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by EOS Intelligence EOS Intelligence No Comments

E-commerce in China – Intensive Competition In Spite of Low Penetration

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In the concluding article of our E-commerce Challenges in the BRIC series, we highlight the challenges faced by online retail companies in China. While China is one of the rapidly growing online retail markets, we discuss how aspects such as growing local competition, infrastructure deficiencies, issues with online security for buyers, and heavy dominance of price-based competition hinder the expansion of e-commerce in the country.

Given the Chinese economic growth story, good performance of its e-commerce market comes as no surprise. Exploding middle and upper class, rapidly growing disposable incomes, rising internet penetration, fascination with foreign brands and mobile solutions, all add up to a perfect scenario for online retail to flourish.

According to McKinsey & Company, China’s online retail market, estimated at US$210 billion in 2012, is the world’s second largest market after USA. It is expected that by 2015, it will reach US$305 billion and surpass the US market, having grown at a CAGR of around 34% during the 2010-2015 period. With the size of even up to US$650 billion by 2020, the momentum is expected to continue, especially that industry analysts emphasize that in China’s case, e-commerce has strong effect of generating additional consumption, and not only drives change of sales channels from the otherwise existent off-line sales.

Thanks to the favorable dynamics, Chinese e-commerce has been named the most promising destination for online retailers, which found reflection in China’s first position in AT Kearney’s 2012 E-commerce Index. Unlike in other markets, Chinese e-commerce space is dominated by virtual market places, where a plethora of merchants sell their products, without the need to invest in opening and managing own online stores. However, aspects such as these, along with other specific characteristics of the market, make doing e-commerce business in China a challenge.

China e-commerce

The Challenges

  • Strong and consolidating position of local players – the Chinese e-commerce market is dominated by Alibaba’s consumer-serving arms: consumer-to-consumer e-commerce platform, Taobao, and business-to-consumer marketplace, Tmall, which together account for close to 90% market share. Several local and foreign merchants, such as Microsoft, are increasingly joining Tmall and other e-marketplaces (as opposed to opening own online stores) to sell their products online to Chinese consumers, which leads to further consolidation of Alibaba’s position in the market. While the market is growing and space is expanding to absorb new entries, such strong and established local players are a significant challenge for newcomers, as well as existing online retailers.

  • Dominance of price-based competition – despite strong local players both in the field of direct online retailing as well as e-marketplaces, majority of them do not offer any particular differentiating factor or unique proposition. However, what makes competing with them particularly difficult is their ability to slack the prices and enter into price competition. With price being the key platform of competing, achieving profitability is very difficult, or even impossible, for instance, for retailers who sell imported products subject to high import duties.

  • Considerable infrastructure deficiencies – Infrastructure woes are a common challenge affecting e-commerce markets developing across all BRIC markets, including China. Only metropolitan areas have sufficient infrastructure to ensure that product delivery can reach in time (and reach at all). In rural areas and locations far from main hubs, there is no guarantee the orders will reach the customer, as the road infrastructure and delivery services tend to be non-existent or fragmented. The infrastructure issues are often indicated as the biggest challenge that hinders realization of the country’s full e-commerce potential, as online retailers are not able to control and improve the entire supply chain. This challenge is particularly difficult, given the already high expectations of Chinese online consumers, who not only expect wide selection and attractive prices, but also excellent and fast services, including short delivery times.

  • Insufficient security solutions for consumers to shop online – despite numerous industry analysts agreeing that the market will continue to grow with large numbers of consumers joining the online shopping crowd, there is a common consensus that security-related risks in China are still significant. This includes issues such as product quality, payment security, information security, consumer rights protection, illegal transactions, etc. All of these aspects still significantly impact consumer trust, deterring many of them from shopping online. Also, e-commerce providers have little control over these risk factors, as the security of online payment is handled by a third party. Cash-on-delivery method is not very popular due to other risks (robbery, fraud, etc.), which drives some e-commerce companies to partner with security services providers or to double the number of own couriers sent to deliver the order and collect the payments, to eliminate fraudulent activities (which generates considerable costs).

  • Low internet penetration in rural areas of the country – while the overall internet penetration is increasing, majority of this growth occurs in urban and metropolitan areas. Currently, it is estimated that not more than 35% of Chinese population uses internet, a ratio below levels in many developing countries. As large proportion of Chinese consumers is still located in the countryside, the internet usage growth confined to the cities limits the internet user base growth for the time being. Moreover, rural-based consumers are not very likely to start using the internet and build an interest in online shopping very soon. Therefore, e-commerce players are challenged with having their customer base currently limited mostly to tier 1 to tier 3 cities.


E-commerce in China is booming, in spite of several teething problems around infrastructure, online and offline security, and low internet penetration. The bigger challenges, however, impact new entrants, which are faced by a highly intensive competitive environment and a market driven purely by price competition. E-commerce will continue to grow in China; there is no question about it. The pace of growth will depend on how the market environment changes to mitigate the risks emanating from the current set of challenges.

by EOS Intelligence EOS Intelligence No Comments

E-commerce in India – Unfavourable Business Environment

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In Part III of our E-commerce Challenges in the BRIC series, we highlight the challenges faced by online retail companies in India. Unfavorable business environment, profitability issues, consumer’s set notions on shopping are some of the key aspects that we discuss, in order to better understand where India stands in the e-commerce space.

Despite India being a rightful member in the BRIC group from the economic development point of view, in terms of e-commerce development, the country is typically not clustered together with Brazil, Russia and China. In AT Kearney’s 2012 E-commerce Index, India was not ranked at all, and the market is described as lacking the necessary technology to connect vast numbers of potential users to the internet, and extremely poor infrastructure preventing reliable delivery and returns. Opinions, however, are divided. According to McKinsey & Company, India indeed does have problem with low internet penetration and significant infrastructure barriers, but these issues are challenging, not disabling, e-commerce market.

Currently, Indian online retail accounts for around 1% of India’s overall retail market, according to Euromonitor, and is estimated to reach about US$1.3 billion in 2013. This might be far behind the market size of other BRIC countries, however, looking at the anticipated CAGR of 34% between 2005 and 2015 to reach over US$2 billion with expected share in overall retail to increase to 8%, it appears that the Indian market does have opportunities to offer. Some forecasts indicate a considerably more intense growth, even up to US$15 billion by 2017. The varied forecasts show how big of a question mark the market and its growth trajectory are.

One thing appears to be true though – despite still being a comparatively small market, potential long term growth might turn India into an attractive destination, with current internet users expressing strong interest in online shopping.

The market has the potential to accelerate, however, currently several challenges hinder its growth.

India e-commerce

The Challenges

  • Very low internet penetration – it is estimated that the internet penetration is about 12.5% of the population, far less than in any other BRIC country. Existing connections are largely characterized by low average broadband speed and unstable, often interrupted signal, which results in high online transaction failure rate. None of the Indian economy’s favorable economic developments, such as growing incomes and rapidly expanding middle and upper class, will translate into flourishing e-commerce market until larger proportion of Indian population is online and has access to reliable, fast connection.

  • Infrastructure and logistics inadequacies – given India’s vast size, order delivery is and will continue to be a problem, as the country is not able to develop road infrastructure at a pace fast enough to meet the demand, therefore is postponing investments in infrastructure in rural and remote areas (where majority of Indian consumers are based). Large part of investment in the e-commerce market goes into warehousing infrastructure, inventory management, in-house logistics and delivery logistics, as currently only in tier-1 cities (and in a few tier-2 cities), e-commerce companies can ensure relatively timely and safe order delivery. Infrastructure issues significantly affect the online shopper’s willingness to shop regularly, and many of them abandon their online baskets after seeing the estimated time of delivery. From the e-retailer’s point of view, all these issues generate additional costs, as they either develop own delivery capabilities or partner with several delivery services providers (who often also lack delivery management technology such as fleet or parcel tracking). Overall, it is estimated that the logistics costs in India are among the highest in the word, primarily due to large proportion of poor quality physical infrastructure.

  • Strong off-line shopping culture – traditional, often small, local retailers for years have been part of the shopping landscape, becoming the synonym of shopping experience for Indian consumers. While this is changing with proliferation of malls and organized retail, those local shops still are a tough competition for potential online stores, especially that they have managed to build lasting, often personal relations with customers in their community. These traditional shops are located in the customer’s immediate neighborhood, with some of them offering free delivery, which makes online shopping advantage of purchasing from home much less relevant. Further, consumers’ familiarity with traditional, off-line shopping makes them wary and distrustful of online shopping, due to a range of reasons: the products cannot be touched and felt, e-commerce and online consumer protection laws are yet to be developed in India, and online payments security is still far from perfect.

  • Challenge with achieving profitability – given the nascent stage of e-commerce development in India and the overall high price-sensitivity of Indian consumers, fierce price competition (or even price wars) have been present in Indian e-commerce space. Players attempt to outbid each other with lower price, to the extent that some of them offered prices below their cost. Players’ profitability has also been compromised due to the need to invest and develop overall e-commerce ecosystems, and attract customers to the very concept of buying online. This resulted in the market being plagued with profitability issues, even for the market leaders such as Flipkart, Jabong, or Myntra, with several market exits by players who were not able to continue operations in such unsustainable way. Over time this will lead to higher consolidation in the market, as further companies decide to exit, while the stronger ones (probably with better financial backup) survive and acquire smaller players –more than half of e-commerce companies are expected to disappear over the next 6-8 months. These developments might put a brake on price reductions, but will continue to make it difficult environment for new market entrants.

  • Dominance of cash-based transactions – cash payments by far dominate in India, estimated at 80-90% of all payments and more than half of online transactions. The use of credit cards has been constant over past years, estimated at around single digit percentage share of population using a credit card. The use of debit cards has increased, and currently some 200-250 million issued cards, however, majority of Indians are still uncomfortable with this way of payment, and often do not feel the need to use it. While cash-on-delivery could be an option here, e-commerce thrives in environments with high use of electronic money. For the time being, cash-on-delivery is quite popular, however, it is risky and costly for e-retailers, as they have to finance the purchase and delivery till they receive the payment, and as many as 45% of orders are rejected without paying, generating costs. In attempts to rationalize costs to deal with profitability issues, online retailers will have to start promoting higher use of electronic payments, however this might mean losing a considerable customer segment of shoppers who will continue to be interested only in cash transactions. Therefore, few players are likely to decide to make such a bold move, and cash payment will continue hampering e-commerce market growth and negatively affect players’ bottom line.


India’s e-commerce market faces a mix of common challenges which exist across the BRIC countries, and inherent issues pertaining to unfavorable business conditions. Consumer culture and infrastructure issues aside, the fact that the market has to compete almost exclusively on price is hurting the current breed of players, and perhaps forcing potential new entrants into re-thinking their business models. The market is plagued with logistical nightmares, in spite of the fact that it only caters to a minuscule proportion of the potential customer base. In view of the challenges, it is no wonder that there are such divergent perspectives on e-commerce’s growth potential in India.

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Part I of the series – E-commerce in Brazil – Marred By Political and Social Influences

Part II of the series – E-commerce in Russia – Strong Impact of Consumer Culture

by EOS Intelligence EOS Intelligence No Comments

E-commerce in Brazil – Marred By Political and Social Influences

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The opportunities for e-commerce offered by several emerging countries, such as the BRIC, has been analyzed at length, and quite rightfully so, given their expanding economies, growing middle class, soaring disposable incomes, paired with higher internet and mobile penetration. While the opportunities coming from these transformations are plentiful, e-commerce markets in the BRIC countries also face serious challenges to their development, some of them common across all four countries, some unique to single markets.

We explore these challenges in a four-part series to understand the major roadblocks influencing growth of the e-commerce industries across Brazil, Russia, India and China.

Brazilian consumers are still relatively new to e-commerce, with current propensity to shop online often compared with the penetration rate witnessed in the US market in 2000-2001. This might seem like a small market, however, the e-commerce growth in Brazil is strong, estimated at 21% during the first half of 2012. According to AT Kearney, Brazil’s 80 million Internet users spend about US$10.6 billion online annually, the largest online spending across Latin American markets. Brazilians are expected to spend US$18.7 billion per year by 2017. These might be modest estimates, considering that eMarketer, a digital marketing portal, already forecasts that retail e-commerce sales in Brazil will grow by 14.8% in 2013, to reach US$13.26 billion. While the market appears to be poised for a very promising growth period, several challenges will continue to put a break on sudden growth.

Brazil e-commerce

The Challenges

  • Troublesome and bureaucratic procedures to set up and run e-commerce business – these structural problems make it difficult for local and foreign players to enter the e-commerce market (or set up a business entity in Brazil in general). Burdensome regulations and procedures mean that it might take even 6 months to establish an e-commerce entity. Further, while operating, the entities are often challenged by frequent litigations and lawsuits over variety of issues (e.g. the domain used). Even with no litigations, Brazil has a generally paperwork-heavy business environment, and this is particularly challenging in a relatively new industry such as e-commerce. All these difficulties have led to Brazil being placed at 130 (out of 150) rank in World Bank’s Ease of Doing Business in 2013 (behind countries such as Ethiopia, Yemen, Uganda, or Pakistan).

  • Inadequate e-commerce regulations – while setting up a business appears overly bureaucratic and regulated, several aspects of e-commerce operations are under-regulated, affecting clarity and smoothness of operation as well as consumer trust. Legislation is slowly, yet gradually being introduced, e.g. only in mid-2013, a seemingly basic and obvious requirement was introduced for e-commerce entities to clearly and visibly display their registration numbers, contact details, purchase terms and conditions, and customer’s rights. While this step is likely to help build customer trust, it covers just a tip of regulations necessary in the market.

  • Inadequate infrastructure affecting order delivery – the country’s weak and immature infrastructure has a negative impact on orders shipping. Brazil is a country with vast territory, and majority of transportation is done by road. The country’s road infrastructure (both city streets and highways) are in poor condition, many of them unpaved, affecting safety, delivery time as well as damaging the cargo and trucks. Overall, receiving a delivery package by a customer located outside of major Brazilian cities stretches to a week at a minimum, with frequent cases of customer complaints about packages not arriving within two weeks or more.

  • Underdeveloped shipping and delivery services – while delivery services are available, many of them are provided by small, often family owned companies, that have limited coverage area and lack parcel tracking systems, thus there is generally inadequate availability of reliable courier services. The government-owned national post, (Empresa Brasileira de Correios e Telegrafosand), does not commonly offer parcel tracking options, inviting fraud, and is considered unreliable and slow.

  • High taxes and complicated tax structure – issues with taxes are often placed amongst top challenges of e-commerce in Brazil. Taxes are high and numerous, which significantly increases overall costs – duties, taxes and fees can double the original price of a product, and can vary considerably depending on product category. Payroll taxes in business innovation sectors reach even 80%. It is estimated that on average, business owners and executives spend 30% of money and 50% of time on dealing with tax-related issues. Further, complex tax structure drives added costs for lawyers and accountants compensation in order to navigate through various issues with the tax regulators and facilitating tax differences between Brazilian states (as there is no uniform tax across the country).

  • Insufficient talent availability – Brazil’s expanding e-commerce market creates jobs that are difficult to fill, given the shortage of qualified workers, people with e-commerce experience or at least an understanding what a particular e-commerce job entails, e.g. e-commerce web designers, experienced IT and business process professionals or high-quality, competent customer service specialists. The lack of good customer service acts as a deterrent to customer base growth, as according to McKinsey’s Consumer and Shopper Insights from July 2012, Brazilian shoppers who no longer shopped online listed previous bad experience with customer service amongst key reasons for turning away from online purchases.

  • Online payment security concerns – the lack of trust amongst Brazilian consumers towards safety of online purchases and transactions, deters many of them from buying online and using internet banking in general. Therefore, the predominant payment option that is currently used and preferred by customers is the ‘boleto bancario’, a code receipt that is generated on the website during the purchase, printed by the online shopper and later taken physically to a bank or a post office where the payment for the purchase is made. On the one hand it allows to satisfy consumers concerns about payment safety and to tackle the issue of many users not having credit cards or internet-purchases enabled debit cards. On the other hand, however, it is contrary to the very concept of shopping online (i.e. without the need to physically go to the shop), and extends the entire process of completing the purchase. Further, in order for e-commerce entity to offer ‘boleto bancario’, it should be led by a Brazilian citizen or at least in partnership with a Brazilian citizen. While foreigners can fulfil prerequisites of offering ‘boleto bancario’, the process of filling those requirements is lengthy and difficult, especially when compared with PayPal functioning in several other markets.

  • Installments shopping culture – Brazilian customers are used to, and hence expect payment options that allow for multiple and no-interest instalments or delayed payment options, resulting in e-commerce entities requiring higher working capital to finance purchases while the customers’ payments for current purchases are received after several weeks. Further, bank involvement to handle the instalments increases costs for online retailers, since bank receives a commission (which is not paid by customers as their instalments are zero-interest).

  • Language barrier – while this challenge might not be of particular relevance to domestic start-ups, international online retailers find it demanding that the entire e-commerce experience must be provided in Portuguese, and that having previous experience in Spanish-speaking market does not automatically make it easy in Portuguese, as these are two different languages (though western parts of the country have considerable base of Spanish-speaking consumers). This pertains to everything from language used on the online store interface, entire customer service, as well as the fact that many local IT and programming specialist speak only Portuguese (with extremely limited English), making it difficult for foreign start-ups to simply copy their experience and solutions to the Brazilian market.

While there are several challenges that currently undermine the growth potential of e-commerce in Brazil, the gradual changes in regulatory environment, customer service and improvement in infrastructure should positively influence the demand for e-commerce services in the future.

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