India’s annual transacting e-retail shopper base is estimated to scale to 230–250 million people in 2023, said the fourth edition of ‘How India Shops Online’ said. Over 100 million of these shoppers were added over the last three years. The report is released by global consultancy firm Bain & Company in collaboration with e-commerce platform Flipkart. By 2028 India’s e-retail market is expected to bounce back to 23 percent–25 percent growth levels and reach over $160 billion.
Diverse consumer micro-segments have become more salient. Now, 7 out of 10 online shoppers reside in Tier 2+ cities, and a third of online shoppers are part of Gen Z (born in or after 1997). About a third of online shoppers come from low-income or low-middle-income cohorts.
In the coming decade, e-retail growth will be driven by adding new shoppers and by growing online spending per shopper. E-retail platforms are investing as much in retention (the core thesis behind digital ecosystems) as they are in new shopper acquisition (via value selection and voice/vernacular offerings).
India will need multiple models to build, scale, and serve the needs of this diverse shopper base, which has varying price sensitivities, service and speed expectations, and language requirements. For example, voice and vernacular offerings are popular among new shoppers from smaller cities.
About 25 percent–30 percent of first-time shoppers used these offerings in 2022, and about 60 percent –70 percent of voice/ vernacular users hailed from Tier 3+ cities. The seller ecosystem is also exploding to cater to these consumers. Twice as many sellers were added in 2022 compared to 2021. Two-thirds came from Tier 2+ cities, and three-fourths operate in the lifestyle, home, and electronics categories. Insurgent online-first brands have emerged as a fast-growing seller cohort, with more than threefold revenue growth from 2020 to 2022. These brands resonate especially with Gen Z consumers.
Waves of change: New business models are emerging to serve consumer needs
Four e-retail models—quick-commerce (Q-commerce), hyper-value commerce, inspiration-led commerce (live commerce), and fast fashion—are emerging, and are at different levels of maturity.
Q-commerce platforms offer hyper-convenience and rapid delivery (typically under 30 minutes). Globally, a series of quick-commerce upstarts emerged, raising substantial capital over 2020–22. The majority of these players have struggled to scale profitably. The story in India has been somewhat different. Q-commerce orders doubled over the last year, and now account for 40 percent –50 percent of India’s e-grocery spend. Leading Indian players have improved unit economics through a combination of scale, average order value growth, higher order density, and value added fees. However, this is currently largely a metro/Tier 1 phenomenon. The top 10 cities account for approximately 80 percent of orders. Scaling beyond top metro/Tier 1 cities is possible but unproven.
Hyper-value platforms deliver value to consumers, primarily by offering an unbranded assortment at ultra-low price points. Globally, the best example of a hyper-value platform is Temu, a cross-border marketplace launched by Chinese e-retailer Pinduoduo. Temu had over 200 million app downloads in 2023. In India, hyper-value platforms have seen accelerated growth. Their share of overall e-retail grew five-fold between 2020–22. These platforms appeal most to shoppers from Tier 2+ cities (which account for 70 percent –80 percent of shoppers) and low- or low-middle-income households.
Inspiration-led commerce (live commerce) has grown rapidly in markets like Southeast Asia, where it accounted for approximately 15 percent of gross merchandise value (GMV) in 2022. Globally, both e-retailers and short video players are looking to capitalize on this trend. The most notable player in this field is TikTok Shop, which quickly scaled to 4 percent of Southeast Asia’s e-retail GMV in 2022. TikTok benefited from a unique growth flywheel created by its customer and creator franchise, differentiated discovery (powered by a best-in-class recommendation engine), and value-led proposition. In India, however, the model remains nascent. Fast fashion is another rapidly growing global phenomenon, accounting for over 1 in 10 dollars spent on women’s apparel. Online-first players such as Shein and omni-channel players such as Zara and H&M have each scaled to more than $20 billion in revenue. India’s fast fashion market is nascent but expected to grow at 30 percent –35 percent per annum between 2022 and 2027. Recent investments are bound to give this model a boost. Tata invested in scaling Zudio, Reliance has partnered with Shein, and Flipkart Group has entered this space with Spoyl (Flipkart) and FWD (Myntra).
Increased focus on profitability and monetization
In India, advertising-led monetization continues to be the most salient. Advertising spending by brands and sellers on e-retail platforms has grown four-fold in three years. Yet, there exists massive headroom. In India, e-retail only accounts for 15 percent –20 percent of digital ad spending, compared to 25 percent –30 percent in the US and 55 percent–60 percent in China. An increasing number of brands and sellers recognize the value of this medium.
Generative AI: A transformative enabler
Generative AI will fundamentally alter the e-retail experience. A series of high-impact use cases are emerging that will positively impact the shopper and seller journeys. E-retailers are looking at the technology to disrupt five areas: discovery, seller enablement, targeted marketing, customer support, and business efficiency.
Global e-retailers have adopted multiple use cases, from designing personalized advertising campaigns to using chatbots for faster customer service. Flipkart Group has been the torchbearer of generative AI applications in India’s e-retail space, with multiple live experiments. Most notable are end-to-end virtual shopping assistant “Flippi” by Flipkart and smart search tool “MyFashion GPT” by Myntra; these aim to make online shopping even more akin to the offline shopping experience. Future generative AI applications hold immense potential in e-retail and could transform the shopper journey entirely. The technology can have a high impact on multi-modal consumer journeys, powered by individual users’ personal preferences.
E-retail has made an indelible impact on the country: it has democratized shopping, helped small and medium-sized business grow, and created scalable employment. The next chapter in India’s e-retail growth promises to be even more exhilarating, as the industry pushes boundaries and pioneers new frontiers.