintain its market share; Amazon was looking to take market share from Flipkart, Snapdeal, and smaller players; and Snapdeal was looking to find a place in the changing dynamics of India’s online retail market.
Here are some of the key lessons from this festive sales season for the key players in the online retail market in India.
- Flipkart has strengthened its position for raising the next round of funding. Flipkart saw key changes in the past six months, including changing its CEO, dropping its plans to go app-only, key executives exiting, acquiring online fashion retailer Jabong, and cutting costs by firing employees and shutting down products like its grocery service Nearby and its in-app chat service Ping. Flipkart was looking for two outcomes from this season: 1) reducing the shrinkage in its market share by further consolidating in the electronics and apparel category and 2) increasing its total sales so that it can raise the next round of funding to fight a long battle with Amazon. Flipkart sold goods worth 1,400 crore (~$209 million) in one day and over $500 million in five days shipping 15.5 million units. With these figures, Flipkart is now in a slightly stronger position to negotiate the next round of funding than in the past few months. According to several reports, Flipkart is exploring funding from Walmart and Alibaba depending on valuations and long-term strategic importance.
- Amazon Prime is key for gaining market share. Amazon has outspent other retailers in terms of online and offline marketing in the past six months in order to increase its market share, based on its large number of products and superior customer experience. According to data from Forrester’s Consumer Technographics® Asia Pacific Online Benchmark Survey, 2016, in the past three months, Amazon has, for the first time since 2014, surpassed Flipkart as the preferred online retail destination for consumers in India’s metropolitan areas. Amazon also launched its Prime program in India in July, and Prime Video is expected to launch in November. The Prime membership free trial expires in the middle of this festive sales season, so customers will have to pay INR 499 for an annual subscription. During the week, Amazon shipped 15 million units amounting to $400 million of sales. However, the impressive part is that Amazon Prime is emerging as the highest-selling product: One in every three units sold was a Prime membership. This will surely enable Amazon to increase its wallet share among high-frequency, high-spending online retail customers during the next year.
- Snapdeal is struggling to find its place in this changing market. Snapdeal is trying to realign itself after losing its No. 2 position to Amazon in terms of market share. The company invested 200 crore to rebrand just before this season and is also working with online service providers like Uber, Urbanclap, and Zomato to position itself as a services aggregator. With the funding squeeze, it is becoming more difficult for Snapdeal to continue growing its reach without access to funds. It has shipped around 11 million units during this season, accounting for over $100 million in sales. However, with the increasing focus on customer experience, a slowdown in funding, and the number of online buyers not growing rapidly due to issues like logistics, payments, income, and language, Snapdeal needs a fresh round of funds and a long-term partner to continue fighting this battle with Amazon and Flipkart.
The Indian online retail market has around 68 million buyers in 2016, and the market is in a phase where wallet share is contributing more to online retail market growth than an increasing number of online buyers. In this phase, companies with a better customer experience and better selection of products are going to gain market share, which will give Amazon some advantage over Flipkart. However, Flipkart is reaping the benefit of the amount it spent while creating online buying behavior in India, and it’s still holding the fort in consumer electronics and apparel, which account for the majority of online retail in India. Amazon Prime can enable the shift of high-spending online customers toward Amazon over the next year, posing a real threat to Flipkart. Apart from raising new rounds of funding, the bigger challenge for online retail companies is to grow the number of online buyers so that they can start thinking about profitability.
For more on the Indian online retail market, ForecastView clients can download the Forrester Research Online Retail Forecast, 2015 To 2020 (Asia Pacific).