If you are an entrepreneur looking to start an Indian e-commerce business, it is important you realize why most e-commerce fail in India. There is a lot of negativity surrounding the e-commerce industry in India. Most e-commerce fail within a year of starting up. This results in layoff, downsizing and waste of venture capital. The e-commerce boom in India which started around 2011 has resulted in thousands of online marketplaces to mushroom in the country. And it is with good reason. India is expected to generate $100 billion online retail revenue by 2020 and many entrepreneurs want to have the slice of this pie. However, by 2017 itself we can already see that the e-commerce industry in India has become extremely cut-throat. Even poster-boy e-commerce firms such as Snapdeal laid off 2000 individuals from its work force this year. It is indeed challenging to run an e-commerce business in India and due to the high number of entrants in this market, it is a red ocean sector.
Let us analyse more deeply why many e-commerce fail to survive in India.
1. Low-Barrier of entry
It is really easy to set up an online store. Especially with the vast number of e-commerce platforms now available such as Shopify, anyone can start their online business from home. However, it is not the small e-commerce business that really cause the problem. These business usually serve a niche market and are quite budget constrained. However, there are a lot of smart entrepreneurs with good connections to VC-firms who are landing millions of dollars of funding. Due to the simplistic business model, India has started spewing out a lot of well-funded e-commerce businesses with little or no differentiation. Everyone wants to be the next Flipkart or Amazon, the problem is India already has Flipkart and Amazon, we don’t need anymore. It doesn’t take a rocket scientist to come up with an e-commerce business idea. Ask any random person sitting next to you on the bus and he can shoot a couple of his own ideas your way. Therefore, an increasing number of well-funded, not-innovative e-commerce businesses launched every year has made it very hard to do online business in India.
2. Lack of long-term strategy
Given the low cost of setting up an e-commerce store in India and the large volume of well-funded e-commerce startups; the e-commerce business in India is a marathon and not a sprint. Entrepreneurs who are jumping into the e-commerce bandwagon should enter it with a long-term plan. A myopic approach to the business might include expecting cash flow or profits in the first couple of years, this rarely happens – actually it never happens. To give you an idea here is an example – Jeff Bezos started Amazon in 1994. The first occurrence of a quarterly profit for Amazon was in Q4 of 2001, seven years later. The first annual profit was achieved by Amazon in 2003, nine years after they began. It made a net revenue of $5.26 billion, with a razor thin net profit at $35 million. There is another important aspect to this Amazon revenue data. A lot of revenue is also generated for Amazon from their value added services like Amazon Web Services (AWS) and Kindle, so they’re not making full profits just on the basis of their online marketplace.
3. Weak internet infrastructure
A country specific reason for why many e-commerce fail in India is because of the country’s weak internet infrastructure. Although India has the second-largest internet penetration worldwide at around 500 million users (behind China, which has 650 million users with internet penetration), India is not as ripe for the internet market. A lot of comparison is made of the Indian e-commerce market to the Chinese e-commerce landscape, however there a few stark differences between the two. I have listed the same below:
- India is a cash based economy and the most recent statistics indicate that 755 of the online transactions are cash on delivery. The problem with cash on delivery payment is that it locks up a lot of capital (Cash). It is a complicated system to retrieve the cash from the different logistic companies. In addition, the cash is paid in a 30-day or 45-day cycle, so you have to wait to receive the money you have made selling goods. Add to this the complication of returns and exchanges, the cash on delivery payment system is a nightmare for the smartest finance controllers.
- Even though we are only second in the world, in terms of the volume of internet users – our internet is one of the slowest in the world. The latest 2016 data suggests only around 142 million Indians have a 3G/4G connection. Whereas China has more than 500 million of its internet users using 3G/4G networks. If you have ever tried to use an 2G internet, you would realize that it is frustrating and almost impossible to browse the web satisfactorily – let alone complete product comparison and make a transaction. So Indian e-commerce companies cannot really target the complete Indian internet user base and expect them to transact.
- Finally, India is a mobile-friendly country and most Indians do prefer to shop using their mobile. However, as per technology research firm Gartner, Indian smartphone quality is at least 5-years behind China which impacts quality of browsing and shopping experience.
4. Discount-driven marketing
The primary problem for e-commerce in India is that these companies aren’t making money. This comes from the fact that due to the large number of competitors, it has resulted in an intense price war. Companies like Amazon, Flipkart etc have bots that scan competitor websites for the same product, analyze its price and if its lower than what is listed on their own, it automatically reduces the price to compete against the lowest one. Practices like this have killed margins greatly. In addition, Indians are extremely price sensitive consumers. If an offline store can compete on price, many Indians might let go off the conveniences of an e-commerce service and choose the former. Its one of the reason why India has so many online coupon websites that do so well. The bottom line is that a business has to make money on the goods it sells, which is not happening and the cause of e-commerce fail in India.
5. Poor human resource strategy
An often over looked reason while debating the e-commerce failure in India is the poor human resource strategy implemented by most of the companies. There are two primary issues that plague the HR strategy in e-commerce: one is the fact that many employees in e-commerce especially in the technology function are incredibly over paid. The recent layoff at Snapdeal confirmed this theory. When the laid off employees look for new jobs, most companies found a huge discrepancy in the pay offered vs the years of experience held by the candidate. So a lot of the laid off employees have had to join at lower salaries than they used to earn. Companies like Flipkart are also notorious for outlandish pay for their top management as well as tech hires. Secondly, most e-commerce companies are very poor at forecasting the number of employees needed, most of these companies are working with excess human resources than required thereby, driving up the overheads. Most hiring is done in anticipation of a huge scale-up within the organization when a round of funding would be received. If the investment deal doesn’t work out, as it most recently has started happening, then most of the employees hired are actually not utilized.
In case you are interested, there is a post on average salary of digital marketers in India.
Finally, it is important to note that the failure of e-commerce in India is not unique to the country. If you look at worldwide survival rate of e-commerce businesses, it is around 20%. And as much as I hate to admit, we will only see very few businesses that will get to the light at the end of the tunnel. If you are an entrepreneur looking to start an e-commerce site then I hope that you have clear understanding as to the challenges you will face.