India’s E-retail Market Estimated to Reach $150–$170 bn by 2027
India’s E-retail Market Estimated to Reach $150–$170 bn by 2027

The pandemic has been a crucible moment for online retail in India, driving a 12-month acceleration in market penetration (around 5 percent in 2022) and a robust market growth of 25 percent, which takes the market to $50 billion in 2022.

Over the next five years, the e-retail market is estimated to increase to $150–$170 billion (growing at 25 percent to 30 percent annually) which will double the market penetration to 9 percent to 10 percent.

E-commerce is very small currently and while it is growing, there is an opportunity for all formats to grow, these are among the findings of Bain & Company’s new report in association with Flipkart titled ‘How India Shops Online 2022’.

India with its 180–190 million online shoppers in 2021 has the third-largest shopper base globally and is well composed to surpass the US as the second largest in one to two years. The majority of future e-retail shoppers are already in the digital funnel, with only 40 percent of the social-media user base shopping online in 2021.

“Shoppers from Tier II or smaller cities frequently use vernacular platform interfaces, low middle-income shoppers prefer free delivery over fast delivery, and GenZ shoppers belonging use social media and image search to discover products online. Brands and e-retail platforms will continue to innovate on business models to curate experiences for each cohort,” said Arpan Sheth, Partner, Bain & Company.

The report also states that the category mix of online purchases will also evolve. In 2022, mobile phones, electronics, and appliances account for a 45-50 percent share of the e-retail market. Over the next five years, fashion, general merchandise (including personal care), and grocery will grow disproportionately and account for two-thirds of the e-retail market.

Fashion is a crucial category to onboard shoppers as more than 40 percent of new shoppers bought fashion in their first online purchase. While fashion continues to be the gateway category and is expected to see an annual growth of 30-35 percent, general merchandise and grocery are expected to grow 35-40 percent annually.

Moreover, shopper addition will continue to be at the heart of future e-retail growth.

In 2021 alone, 40–50 million shoppers were added and in the next five years, the online shopper base is estimated to increase to 400–450 million. Most of these new shoppers (about 60 percent) come from Tier III or smaller cities.

A new generation of digital natives - Gen Z has started transacting online with 1 in 3 shoppers being from this cohort.

Due to the pandemic, India’s evolving e-retail market has been marked by multiple disruptions over the past 12 to 18 months, steering it into Phase 3.0.

This phase includes the emergence of shopper micro-segments; the introduction of novel business models; and the use of technology to deliver a bespoke, life-like customer experience to shoppers.

Multiple disparate shopper cohorts - based on geography, income, and age are coming online and each of these micro-segments exhibits distinct shopping behavior with exposure to technology-led disruptions that have enhanced the online shopper experience.

  • In tier III or smaller cities, Made-for-Bharat innovations such as voice- and vernacular-based search have continued to gain traction, with more than two-thirds of voice and vernacular users hailing from these towns.
  • Other customer experience innovations such as AR/VR and AI are bringing the offline store experience to customers to make shopping easier. Metro or Tier I cities are driving adoption of AR with 60 percent of shoppers from this segment and is used primarily for large-sized products such as furniture, and large appliances.
  •  One in three shoppers in 2021 belong to low-to-middle income segments and seek easy discovery and rely more on image-based search. They also prefer free delivery over fast delivery.
  • Gen Z shoppers frequently use wish lists to shortlist products before adding items to the cart.

“India is ushering in a new era of growth– what we’re calling Phase 3.0. In this post-pandemic phase, we will witness rapid growth in both the user base and spend per user. The shopper base will mature and transact more frequently, spending more time on platforms which will accelerate this through user experience innovations and new, disruptive business models,” said Shyam Unnikrishnan, Partner, Bain & Company.

Alternate business models including, social-led commerce, video or live commerce, direct-to-consumer commerce, and quick commerce, are also demonstrating tremendous potential.

Social-led commerce model is expected to grow approximately 50 percent annually from 2021 to 2025 including three models- social-network-led, reseller-led, and community buying.

The reseller model has facilitated wider e-retail reach and onboarded new shopper cohorts and is seeing 2-3 shoppers from Tier III or smaller cities, the fastest-growing shopper segment. It also presents as a platform to onboard new shoppers online, 40 percent being first-time e-retail shoppers. 

Video or live commerce also offers substantial potential, with more than 600 million users of short-form video platforms expected in India by 2025.

India has also witnessed a massive scale-up of online first brands across categories through Direct to consumer (D2C) commerce, with brands having garnered more than $2 billion in funding between fiscal years 2015 and 2021.

Q-commerce, a recent disruption globally, has gained interest in India, with players having raised more than $3 billion in funding up to June 2022.

Sustained e-retail growth has been accompanied by tremendous growth in the supplier and logistics ecosystem. India’s online seller base has grown 35 percent annually over the past year, with approximately 40 percent of new sellers coming from Tier II or smaller cities.

“Growing online population, ubiquitous data, and rising incomes are the primary drivers of the tremendous growth of e-commerce. Commerce Advertising as a consequence is already around 15-20 percent of the digital adex. We expect it to grow faster than digital and become a $3-$4 billion opportunity by 2025,” said Sankalp Mehrotra, Vice President- Monetization, Flipkart.

 He further added, “The traditional marketing funnels are collapsing, with product discovery to product search, feature comparison, and the eventual purchase happening on singular platforms. As users continue to migrate, so will the brands. Growing reach, and opportunities across video, search, display, etc. - both on and off-platform clubbed with full-funnel measurement makes commerce advertising a compelling proposition for all marketers. Tens of thousands of sellers and multiple incumbents and insurgent brands across verticals are already harnessing the power of commerce ads. Looking at trends from developed geographies, this is just the beginning.”

In addition to the large efforts by private sector players like Flipkart to democratize e-retail in India, the central government is also playing an important role in this space through the creation of the Open Network for Digital Commerce (ONDC) which aims to create an interoperable network for digital commerce akin to Unified Payment Interface (UPI) network for payments.

Although a nascent initiative, its successful and full-scale execution could provide a fillip to the Indian e-retail ecosystem.

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