Feb. 25--NEW DELHI -- E-commerce may account for a mere 0.5% of the total retail business in India, but it is beginning to affect both sales and profitability of brick-and-mortar retailers, with a growing number of value-conscious consumers warming up to the idea of shopping online, according to a report by credit rating firm Crisil Ltd.
Over the past four-five years, competition from online retailers such as Flipkart (in books, music and electronics), Myntra and Jabong (in apparel) has eaten into the revenues of brick-and-mortar retailers, adds the report, pointing out that in this period, the rate at which the latter have opened new stores has slowed.
Indeed, if foreign direct investment rules are eased -- none is allowed in online retail -- companies such as Amazon.com Inc. will likely invest more, intensifying competition. Amazon already operates in India, providing a platform for retailers to reach customers.
Escalating rentals, higher inventory and a sluggish economy have hit the country's top retailers, but their online rivals have continued to grow, powered by private equity and venture capital funding. E-commerce companies have led a price war, offering steep discounts and hefty promotions to gain market share -- which boosts their valuations.
In recent weeks, brick-and-mortar retailers have struck back, asking companies why they should even distribute their products which are available for far less on e-commerce sites willing to operate with slim, sometimes no margins at all.
Most e-retailers can do so because they are heavily funded (by private equity and venture capital funds), said Rahul Prithiani, director (Industry Research) at Crisil.
Last week, computer and phone maker Lenovo said it would no longer honour warranties on products sold online.
On Monday, The Economic Times newspaper reported that phone makers Nokia, Samsung and Apple were planning to "clamp down" on the practice.
Praveen Sinha, co-founder at online retailer Jabong.com that in January raised more than $100 million (around Rs.620 crore today) from its existing investor Rocket Internet and new investors including CDC Group Plc, the UK's development finance institution, said that discounts are commonly used as a way to acquire customers by e-commerce firms around the world. "It is a new channel, you need to give something to the consumer to have him try out this medium of shopping," he said.
According to the Crisil report, revenues at e-commerce firms grew to Rs.13,900 crore in 2012-13 from Rs.1,500 crore in 2007-08. By 2016, the number could touch Rs.50,000 crore, it projected. The report put the current size of the organized retail market in India at around Rs.1.78 trillion.
As consumers continue to flock online, companies such as departmental store chain Shoppers Stop Ltd, electronics retailer Croma (run by the Tata group's Infiniti Retail Ltd) and apparel retailer Aditya Birla Nuvo Ltd have started their own e-commerce portals.
The report said that more traditional retailers would follow suit.
Online sales complement offline ones, explained R. Satyajit, chief operating officer (international brands and new businesses) at Madura Fashion and Lifestyle, a division of Aditya Birla Nuvo, responsible for the company's e-commerce portal that was started eight months ago, and which sells brands such as Allen Solly and Van Heusen. It's all about access, he explained: Madura F&L reaches 100-200 towns through its offline distribution channel, the website gives it access to around 800.
According to Crisil, the impact of online retail is most evident in books, music and electronics, where the product specifications are standard and differentiation low. Unable to match the huge discounts offered by online retailers, traditional booksellers and music stores are either shuttering outlets or folding up altogether. PlanetM, a part of Videocon-owned Next Retail, has been closing stores since 2012. Between 2011 and 2013, it shut over 100 stores. As of March 2013, it had 85 open. As a part of this restructuring, PlanetM has adopted a kiosk-based model for expansion, saving on rentals.
In an interview last week, Amit Agarwal, head of Amazon Seller Services Pvt. Ltd, the Indian unit of the world's largest online retailer Amazon.com, said that people were shopping for consumer electronics and books extensively seeking "value" across their purchases. "These two categories are very large," he added.
Meanwhile, consumer demand has slowed.
India's economy expanded by 4.8% in the three months ended September. According to a January report by India Ratings and Research Pvt. Ltd, a Fitch Group company, urban consumer sentiment is expected to remain subdued in 2014-15.