E-commerce in India is on a growth path and there is tremendous room for expansion; online retail sales account for just 1.6% of retail sales in India, according to the World Bank, compared with 15% for China and around 14% globally.
Like most e-commerce markets around the world, much of the attention has been focused on India’s e-commerce marketplace platforms, notably Walmart’s (NYSE:WMT) Flipkart, Amazon (NASDAQ:AMZN), and newcomer Reliance JioMart, the e-commerce arm owned by India’s most valuable company by market capitalization Reliance Industries. However, as the e-commerce market matures and consumers become increasingly comfortable shopping online, new growth opportunities are expected to unfold, opening the doors for growth to a new wave of e-commerce related businesses. One such area is direct-to-consumer (D2C) e-commerce which is gaining traction in the United States.
D2C commerce has been growing by double-digit rates over the next few years, and according to nchannel.com, as much as “81% of consumers plan to shop direct-to-consumer brands within the next five years.”
And brands are listening. A notable example is Nike’s (NYSE:NKE) decision to pull its footwear, apparel, and other merchandise from Amazon and instead focus on direct sales.
As part of Nike’s focus on elevating consumer experiences through more direct, personal relationships, we have made the decision to complete our current pilot with Amazon Retail. We will continue to invest in strong, distinctive partnerships for Nike with other retailers and platforms to seamlessly serve our consumers globally,
– the company said in a statement.
The trend is catching up in India too, with brands increasingly developing their own independent platforms to sell direct to consumers, and seemingly enjoying promising results; the average revenue surge between 2018 and 2019 for 11 prominent D2C startups including The Man Company, Yoga Bar, NUA, The Moms Co. and others was reportedly 213%.
Venture capital investors appear to have spotted the potential too with homegrown D2C startups such as The Moms Co., and Hopscotch India raising millions of dollars in startup funding from venture capital investors the past few months amid the Covid-induced economic slowdown. D2C mom and baby care brand The Moms Co. raised $8 million in September, while D2C apparel brand Hopscotch raised $25 million the same month in a funding round which saw participation from EE Capital, Facebook (NASDAQ:FB) co-founder Eduardo Saverin’s investment arm.
This year, the D2C development has been accelerated by the Covid pandemic which has forced brands to move online. According to a report by e-commerce SaaS platform Unicommerce, over the past year, there has been a 65% increase in brands developing their own website in India, which led to an increase in self-shipped orders. Consumers too are increasingly gravitating towards such online stores, with the report noting that brand websites have witnessed 88% order volume growth compared to 32% for e-commerce marketplaces.
Longer term, as India’s e-commerce market blossoms and consumers become increasingly demanding, it is likely that a growing number of merchants will build their own e-commerce platforms to differentiate themselves by offering richer online shopping experiences, customer interaction, and quality customer service, in an effort to stand out from the sea of online merchants and thereby rake in a bigger chunk of India’s ballooning e-commerce spend. Marketplace platforms, which have become the middlemen in the modern e-commerce supply chain, often do not offer such differentiation; merchants on such platforms have to contend with a standardized look and feel, giving them little opportunity to shape their online brand identity, connect with their target market, and thereby build brand loyalty.
The development bodes well for a number of digital businesses, including e-commerce enablers such as Shopify (NYSE:SHOP), as well as advertising platforms such as Facebook.
Automattic’s (MATIC) WooCommerce, and Shopify dominate the global e-commerce platform market. However, Shopify is growing at a faster clip according to data from Store Leads.
Source: Store Leads
The situation is the same in India; WooCommerce leads with 26,879 active stores as of Q3 2020, while Shopify was second-placed with 19,559 stores, followed by Wix (NASDAQ:WIX) with 7,511 stores and Adobe-owned (NASDAQ:ADBE) Magento with 2,762 stores.
In India too, Shopify is growing at a faster rate compared to its bigger rival with the number of Shopify-powered stores increasing by 4,712 between Q2 2020 and Q3 2020, compared with 1,594 for WooCommerce.
The opportunity for Shopify is tremendous and there is reason to be optimistic about the company’s growth prospects. Shopify’s biggest advantage is ease of use, and this appears to be a big selling point for smaller businesses with tight budgets and little to spend on hiring a coder to develop, maintain and troubleshoot the website. The same cannot be said of WooCommerce which is generally noted to have a steeper learning curve and thus more often than not would compel a business to shoulder the cost of hiring a developer to build, manage, and troubleshoot a WooCommerce-based site.
The same is true for Magento which probably explains why the average Magento merchant is generally larger. In India, for instance, Magento users include big brands such as snack giant Haldirams, footwear brand Crocs India, and homegrown Ayurveda skincare brand Forest Essentials, to name a few.
Shopify’s position as a platform of choice among SMEs was quite evident when the company revealed that it saw rapid adoption among SMEs in India, helping the company register overall merchant growth of 44% in 2019.
There is ample room for growth. Statistics show SMEs generally lag larger enterprises in e-commerce adoption, especially in developing countries. With SMEs accounting for 95% of Indian business establishments, it is fair to say that SMEs are likely to be the primary growth driver in D2C e-commerce. In India, less than half of India’s 42.5 million SMEs participate in online sales, which suggests an untapped market of millions of SMEs in India alone, a tremendous growth opportunity for Shopify which currently serves about a million merchants worldwide.
Shopify, however, is likely to face increasing competition going down the road, particularly from India’s numerous homegrown rivals such as StoreHippo, Zepo, and Zoho. Indian SaaS major Zoho in particular is a notable competitor to watch. A well-established SaaS player with a wide suite of business SaaS offerings ranging from productivity tools to CRM, HR, and finance software solutions, the company launched its e-commerce offering just last year which gives Shopify a five-year head start (Shopify has been operating in India since 2014).
Despite this late-mover disadvantage, Zoho’s more than 20 years of experience in the software industry, and a user base of more than 50 million users in more than 180 countries, could offer the company the advantage of being able to aggressively cross-sell its e-commerce SaaS solution to its sizeable user base.
Moreover, Zoho’s e-commerce SaaS solution is quite competitive compared to Shopify’s; Zoho’s most basic plan is priced at $20 per month compared to $29 for Shopify India, with the added lure being that Zoho’s most basic plan does not charge any transaction fees for stores earning less than $1,000 per month after which the transaction fee is 1.5%. Shopify India by comparison charges a transaction fee of 2%.
Nevertheless, there is likely to be space for several e-commerce enablers in India’s gigantic market, and Shopify is poised to be one of them.
As online merchants look to build their own independent branded store, Facebook is set to benefit through increasing social media ad spend from merchants looking to build and promote their brand. According to a survey conducted by eMarketer, social media ads were the most popular channel from which internet users heard for the first time about D2C brands they had made purchases from.
Being the world’s largest social media platform, and the most popular in India with more than 240 million users, it is fair to say that Facebook is probably the most popular platform for new brands to reach a large audience, which puts the company in good position to capitalize on the anticipated D2C-driven increase in social media ad spend.
According to the filings reviewed by Bloomberg, Facebook generated INR 22.33 billion in ad revenue in India during the financial year 2019. That is approximately $300 million, less than 0.5% of the company’s revenue of $69.655 billion in 2019, but the potential is significant.
India is reportedly the fastest-growing advertising market in the world, with growth driven by digital advertising which is growing faster than any other medium. The growth story is still at early stages considering digital ad spend accounts for just 20% of the country’s overall ad spend, according to figures from media agency Dentsu Aegis Network.
Source: Dentsu Aegis Network
This compares with China where digital media accounts for more than 65% of the country’s overall ad spend as of 2019.
According to a report by media and marketing company Dentsu Aegis Network Ltd, India’s online advertising industry is expected to grow at a CAGR of 27.42% between 2019 and 2025, outpacing the advertising industry overall which is expected to grow at a CAGR of 11.83% during the same period.
Source: Dentsu Aegis Network
Assuming Facebook retains its current market share in India during the forecast period, that would suggest Facebook could potentially quadruple its ad revenue in India from INR 22.33 billion in FY 2019 to more than INR 95 billion by 2025 ceteris paribus.
With Facebook controlling three of the most popular social media platforms in India – namely Facebook, Instagram and WhatsApp (the first two of which are leading B2C social media platforms, as opposed to Microsoft’s LinkedIn (NASDAQ:MSFT) for instance which is generally noted to be stronger in the B2B segment), the company looks poised to be among the biggest beneficiaries of India’s D2C commerce-driven social media ad spend growth.
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Originally published on Seeking Alpha