Take advantage of India's growing E-Commerce
Industry analysis of the Indian E-Commerce sector
The lockdowns have shifted most of our shopping online, even if you weren't already. Millions of new internet users and an increasing number of online stores have given rise to the question - should you invest in this industry? Let's find out.
Though E-commerce in India makes up just 5% of India's retail market and 25% of the organized market, its value is expected to touch $80 billion dollars by 2030 according to a Financial Express report. It is expected to surpass the mighty US market by 2034. With a projected CAGR of 27%, apparels and electronics are likely to be the key drivers of growth. The online grocery platforms are not behind with a projected US$ 18.2 billion in 2024. With 10 million internet users in India added monthly and expected to reach 900 million by 2025, the "Diwali Festive Sale" remains a time of highest sales. Not to mention the Google-Jio deal ‘Google for India Digitization Fund’ has certainly taken the numbers up a notch.
What is E-commerce?
Any physical good bought by a digital channel (laptop, tablet, phone, etc.) from a consumer is an e-com transaction, collectively known as the E-Commerce market. Keep in mind that anything other than that mentioned above, for example digital services, media, or B2B items are not to be taken count of.
Within the Indian consumers, apart from electronics and apparel, furnishing, personal care & groceries are a hit.
Such companies typically follow a "long tail business strategy", according to Chris Anderson where merchants make substantial profits by selling low volumes of hard-to-find items to many customers, instead of only selling large volumes of popular items. This indicates why niche brands may do well, sticking to a specific set of products.
The sources of revenue for such enterprises are not only limited to sales, but popular aggregators also benefit by running advertisements for merchants who are willing to pay for traction.
Improved spending capacity in developing and underdeveloped countries, rising penetration of smartphones, dependency on social media that promote shopping and new avenues for digitized payments is expected to take the global e-commerce market to USD 16,215.6 billion by 2027, at a whopping CAGR of 22.9%.
COVID-19 has transformed how people buy, and most have switched to buy from online portals, disregarding the traditional store concept.
Leaders like Alibaba, Amazon and Walmart have come up with the best marketing campaigns in India and other developing countries to influence consumer behaviour and skyrocket sales.
Though the sector looks like it's in an unending growth trajectory, there are enough reasons it may not do as good as expected.
The selling point of online shopping is that it is "online." Only 40% of the total population in our country uses the internet to buy stuff, which is meagre compared to 84% of the US and other developed countries. We Indians also want to touch and see a tangible product, before we can trust the seller and decide to purchase it, which is not possible with shopping online.
Also, cash on delivery is preferred which can be a hindrance . Poor logistic frameworks and inaccessible roads are responsible for delayed deliveries that can considerably decline a buyer's interest.
Good Future prospects
The prospects are on the brighter side though. 97% of postal codes ordered at least 1 once during FY20, and the trend of buying online is gaining popularity in the rural sector, 3 out of every 5 buyers being from a 2-tier or 3-tier city. The upcoming 5G network and digitization of India has been a catalyst in this.
The young and growing demographic remains responsible for high internet usage, getting attracted by personalization and digital payment "rewards" of these vendors, succumbing to deals and discounts. Discretionary spending too, is on the rise as the number of working women are expected to rise by 40% in the coming 5 years.
Setting up an online store has also become relatively easy, demanding just a few clicks. Branding, social media marketing and logistical solutions have simplified marketing a store and elimination of middlemen enables vendors to offer subsidized prices.
The overall increase in innovation across platforms over the internet and ancillary segments ensures that there is something for everyone. E-com and aggregator startups are also on the rise.
The government is showing its support by allowing 100% FDI under automatic route.
Approach to investing
Now the most crucial part, HOW TO INVEST?
Growth of E-com doesn't only signify the changing face of Indian retail, but also of its ancillaries that contribute to the health of the industry. These vital auxiliaries are the internet, digital banking and logistics/warehousing sectors.
Our suggestion would be to allocate 50% of your funds for this industry to retail and consumer giants like D-Mart, Tata Consumer Products and Titan, among many. 40% of it can be invested in the internet space, our favourites being Infoedge (listed as NAUKRI) and Indiamart; and in digital banking, sticking to top performers that have deep penetration like HDFC Bank, Axis Bank and SBI. The remaining 10% can be allocated to the upcoming logistic companies like Adani Ports and Special Economic Zones, Container Corporation of India and Blue Dart Express Ltd.
Indirect investments can be fostered through focused mutual funds like the Axis Focused 25 Fund, Principal Emerging Bluechip Fund and DSP NIFTY Next 50 Index Fund.
The "FMCG Tracker" smallcase is also a good option to gain exposure to this industry.
Also watch out for promising IPOs of PayTm and Nykaa!
In a nutshell,
The Indian e-commerce industry in India has pretty bright prospects owing to rising internet penetration supported by a young demographic. If targets of organized supply chains, supreme data analytics and rural acceptance are achieved, it has the potential to be a world leader in this industry.