COD payments at e-commerce firms back to pre-demonetisation levels

COD payments are higher in Tier 2 and Tier 3 cities as compared to Tier 1 cities where customers are more inclined to pay by card on delivery or make online payments. Photo: Indranil Bhoumik/Mint

New Delhi/Bengaluru: A year after the government’s all-out effort to reduce cash usage and push digital payments after the invalidation of high-value banknotes, cash transactions at e-commerce firms have already returned to pre-demonetisation levels.

That’s an indication that hopes of a transformational shift toward digital payments in the aftermath of demonetisation, which caused an unprecedented cash crunch, are unlikely to be realized in an e-commerce market estimated where, according to Redseer Consulting, transactions reached $14.5-15 billion last year.

Cash transactions, which accounted for as much as 60-65% of all e-commerce orders in India until November 2016, dropped to as low as 45-55% after demonetisation took out 86% of the currency in circulation by value, according to executives at online retailers and logistics firms.

But as cash availability increased starting early this year, many shoppers immediately shifted away from digital payments. Now, cash again accounts for 60-65% of all e-commerce orders, these executives said.

Mint had reported on 8 November that demonetisation has failed to make a dent in cash usage in the Indian economy because of poor digital infrastructure and the ingrained habits of consumers, besides other reasons.

“Cash transactions are back to their old levels, or even higher very slightly,” said T.A. Krishnan, CEO of Ecom Express Pvt. Ltd, one of the largest logistics providers to online retailers. “E-commerce companies are going deeper into the country and in these areas (Tier 2-3 cities), consumers are paying by cash. Eighty percent of our deliveries are paid (for) with cash.”

According to Krishnan’s estimates, some 70% of all e-commerce orders currently are paid for with card or cash on delivery.

“We see no positive shift towards credit or debit cards and the COD (cash on delivery) orders have gone back to old levels. In smaller markets (Tier 2 and 3 cities) this number is up by 5-7 (percentage points),” said Abhishek Chakraborty, executive director at DTDC Express Ltd, a logistics firm.

DTDC ships close to 1 million orders a month. The firm had seen prepaid orders touch about 70% of the overall e-commerce business soon after demonetisation, and this number is now back to about 60%.

Hyperlocal delivery firm Shadowfax Technologies Pvt. Ltd said it has also seen a jump of 5 percentage points in COD orders in the last three months. Shadowfax is one of the biggest external logistics providers to online food and grocery delivery companies.

According to Sanjeev Kathuria, CEO of courier firm Dotzot, COD orders saw a sharp fall after demonetisation but returned to normal levels soon after.

“The overall orders for the e-commerce industry saw a dip post November 2016 but we have not seen people switch to credit or debit card transactions, as was anticipated,” Kathuria added.

Flipkart and Amazon India, India’s two largest online retailers, have seen a slight decline in the proportion of cash orders delivered by their own logistics units, executives at the companies said on condition of anonymity.

Flipkart and Amazon, which also use third-party logistics providers, have been pushing customers to use their digital payment platforms, PhonePe and Amazon Pay, to pay for orders. But on an overall basis, a large number of their orders still continue to be paid by cash.

Flipkart declined to comment for this story. Without giving numbers, Amazon India (Amazon Seller Services Pvt. Ltd), the second-largest e-commerce firm, said the proportion of its cash orders has reduced this year compared with the levels before demonetisation.

“Due to the demonetisation in November 2016, people began to adopt electronic payment methods resulting in reduced cash usage. While cash began returning by end of Q1FY17, by then, we had taken several initiatives to encourage digital payments include providing point of sale machine delivery agents and supporting customers in making electronic payments when they deliver across thousands of pin codes across the country. COD (cash on delivery) share in Tier 2/3 cities is higher than Tier 1 but the gap is narrowing, as a result of our initiatives to drive electronic preference,” an Amazon spokesperson said in an email.

E-commerce versus kirana: Ambani crafts another wave of disruption

Reliance Industries chairman Mukesh Ambani is the man who has his finger on the pulse of Indian consumer. In a speech at the Economic Times Awards for Corporate Excellence recently, Ambani said when the fashion was to invest abroad, Reliance took a contrarian bet to invest Rs 3.5 lakh crore in India and that has paid off handsomely. 

Ambani was talking of his telecom venture, Reliance Jio, that disrupted the sector with freebies and a flood of cheap data. 

After the smashing entry of Reliance Jio, Ambani is making another contrarian bet. When retail companies are logging into India, Ambani is betting big on Bharat. Amazon and Flipkart may be putting billions of dollars in e-commerce wars, Ambani plans to ride high on the corner shops—the small kirana stores. 

For the retail biggies, the mom-and-pop stores could be dying but for Ambani they are an ambitious business opportunity. For his retail foray, Ambani is neither spending money nor dirtying his hands with delivery issues. All he plans to do is link manufacturers and kirana stores to his Reliance Jio customers and mint money. 

Reliance Jio will offer its subscribers digital coupons to buy goods at Kirana stores at discounted rates. It will not spend its own money on discounts. It will only mediate between manufacturers and kirana stores to benefit its subscribers. While manufacturing brands will get free publicity, kirana stores will have more customers. And it will be an effective way to add and retain subscribers for Jio. The company is running a pilot project of this scheme in Mumbai, Chennai and Ahmedabad before it rolls out the scheme next year. 

Small kirana stores are seen as a threat by e-commerce companies, but Ambani views them as an opportunity. In an age when the digital and brick-and-mortar are mostly seen as two opposing models, Ambani seeks to combine them in an innovative way using technology, e-cash, coupons and telecom userbase. 

Mukesh's father, legendary businessman Dhirubhai Ambani, used to say if you made a phone call cheaper than a postcard, you would revolutionise the lives of millions of Indians. After realising his father's dream by not only making a phone call totally free, but also making a handset, JioPhone virtually free, Ambani is all set to ride the digital revolution. 

When he began offering free data to Jio customers last year, Ambani must have realised how telecom could open for him the big doors into the Indian retail market. 

Jio’s cheap data opened up a vast market for Ambani with which it can play in diverse ways. E-commerce is only 3-4% of India’s $650-billion retail industry. Organised retailers hold just 8% of it. Small kirana shops make up the remaining 88% of the market. It is this market that Ambani is accessing through his telecom foray. 

Bharat, he knows, is still bigger than India. Rather than trying to pull it online, what Ambani is doing is taking the online shoppers to Bharat, the traditional retail sector, that is. After telecom sector, now the retail players should get ready for a wave of disruption. It's not just retail players who should be afraid of Reliance Jio's new foray into retail. It will give tough competition to digital wallets such as Paytm, Mobikwik and Phone Pe too once it has developed its own retail network. 

Online groceries is a tough nut to crack. So why are India’s e-commerce giants obsessed with it?

The next frontier for the great Indian e-commerce battle could be shampoos, cereals, fruits, and vegetables.

Despite a failed attempt two years ago, India’s largest homegrown e-commerce major, Flipkart, is once again experimenting with online grocery retail with a service called Supermart. The company is currently running Supermart in a pilot stage for its employees in Bengaluru. “We intend to scale it (Supermart) up to all customers in Bengaluru and take it to other cities in (the) future,” a Flipkart spokesperson told The Economic Times newspaper. Flipkart did not respond to an email query seeking details about the service.

Flipkart’s move into the segment comes over 20 months after its fierce rival Amazon India launched grocery sales in February 2016. This is one of the “fastest-growing categories for” Amazon, a spokesperson said.

The two giants queuing up for online grocery retail is a bit odd, especially given the fact that the segment has seen a high number of casualties over the last couple of years, and that the companies that did survive have struggled to grow. For example, Gurugram-headquartered Grofers has had to downsize its business, its one-time competitor PepperTap closed down after just 17 months, and other pilot projects have failed.

But, if executed properly, getting into the pantry could be the next growth lever for Flipkart and Amazon India. “E-commerce grocery shopping is expected to grow rapidly, particularly among the digitally-centered millennial generation. Consumers are beginning to change where and how they buy groceries, and multi-channel supermarkets have to meet these emerging needs,” said Anindya Ghose, a professor at New York University’s Stern School of Business. “If an e-commerce retailer is not jumping on board the grocery train, it may not be around to catch that ride a year or two later.”

Why groceries?

In the first wave of e-commerce growth in India, electronics and apparel emerged as the high-growth segments. Companies could attract customers with deep discounts, easy payment schemes, and by bringing international brands within their reach.

But grocery has remained largely untapped. “Even after 15 years of e-commerce in food retailing, we’re talking about at best 3-5% market share (of overall food retail), compared with 50% in travel or 35% in electronics in mature markets,” Ghose said. This leaves huge headroom for growth.

Moreover, grocery retail is a high-volume business, since customers shop for items like bread, flours, and cleaning supplies weekly or monthly, but buy new phones or large electronics only once in a while.

“If you want to transform a person’s shopping experience you need to look at where a customer spends the most time. The answer is FMCG (fast-moving consumer goods) and grocery,” Saurabh Srivastava, director for the FMCG category at Amazon India, told YourStory last month. “Customers interact and engage on a daily basis in this category. You don’t buy a mobile phone or a fridge on a daily basis.”

Amazon’s grocery segment has seen a 250% growth in demand since its launch, Srivastava told Quartz. The company currently offers 1.9 million products in this segment from 9,000 sellers, he added.

Crash and burn

But selling fruits and vegetables online is a very different challenge from hawking smartphones. From wafer-thin margins to expensive logistics, grocery retail has its own requirements, which have led to the death of several startups, including Sequoia Capital-backed PepperTap.

Clocking high growth in a handful of cities, especially metros, is possible. Yet, expanding online grocery retail to a large-enough scale across hundreds of cities is extremely tedious because it requires tying up with local suppliers, hiring hundreds of delivery staff, and ensuring proper storage facilities in each market.

And such attempts have failed in the past in India. In 2015, Flipkart had launched its groceries delivery app, Nearby, as a pilot in Bengaluru. But just five months later, the company shut the business down reportedly due to poor demand and tight margins.

In January 2016, Grofers shut operations in nine cities as it was unable to generate enough demand to sustain its business in those places. And a few months later, the country’s then third-largest online grocery retailer, PepperTap, shut shop despite having raised over $51 million.

“If we were going to stick to our two-hour delivery promise (which was rapidly becoming a key differentiator in the markets for us), we needed to build spare capacity in every one of the 17 cities in which we were present,” co-founder Navneet Singh had said at the time. “Compounded with the necessity for discounts, this meant that the cash we were burning on every single order was increasing rather quickly with no immediate end in sight.”

So, even as Amazon India and Flipkart have cracked the logistics for their existing categories—including delivering to far-fetched destinations—grocery will require them to build separate capabilities.

“Unlike non-grocery retailers, online grocers cannot have a marketplace model for any of their fresh foods. Furthermore, perishability of the products makes it time-bound to be delivered,” Shabori Das, senior research analyst at market research firm Euromonitor International, wrote in November 2016.

Big baskets and coveted customers

All these challenges are unlikely to deter Flipkart and Amazon India. After all, the online grocery retail segment is currently estimated at around $1 billion, with a projected compound annual growth rate of 55% over the next four years.

But the contest could take an interesting turn if either of the giants succeeds in acquiring an existing online grocer, particularly Big Basket. For several months now, there have been rumours about Amazon holding acquisition talks with Big Basket, although the two have so far denied the reports. For Flipkart, unlike the last time when it attempted the venture, there are no financial constraints as the company has over $4 billion in cash in its bank, which gives it room to pour money into its grocery basket, and even make an acquisition.

“The grocery segment is going to be incredibly important for the e-commerce battle in India. Why? Well, because given the much lower margins in the grocery business, if you lose 10% of customers to a competitor’s online proposition, that makes a big difference to your topline,” Ghose said. And going by trends that have played out in the US and Europe, Ghose added, online grocery retail typically attracts the most profitable customers: dual-income households and customers who prioritise convenience over price.

“These are the kinds of customers e-commerce retailers should care about,” he said.

Online Food Retail Dream Of Ecommerce Giant Amazon Hits Another Snag

Ever since Amazon received DIPP’s nod for a $500 Mn investment in July 2017, there has been a lot of buzz about the ecommerce behemoth’s entry into the country’s online food retail market. Originally scheduled for this year’s Diwali, the rollout has reportedly been delayed as the company is striving to keep this venture separate from its online marketplace.

As an ecommerce platform, Amazon currently serves only as an aggregator that connects sellers and buyers. Having won the government’s approval in July this year, the company can now sell  food products manufactured and/or produced in India directly to consumers across most cities.

As per the government’s mandates, however, Amazon and other foreign retailers are not allowed to sell non-food items directly to consumers.

To prevent conflict of business interests, the Government of India has asked Amazon to keep its marketplace and food retail arms completely separate. To that end, the ecommerce giant has been instructed to have separate offices, inventories and accounting systems in place.

Amazon has declined to comment on the development, with a spokesperson informing Inc42, “We have not announced any dates or details about our approval for food retail license and we cannot comment on future plans.”

To comply with the terms set by the government, Amazon will have to move some of its warehouses from Amazon Seller Services to Amazon Retail India. Because these warehouses are currently leased to Amazon Seller Services, new lease agreements will likely have signed by both entities. The company will also have to procure a licence from Food Safety and Standards Authority of India (FSSAI).

Amazon India Bullish On The Online Food Retail Sector

Amazon has been looking to enter the food retail business for quite some time now. In July 2017, the ecommerce giant’s proposal to invest $500 Mn in offline and online food retailing was finally approved by the DIPP.

Both Grofers and Bigbasket have also received the government’s nod for their proposed food retail ventures. Amazon’s arrival in the space will likely give brick-and-mortar retailers like Big Bazaar a run for their money.

According to sources, Amazon will be selling packaged food and groceries on its online marketplace and in third-party offline retail outlets. At present, Amazon Pantry offers food products sourced from online vendors. The company also provides same-day delivery of everyday essentials via the Amazon Now app, which was originally launched in February 2016.

The ecommerce company is looking to delve further into India’s food retailing business, with the proposed launch of a private grocery label. A similar move was made last year in the US, where the company’s private label items are sold exclusively to Prime members.

How Amazon Is Taking Hold Of The Indian Online Grocery Market

Amazon’s efforts to capitalise on India’s growing online grocery market can be traced back to 2015 when the company launched an on-demand express grocery platform called KiranaNow in Bengaluru. Later in July 2016, Amazon India launched Amazon Pantry, a service that offers grocery and household essentials to users across India.

The company first put the investment proposal forward in February 2017. As per the proposal, the ecommerce company would be infusing $500 Mn into its food retail business over the course of five years. At the time, it was reported that the ecommerce giant was planning to undertake “retail trading of food products (produced or manufactured in India) to customers at any location through any channel, offline or online, including ecommerce, across India.”

Will Indian e-commerce ever match up to the Chinese dragon?

The Indian e-tail market is less than 2 percent that of China, and there are hopes it will catch up. Research, however, highlights the vast difference.

India’s online retail industry has taken up significant space in the investor wallet and mind over the past decade. It has also seen some of the largest funding deals, with Flipkart’s almost-$4 billion funding this year leading the pack. A look at the infographic below will make it clear that India’s e-tail industry is still nascent, and tiny, compared with China’s, the largest online retail market in the world.

It is not just the difference in size of the markets. The consumer base too is drastically different. While China had 460 million online shoppers in 2016, India had only 69 million. By 2020, China will have 660 million online shoppers according to a report by Goldman Sachs, while India will have 175 million according to a study by Google and AT Kearney.

Hope that made foreign investors and companies like Amazon and Alibaba will pump in billions of dollars into the Indian market is strong and the logic straightforward - Indian e-tail is in its infancy and it is best to get in at the ground floor and ride to the top.

A number of India e-tail proponents have, in the past, opined that India today is at the stage China was a decade ago, and that the latter’s super-fast growth came in over the last 10 years. So, India, the reasoning goes, will grow like China did in the last decade.

But will that happen? The Indian e-tail industry’s growth rate came down drastically last year. After growing at 180 percent in 2015, the industry grew at only 12 percent last year, and is projected to grow at 20 percent this year, according to RedSeer Consulting. The industry in China is expected to grow at 23 percent CAGR until 2020. This, despite China being a much more mature market.

A few data points add to the worry that this slow growth is what’s the future of the e-commerce. The average spend per user is drastically different. While the average annual e-commerce spending per consumer in China is forecast to cross $1,800 (around Rs 1.17 lakh) this year, according to data from iResearch Consulting Group, for India this number is between $120 and $140 (Rs 7,800 to Rs 9,000), according to RedSeer Consulting. In 2010, China’s average consumer spend on e-commerce was already much higher at around $600 (around Rs 38,900).

Also, the assumption is that as more Indians get access to internet, more online shopping will be seen. But, India already has 430 million people with access to internet. China has about 750 million. This means about 16 percent of those with access to internet shopped online in India. While 61 percent of those with internet access in China shopped online.

China also had a manufacturing industry boom that led to drastic improvement in income levels across the country. This has not happened in India. China’s GDP per capita in 2007 was around $3,480, while India’s was around $1,860 in 2016.

These issues raise questions over whether e-tail growth will pick up in coming years in India. If it doesn’t, what happens to the billions of dollars that have been pumped in – just Flipkart has raised round $7 billion in the past decade.

Do you think Indian e-commerce will grow like the industry did in China? Share your thoughts in the comments section below.