From: nikhil.kamath
E-commerce in India has undergone significant transformation, driven by unique market dynamics and consumer behavior. This article explores the evolution of e-commerce, its key growth drivers, and the challenges faced by businesses operating in this space.
Evolution of E-commerce in India
In 2015, e-commerce in India was primarily focused on smartphones and white goods. However, the retail landscape in India is heavily dominated by small businesses, with 85% of retail transactions occurring offline through long-tail unbranded small businesses [0:05:05]. Companies like Meesho emerged with the goal of bringing these small businesses online [0:05:22].
Today, e-commerce platforms like Meesho serve a massive customer base, with close to 140 million annual consumers and about a million small businesses selling across various categories [0:05:36]. In the last 12 months, Meesho processed approximately 1 billion orders [1:53:28].
Key Growth Drivers
Digitization and Social Media Influence
Digitization has become an integral part of life, influencing purchasing decisions even for offline retail [0:41:11]. The proliferation of social media platforms like Instagram and TikTok has significantly impacted consumer behavior, driving demand through “FOMO” (fear of missing out) and inspiration [0:43:54]. People often take photos from Instagram and search for similar products on e-commerce apps like Meesho [0:44:12].
Brands are now leveraging influencers, not just celebrities, to connect with consumers [0:45:34]. The shift is towards finding influencers who align with a brand’s philosophy and resonate with specific customer segments [0:50:09]. This decentralized approach means that trends are often led by people, with brands following, rather than corporations setting trends [0:46:25].
Rise of Aspiration-Driven Consumption
As per capita income increases in India, a significant portion of this increase is observed in discretionary spending [1:14:11]. Consumers are increasingly driven by aspirations, wanting to look like celebrities or influencers they follow on social media [1:12:02]. This desire for self-expression and individualistic consumption, rather than just fulfilling basic needs, is a major factor driving demand [0:49:10].
E-commerce platforms are tasked with making these aspirations affordable for a wider audience, including the “India 2” segment (the serving class with rising, albeit still small, discretionary income) [1:13:13]. This segment’s consumption of SKUs (stock-keeping units) is also rising, indicating a diversification of their purchasing habits [1:13:48].
Direct-to-Consumer (D2C) Brands
The rise of e-commerce platforms has enabled the growth of D2C brands, allowing for personalization and localization that was previously impossible [1:58:06]. Many of these brands are online-only, starting as micro-businesses and serving niche markets [1:58:21]. This model allows entrepreneurs to discover specific search terms and build loyal customer bases [1:58:27].
Challenges and Nuances
Entrepreneurial Challenges in E-commerce
Entrepreneurial challenges in ecommerce include navigating a complex market, adapting to changing consumer behaviors, and effectively allocating marketing capital.
One major challenge is the need for deep localization in marketing. Unlike homogeneous Tier 1 markets, India’s audience is highly heterogeneous. Platforms like Meesho adopt a local approach, using different celebrities for different regions to connect with specific demographics [0:54:28].
Profitability and Unit Economics
Profitability in ecommerce remains a key discussion point. While growth is important for reaching critical mass, especially in early stages, sustained profitability is crucial [2:00:51]. Over-investing in growth at an extraordinary cost can be detrimental to a company [2:01:10]. Meesho aims to achieve profitability by the end of 2024, recognizing the need to balance growth with financial health [2:01:55].
The Influence of Offline Retail
Despite the digital shift, physical presence remains important, as digital presence now influences purchases across all mediums [0:42:37]. The “touch and feel” aspect of products, especially for clothing, makes offline shopping appealing for some consumers, particularly Gen Z, who prioritize exact fit over price sensitivity or easy returns [1:16:12].
The Role of ONDC
The Open Network for Digital Commerce (ONDC) is a government initiative aiming to onboard small businesses and unbundle the entire e-commerce value chain [1:44:08]. Its vision is to create an interoperable e-commerce platform, similar to UPI for payments, where a seller can upload their catalog on one app and have it appear on all integrated apps [1:45:27]. This initiative seeks to bring the millions of un-digitized small businesses online [1:44:46].
However, the implications of ONDC for established e-commerce platforms like Amazon and Flipkart are still unclear. If all products become universally available, it raises questions about how platforms will differentiate themselves, as convenience or delivery time could become commoditized [1:48:02].
Investment Strategy
Ecommerce investment strategy often involves evaluating businesses based on their ability to scale and penetrate diverse market segments. Investors tend to be wary of entitled founders and favor those who have grown up with more insecurity or come from less abundant backgrounds, believing this fosters harder work and an expansive mindset [0:08:37].
One investor mentioned backing entrepreneurs building Quick Service Restaurants (QSRs) in India, believing they can open thousands of stores across tier 2 and tier 3 cities. This interest stems from observed profitability in some food businesses, like the Rameshwaram Cafe, which records 7,500 bills a day and generates substantial revenue from a small footprint [0:31:00]. This indicates a shift in investment focus beyond pure tech.
Nykaa’s Position
The future of ecommerce companies like Nika is viewed as a specialized vertical player. Nykaa is considered a brand in itself, known for its deep focus on the beauty and fashion categories and its exclusive product offerings [1:50:51]. While it serves a specific, narrower customer base with a high average order value, its disciplined unit economics have made it attractive in the public markets [1:52:49]. However, its limited segment and category exposure mean it does not fully represent the broader Indian e-commerce market [1:53:02].
The Future of Commerce in India
The future of the commerce industry in India is seen as deeply intertwined with digital. Commerce will be driven by “digital use,” influencing brand perception and purchasing decisions [0:41:01].
The market in India is incredibly heterogeneous, with different consumption patterns across various segments:
- India 1 (Consuming Class): Around 11-13% of the population, roughly 200 million people [1:01:33]. These are consumers of value-added products.
- India 2 (Serving Class): Three to three-and-a-half times the size of India 1, including drivers, helpers, and watchmen [1:00:31]. Their discretionary income is growing, driving demand for aspirational products [1:13:02].
- India 3 (Farm Laborers/Factory Workers): A large segment, often relying on government aid [1:00:49].
India’s economic growth is projected to be driven by increased consumption, as it is the world’s most populous country [1:02:49]. The wedding economy alone is estimated at 15 lakh crores annually, highlighting a significant area of consumption driven by societal events [1:05:44].
Emerging trends include:
- Creative Economy: India can excel in this sector, particularly with generative AI [1:10:41].
- Individualistic Consumption: Mobile phones have fostered personal preferences, requiring brands to cater to diverse individual tastes rather than mass advertising [0:49:10].
- QSRs: The growth of profitable Quick Service Restaurants catering to social interaction and new food discovery is a promising area [1:28:10].
- Influencer-led Marketing: The continued rise of micro-influencers who connect authentically with specific audiences will shape marketing strategies [0:50:35].
E-commerce is no longer a separate industry but an integral part of commerce itself. For anyone entering the commercial landscape today, understanding and leveraging e-commerce is essential for success [2:05:01].