Indian businesses have patience tested over online ventures

By Shilpa Kannan
BBC News, Delhi

media captionFashion is playing a key role in driving India's e-commerce growth

As the lights come on, models pose and the cameras click away.

Tunics, shoes and jewellery - are all being snapped.

Photos are uploaded within minutes; to be seen by millions of online customers across the country.

This is the new world of e-commerce in India.

Jabong is one of the latest companies to enter the market.

Selling more than 50,000 products from shoes to cutlery online, the company says the Indian market is promising - especially in small towns, where more than half of all online sales comes from.

Arun Chandramohan is one of company's founders and chief executive.

He says India is "structurally more attractive because we have a large youth population, growing aspiration, a large country where we don't have very high penetration of malls".

Fast catching up

Increasingly Indian shoppers have discovered buying items with just a click of a button, including through their mobile phones too. Travel booking websites are the most popular choice.

The Indian railways ticket site is used by almost one in five of the country's web users, according to research company Comscore.

But retail websites are fast catching up as more young people begin to buy their clothes and shoes online.

While there are only about 10 million active online shoppers right now, the industry estimates that there are over a hundred million consumers ready to spend their money over the web.

But getting to those consumers is not easy - India faces serious issues with poor infrastructure and logistics.

Most companies, like Jabong, follow a model where they buy products, pile them high in their warehouses and hope consumers will buy it from them.

But this approach adds the costs of warehousing, inventory and logistics.

Some others follow the marketplace model.

This is when a company displays products from various vendors on their website and orders a product only after a consumer buys it online.

But it means shipping and delivery may take longer.

Ignoring profits

The sustainability of both business models is a critical issue, warns K Vaitheeswaran, the boss of Indiaplaza - the country's first e-commerce site.

"So far all the investors who have come and heavily invested in new e-commerce companies have asked for sales and top-line growth," he says.

"But they ignored profits. Suddenly they are beginning to realise that they may not get good returns on their money."

He says his company has survived this long because they have kept operating costs low.

When the company was first set up in 1999, less than three million people used the internet in India, and only about 20,000 people actually shopped online.

Now, the country is among the top three fastest growing internet markets in the world - last year, internet use surged by 41%.

image captionIndiaplaza was India's first e-commerce site

The potential to grow further is huge.

According to Rajan Anandan, managing director of Google India, of the 137 million internet users in India, only about 25 million are involved in online transactions.

In comparison, China has already got more than 180 million people transacting online.

While the number of people getting online is increasing, getting them to spend their money is still difficult.

Companies say the cost of acquisition of customers is quite high.

To attract new customers, firms have to spend money on advertising and offer discount coupons or have flash sales.

Some industry estimates suggest that firms are spending between $15-$50 (£9.30-£31.20) in getting each customer.

So the country's $10bn market is driven mainly by companies offering big discounts and free deliveries.

The other big problem facing companies is that very few Indians own credit cards.

So most firms have an option where customers can pay cash on delivery - adding significantly to their costs.

Funds crunch

But while the costs are daunting, it hasn't stopped companies from entering the market.

Amazon's Indian venture,, doesn't sell products directly but aggregates information from different e-commerce sites.

Ebay India, which started in 2005, clocks six transactions per minute, according to the Internet and Mobile Association of India.

image captionA lack of credit cards in the country means products are often paid for with cash on delivery

In comparison, India's largest e-commerce company, Flipkart sells 20 items per minute.

E-commerce accounted for the maximum chunk of private equity and venture capital deals in 2011 according to a study by advisory firm, Zinnov.

They reported that the sector has grown 800% since 2008.

Another firm, Technopak, predicts the ecommerce market to hit $70 billion by 2020.

But the worry is that none of the companies are making a profit yet.

And there are signs of a funds crunch.

Venture capitalists are becoming more wary as barely any e-commerce firms so far have made any profit.

Winners and losers

Already some consolidation is taking place.

Sunjay Guleria is co-founder of Sher Singh and Exclusively, sites which target Indian expats. He recently sold his company to another retailer, Myntra.

He agrees that capital has tightened up considerably.

"There will be winners and there will be losers.

"India itself - the landscape is very small in terms of the conversion rates. So there will be people who just don't make it.

"It'll be the bigger guys who have achieved scale that are doing millions of dollars a month in transactions that will break away from the path."

With organised retail accounting for less than 5% of the market, ecommerce is leap-frogging across the country especially in towns that lack supermarkets or shopping malls.

As incomes improve, and more young people get online to buy, the brands they aspire to own is increasingly just a click away.

Promising news for the companies that have dived in - but making big profits may take longer than they originally hoped.