Indian e-commerce awaits a smartphone revolution

E-commerce, particularly sales of FMCG products, will take off only once smartphone usage reaches higher numbers

A study undertaken by Google and Bain & Company has projected that over 5% of FMCG sales (currently only 0.3%) will come from e-commerce by 2020. The questions is whether this is an achievable number for India, where only 8% of retail outlets are in the organized sector – or what you call modern trade – one of the lowest in the world .  

A study by Kantar WorldPanel has projected that as much as 5% of FMCG sales globally will happen though e commerce by 2016. So can’t we achieve the same percentage four years later?

The answer whether this number projected by Bain can be achieved or even exceeded is to be found elsewhere. One is the strategy that e-commerce companies wish to follow to woo customers. They have a choice – to connect to customers who today buy their FMCG stuff from small kirana shops across the country who are part of the unorganized retail. Or they can stick to targeting the urban middle class who prefer to go to shopping malls to buy their products and are the early adopters of e-commerce in the hope that as organized retail grows, which it will, their numbers will also go up. The speed of e-commerce conversion will only happen if they crack the former.

The second challenge will be the proliferation of smart phones – there is no other way to reach the mass customer base if s/he does not have a device with data through which he orders online. E-commerce companies can do very little except hope that the data revolution happens.

The good news is that e-commerce companies do not have to worry about the low penetration of organized retail in the country as an impediment to the growth of e-commerce. Global experience clearly shows that there is no direct linkage between the success of e-commerce adoption of customers to how advanced or how big organized retail is in that country.

So, for instance, South Korea leads the world in terms of adoption of e- commerce for FMCG products – it is as high as 10.2 per cent by Kantar. Yet organized retail is only around 15- 20% of total retail space.  However while Germany organized retail has a penetration of over 85%, e-commerce share of sales in FMCG products is only 0.8%, only 50 basis points more than India’s. In China, while organized retail is already 20% of overall retail, e-commerce share of FMCG sales is 0.9% but growing rapidly.  

What is more important is not the maturity of the organized retail business, but the availability of smart phones and its penetration. The success of e commerce in South Korea is primarily because it has the highest level of smartphone penetration in the world of over 80 per cent. China’s commerce is on the road to huge growth because smart phone penetration has hit 70%. In Germany, on the other hand, smartphone penetration is still only 50%. And in Brazil, e-commerce’s share of FMCG is as low as 0.1% because smart phone penetration at 29% is low.

India suffers from a similar challenge. According to industry estimates, smartphone penetration is as low as 10%, surely something which explains why e-commerce in general and especially FMCG products sales (where rural India constitutes for a large percentage of sales) have not really taken off. However there are varying estimates about a dramatic change – Ericsson predicts penetration to go up by 40% by 2020  and even Bain-Google say that there will be over 650 million people who will be online, and at least one third of them will shop online. If the dramatic increase in smartphone penetration happens, there is no reason that Bain’s target can’t be achieved.