E-commerce: Can it be Profitable?
E-commerce: Can it be Profitable?

Today, most of the e-commerce portals in India are operating at heavy losses driven by a deep discounting model, which is unsustainable over a longer term. Tata Strategic research has identified potential themes that can be profitable and a hit in the Indian market, serving under-served geographies, targeted opportunities, areas with high information asymmetry and margin categories with potential to reorganise the cost structures.

Indian e-commerce market is witnessing a rapid growth. The market which was at USD 11 Bn in 2015 is expected to reach USD 100Bn by 2020. A large part of this growth is currently driven by the deep discounting model followed by most leading players. All three major players are currently experimenting significant losses, anywhere between 15-20 per cent of Gross Merchandise Value (GMV) sold. These losses are over and above the discounts provided by the brand/ seller. Besides discounts, disproportionate marketing spends on customer acquisition is another reason for these losses. While heavy spends are expected during category creation, such losses are unsustainable over a longer period. In the medium term, only players who are able to drive profitable unit economics and control cash burn will emerge winners.

Increasingly, the primary reason for customers adopting this channel over offline stores is the price discount it offers. As the players start looking for profitability, the quantum of discounting is bound to shrink. In fact, the recent press note by the DIPP (Department of Industrial Policy & Promotion) restricts e-commerce marketplaces from directly or indirectly influencing the pricing of the product. This intervention is likely to have a direct implication on the extent of discounts prevalent in the industry. As the e-commerce channel matures in India, several themes are likely to emerge for companies to drive profitable growth. Tata Strategic research details few of these themes below:

Under-served markets

Small town India, especially2 - 5 lakh plus pop-towns are seeing an evolution across retail categories today. While cities beyond the top eight towns constitute 77 per cent of urban population, they have a sizeable 60 per cent + share of the higher income urban population (> Rs 5 lakh p.a.). Modern retail hasn’t yet seen uniform proliferation across categories and pop-strata though.

In the past, Tier-II & III consumers were travelling to the nearest large town for their shopping needs seeking brand and range variety. Brands continue to be wary about entering these towns through direct distribution/ exclusive retailing due to prohibitive cost structures vis-à-vis the through puts envisaged. This creates a sweet spot for e-commerce portals to capitalise on this pent-up demand. Moreover, this set of consumer’s seeks range, availability and convenience rather than low-price. Online players can position themselves on the convenience platform and provide a clear delivery promise to win these consumers profitably. Lower-tier towns have been a significant driver of e-commerce growth for Alibaba and the overall Chinese market. Online spending forms 21-27 per cent share of wallet for consumers from these towns, much higher than their counterparts in Tier-1 towns. More significantly, less than half of this spends substitute their offline purchase, the rest is in fact, additional consumption driven purely because of e-commerce.

Targeted opportunities

With this theme, players can consciously target a specific customer group or product segment, and provide a superior experience. Some variations that can be followed are:


·         Specialist portals: Any consumer looks for either a specialist or a generalised offering, depending on his/her need and requirements. The same is evident from the co-existence of a spectrum of product and service retail offerings in the offline environment today. While there are large hypermarkets and department stores which offer multiple product categories addressed to various occasions and target customers, we also see retail formats carrying a set of brands addressing a particular target customer segment e.g. baby products, footwear, accessories, etc.

·         Curated merchandise: The number of sellers and SKUs available on marketplaces in India is increasing by the day. Today, the industry lists around 1 lakh sellers and more than 19 million products. As these portals continue to scale up, consumers are likely to be overwhelmed by the sheer magnitude of this range, impacting their shopping experience. This creates an opportunity for other portals to position themselves as providers of curated merchandise. Limiting the range available & restricting the sellers as well as brands at the store. A similar phenomenon was seen in the Chinese market, when the Alibaba-owned Taobao spun off Tmall in 2008, limiting the range largely to the brand owners. The range could also be carefully pruned to align with a target group based on attitudinal life stage segmentation. We could also see some of these portals display pre-selected/ shortlisted merchandise customised to the style and preferences of the user (a ‘personal virtual stylist’).


Areas with high information asymmetry with dis-intermediation potential

India has a unique scenario with many products and services driven majorly by the unorganised players due to the lack of formal channels. Used goods/ aftermarket trading is a typical example of such product trade. Similar is the case with many household maintenance services, including plumbing, electrical, furniture, etc. Non-standardised prices, offerings and expertise within these are pain points in large urban markets. In both these cases, there is a significant information asymmetry between the buyers and sellers. An e-commerce platform addressing these very pain points is likely to be a winning proposition. There are also many specialised sectors like handicrafts, metal décor, etc. where the sellers and manufacturers are constrained by the customers they can reach, largely thriving on tourist locations and airports.

An e-commerce play will readily give them access to a wider customer base and hence the ability to grow such businesses manifold. Take for instance, the online handicraft market in India. Such extended availability will drive online handicraft sales to grow 10-11 times to reach USD 550-600 Mn by 2020.The profit opportunity in these cases lies in the platform’s ability to charge for convenience, given the paucity of alternatives.


High margin categories with potential to reorganise category cost structure

Categories like footwear, furniture, apparel, home décor require the retailer to carry a wide range at every front-end store. Some of the larger department stores today carry 35 to 70 days of inventory in their offline store and warehouse. With every change in the fashion season, a sizeable proportion of this stock is sold at a markdown, accounting for 20-25 per cent of annual sales. Online retailers who aggregate inventory at regional/ national warehouses, while addressing wider customer base can thus rotate inventory faster. This helps them reduce the net markdowns on obsolete stock. Absence of prohibitive rental and employee costs allow for additional savings. Only players who derive such cost and working capital savings can realistically pass them on to consumers through reasonable discounts, and yet be profitable.


Building profitable and viable businesses is imperative in the business environment today, in which most competitive advantages are transitory. Several themes can be used by long term players planning to win in the e-commerce sector and grow profitably. The choice for them will be dependent on scale ambitions as well as internal capabilities that the players are willing to invest in. Only then can e-commerce truly realise its potential of creating new businesses that command premium valuations based on economic fundamentals.

 This article has been authored by Pankaj Gupta, Senior Practice Head - Consumer & Retail, TATA Strategic Management Group & Seshadri Narasimhan, Engagement Manager – Consumer & Retail.

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