Niraj S^* and Nageswara Rao SVD
Shailesh J. Mehta School of Management (SJMSOM), IIT Bombay, Maharashtra, India

Corresponding Author: Niraj S, Shailesh J. Mehta School of Management (SJMSOM), IIT Bombay, Maharashtra, India, Tel: 919619413627; E-mail: nirajsatnalika@gmail.com

Received: June 10, 2015 Accepted: July 21, 2015 Published: July 23, 2015

Citation: Niraj S, Nageswara Rao SVD (2015) Sustainability of E-retail in India. J Internet Bank Commer 20:107. doi:10.4172/2165-7866.1000107

Copyright: © 2015 Niraj S, et al. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Related article at Pubmed, Scholar Google

Visit for more related articles at

Keywords

Business sustainability; E-retail; E-commerce; Tipping point

INTRODUCTION

E-Commerce involves transaction of physical goods and intangible (digital) products and services (which is delivered digitally). E-Commerce sales are conducted over computer network, using multiple formats and devices like personal computers, laptops, tablets and mobile phones. It can be categorised into four categories depending on the buyers and sellers:

B2B: It involves transactions between businesses, such as between businesses such as between a manufacturer and a wholesaler, or between a wholesaler and a retailer.

B2C: It involves sales by “pure-play” e-Commerce enterprises or by traditional brick and mortar retailers through their online sales channel to consumers. Direct selling to consumers via ICT network helps small and medium businesses reach greater mass (both domestically and internationally).

C2C: It is the modern day trade where classified advertising section in a local newspaper or online portal is used to sell products (both new and used) by individuals to individuals.

B2G: This is similar to B2B except the fact that buyer in this case is a government entity.

Further eCommerce can be categorised into four segments depending on the type of product/service transacted and business model followed.

Online ticketing: This segment includes websites offering tickets for travel by air, bus and rail travel stay in hotels, cruises, travel packages, movies and events.

Online retail: Includes portals selling retail products online, wherein the company markets products to customers using the internet and also undertakes responsibility for the delivery of those products, either through his own network or through a third party. In this model, companies usually hold inventory of goods.

Online marketplaces: Includes all web-based platforms where sellers display products for other customers/ buyers to purchase online. Online marketplace does not take any inventory risk and merely provides a platform for the buyer and seller to transact.

Online deals: Includes websites that offer deals to customers on various products and services. To avail the deal, the customer typically makes a payment on the deal website before it is redeemed at the vendor’s physical location.

What is e-retail?

The term e-Retail embraces all the ways of transacting (goods) via electronic medium. It comprises of two business models (online retail and online marketplace). Graphically e-retail can be represented in Figure 1 [1].

Sustainable business

Sustainable business is defined as a business which has minimal negative impact on environment (local, global, society, community or economy) and also meets the principle of triple bottom line [2,3].

Why is sustainable development model important?

Integrating sustainability into strategic decision making and initiatives is important because these issues play out over a long term. This also helps companies address the concerns of their stakeholders (customers, regulators, government etc.) For example: companies like General Electric adopted practices for climate change in 2004 before Hurricane Katrina hit and also resolved the sale in clean technology by doubling its investment in research. This helped company create value. Further, the companies also look to reduce cost of operation and improve return on capital while ensuring they create value. This is done as a measure of cost optimisation by the companies where companies drive down cost by systematically managing their value chains. Companies re-visit their strategy to align long term growth prospects which is aimed to determine any lead which could lead to new growth opportunity. For example: Pharmaceutical company adopted a flexible pricing model for its patented drugs in order to make it affordable for people in countries like Africa. The company is profitable and aims to garner significant market share in terms of sales volume in the new market. Sustainable development model also helps companies look into the risk strategy. For example: Nestle faced supply constraints and thereby launched a plan in 2009 to promote producing 12 million cocoa plants over a period of 10 years. To enable this, the company reached out to the farmers to teach efficient and sustainable method. Thus we see sustainable business model adopts sustainable development model which comprises of following components in Figure 2 [4-12].

Literature

After the publication of Bruntland report, the concept of sustainable development has gained tremendous importance for industry participants. The Brundtland report defines the sustainable development as ‘‘development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs (WCED, 1987)”. A business becomes sustainable if it meets the principle of triple bottom line including social (people), environmental (or ecological/planet) and financial (economical/profit) aspects.

A major challenge for the industry is to demonstrate its contribution to the welfare of current generation without jeopardizing the need of future generations for a better quality of life. Further, Mathew Tueth (PhD) reiterated the ideas which was previously put forward by authors like Paul Hawken [13], Bill McDonough and Michael Braungart [14], and Janine Benyus [15], proposed that a mature and authentic sustainable business will contain six essential characteristics. Based on his theory the following six are the parameters that determine the sustainability of a business (Figure 3).

In terms of e-Commerce business, for enterprises, e-Commerce offers both opportunities and risks. New ICT applications and services are helping to reduce various costs for suppliers. Leveraging different online and mobile channels enable sellers capture a wider set of potential customers (both consumers and businesses) in domestic as well as foreign market. Also suppliers reduce cost by reducing investment in physical infrastructure (such as buildings) in expensive locations and focusing on different strategy like third part logistics to reduce the delivery cost (OECD, 2013). At the same time, in emerging economies enterprises are still unaware of the possibilities presented by e-commerce.

If we talk about e-Retail market in India, the aggressiveness of the players in India undoubtedly makes senses as it replicates a similar paradigm followed by global players like eBay Inc. and Amazon Inc. during late 90’s in the United States [16-21]. The massive investments flowing into the business are based on the promises of the future returns the business is expected to make but given the fact huge discounts offered by the players to attract volumes and gain market share, the question of business sustainability remains unanswered. It is important to know that how long this business model can sustain itself.

In the Indian market, the e-retailers have been growing manifold (to the tune of 200-300 per cent y-o-y) in top line but the irony is none of the e-retailers are yet profitable in India. The profit-loss ledger continues to sail deep inside the red sea. For example: companies like Snapdeal.com owned by Jasper Infotech reported a loss of Rs 264.6 Crore on revenues of Rs 168 crore whereas rival Flipkart India Pvt Ltd reported a loss of Rs 281.7 crore on sales of Rs 1,180 crore for the year ended March 2013. Players catering to niche segments or focused single segments are not different either. Fashion e-retailer Jabong (owned by Xerion) reported revenue of Rs 438 crore in the year ending March 2014 with losses of Rs 293.4 Crore.

The following Table 1 shows the revenue and loss of top eCommerce firms in India.

The main agenda for most of the e-commerce players has been customer acquisition. Spending big bucks on marketing, and brand building is something which is seen throughout the year. The activity take on full pace during the festive season like stock clearance, new year sale, Diwali sale, while some of the players launch their own massive discount period like big billion day launched by Flipkart, Singles Day launched by Snapdeal (Table 2) [22-24].

Note: The structure might change depending on the business model, scale of operations, product portfolio and service offerings

Thus we see that despite the fact that the companies make positive margins at the gross level, their margins at the operating level goes down the gutter while the revenue increases significantly. This very well indicates that the volume only game is not a good practice for any business. It is undoubtedly true that high volume means the business have a decent chunk of market share but the law of business existence is violated here.

Positive gross margins and negative operating margins indicate that the companies incur huge operational expenses in the form of logistic cost, fulfilment cost, payment gateway cost and many more. Thus, the e-retailers on India need to re-look their strategy to optimise cost by means of mergers and acquisitions (inorganic growth) and also reduction in cost of customer acquisition (by reducing discounts offered). As the profitability concerns come up, the re-retailers will have to formulate strategy apart from offering discounts as the competition will only surge given the fact that the manufacturing brands have started entering the e-retailing space.

Are e-players likely to change track anytime soon?

With the vast majority of the Indian market still untapped, it seems hardly to be the case. The Indian e-Retail market came into existence with the advent of Flipkart in 2007 and has grown leaps and bounds ever since. Factors such as poor quality of the underlying ICT infrastructure, high adjustment costs, uncertainty surrounding e-commerce and limited perceived strategic value for the firm have been found to dampen the interest among firms to engage in e-commerce. The US e-commerce space, much older and more mature than ours still continues to grow, though at an obviously declining rate. Underpenetration in the Indian market offers vast opportunity for the players to invest and grow. E-retailers in India have started invested huge money on TV advertisements as it is the best medium to reach mass market and to build credibility. Credibility is what the e-commerce space is looking to build in the eyes of the first-time Indian online shopper and to do this they will no doubt need to continue investing in marketing and building robust mobile and online platforms.

A number of proved and potential benefits are presented by B2B and B2C e-Commerce such as enhanced participation in international value chains, greater market access and reach, and improved internal and market efficiency, as well as low transaction costs. It may spur job creation in the information and communications technology (ICT) sector and in enterprises that become more competitive thanks to online procurement and sales.

However, uptake of eCommerce was for a long time confined mainly to large enterprises in developed countries (UNCTAD, 2010). Kshetri categorised barriers to e-Commerce into three categories namely economic, socio-political and cognitive.

Economic barriers: This includes inadequate ICT infrastructure, unreliable and costly power supply, limited use of credit cards (plastic money), lack of purchasing power and underdeveloped financial systems.

Socio-political barriers: It includes weak legal and regulatory frameworks (which influence whether people and enterprises trust online transactions), cultural preferences (like face-to-face interaction while purchase of goods).

Cognitive barriers: It includes low level of ICT literacy, awareness and knowledge related to e-Commerce among both consumers and enterprises [25-28].

The following chart depicts the important parameters which help in running an e-Retail business (Figure 4).

Internet access: Internet access (as seen in the chart above) is needed to conduct online shopping for both buyers and sellers. Data published by indicates that almost 40 per cent of the entire global population can theoretically make online purchase using different devices from different locations.

Payment system: Payment systems are rapidly evolving thereby expanding the possibilities of consumers and corporate buyers to pay for products bought online. Payment system can be account based, electronic currency system or others. Account-based payments systems include credit cards, debit cards, e-wallets, mobile payment or online banking. Electronic based include PayPal, Bitcoin or other similar system. Credit cards still accounts for lion’s share of retail e-commerce settlements (WorldPay, 2014) in developed countries while in countries like India due to poor penetration of financial system and people’s reluctance in using plastic money, cash-on-delivery accounts for a significant share. Cash on delivery can be seen as a low risk option for consumers to enter e-commerce. However, it is a higher risk option for producers [29,30].

Delivery system-Scope of ecommerce is highly influenced by the quality of product delivery. Many consumers turn to e-commerce because of convenience of receiving physical products at their homes. Weaknesses in delivery infrastructure hamper e-commerce, especially for goods.

Hypothesis

Looking at the discounting business model of e-retailing in India and the fact that players in India are not profitable along with the requirement of infrastructure for market growth, we hypothesize that the subject form two hypothesis- one on sustainability while other on the penetration of e-retail market which is dependent on several parameters.

Here we provide the hypothesis for this research paper work.

Hypothesis 1: “Indian e-retail market is not sustainable if the players don’t move to profitability beyond a tipping point”.

Hypothesis 2: “Penetration of e-retail market is dependent on parameters such as availability of internet, logistics infrastructure,literacy rate, penetration of computers/smartphones and penetration of plastic money”

Based on the importance in eCommerce, we have assigned the following weightage to different parameters which enable ecommerce (Table 3) [31-40].

Using the above parameters we develop index for 5 countries both developed and developing economies. Countries included are USA, UK, Brazil, China, and India. This index (or score) is based on the indicators related to the exogenous factors such as literacy, logistics, ICT infrastructure. The index allows countries to compare their e-commerce readiness with that of others and also indicates their relative strength and weaknesses with regard to different elements of the e-commerce process.

Based on the above parameters we find that India is a score of 1.5 significantly below than that of United Kingdom (4.5) and United States (4.4). Further, developing economies like Brazil and China has a score of 3.0 and 2.4 respectively. This very well indicates that the there is still tremendous opportunity remaining in the Indian e-retail market. Based on the market size estimate of e-retail and population we have estimated per capita spend in e-retail for these countries and further analysed the correlation between composite score and per capita expenditure on e-retail (Table 4).

It can be seen that approximately 2/3^rd of the variation can be explained by the composite score which is indeed a composition of parameters like penetration of internet, logistics, literacy, penetration of computers, penetration of mobile phones, and penetration of plastic money.

Further, the correlation of composite score vis-à-vis different parameters indicates that the composite score is highly dependent on the penetration of internet, logistics and penetration of computers. These three components form the backbone of any e-retail business (Table 5).

This indicates that these components need to improve which will eventually help in improving the overall composite score thereby creating a room for the growth in per capital expenditure in e-retail.

Tipping point for India and developed economies

Tipping point is a point where a shift in ecosystem occurs. Tipping point for the e-retail market in India is that level of penetration beyond which the e-retailers have to shift the focus on profitability. In order to compute tipping point, we have use three different scenarios [41].

Developed economy: Median values for per capita spend and composite score are taken for the two developed economies (US and UK).

Developing economy: Median values for per capita spend and composite score are taken for the two developed economies (Brazil and China).

Overall economy: Median values for per capita spend and composite score are taken for the two developed economies (US, UK, Brazil and China) (Tables 6 and 7).

Adjusting the per capita spend with the three scenarios with respect to the composite score we get the projected per capita to be spend (Table 8).

Thus we estimate that a per capita expenditure of USD ~90, the Indian market will be penetrated enough for the players to shift the focus to profitability. A per capita expenditure of USD 90 translates to roughly 20 per cent of penetration of e-retail in overall retail industry. Thus we believe that a penetration of 20 per cent in India market will be ideal for the companies to gain market share and build brand, a point which we can call as tipping point (Figure 5).

Beyond this tipping point the companies in the e-retail space has to shift focus solely on profitability and returns. If not done, the companies won’t sustain in the market and continuous triple digit growth and whooping valuations will result in a bubble which will eventually burst. The following table shows the funding details, valuation and Valuation/ Sales ratio for some of the top e-Retail companies of India [42] (Table 9).

The table clearly indicates that the companies in e-retail space have an average valuation of around 8 times its sales. A further rise in valuation with negative profit will result in creation of bubble (a similar situation was seen in Dot Com crisis) which will eventually burst thereby resulting in destruction of wealth [43,44].

Conclusion

It is seen that in terms of potential, the Indian market has a long way to go for e-retailers. Given the low penetration of enablers like penetration of internet, literacy, logistics, penetration of computers, penetration of mobile phones, and penetration of plastic money the penetration of e-retail has remained less. In terms of sustainability the e-retail market is sustainable given the tremendous opportunity offered. For people, the industry offers competitive salary while number of jobs created is tremendous. For planet, no environment pressure is created by the industry as the invoice generated is sent through email. Also companies in India are engaging in several ground level initiatives (in terms of CSR activities). However, profitability remains a concern as the companies in the space are making operating losses. But the concern can be overcome post tipping point where the focus should shift to profitability rather than market acquisition. Thus, e-retail is sustainable if only right strategy is implemented at the right time else it will lead to bubble.