India's E-Retail To Outgrow Modern Trade By 2026: Report

Covid-19 was a watershed moment for India’s e-retail market driving a 12-month acceleration in e-retail penetration which was at 4.6% of the total retail market, by end of 2021. This acceleration was even higher in the top eight metro cities where online shopping is more common—where one in three people shopped online at least once, last year. This momentum will continue to empower millions of sellers and micro-entrepreneurs and create employment opportunities at scale. These are among the findings of a report titled “How India Shops Online 2021”, released by Bain & Company.

At USD$810 billion, the Indian retail market is the fourth largest in the world and is quickly evolving to include a sizeable e-retail component. India is home to the third-largest online shopper base of 140 million, only behind China and the US. However, the market is still massively untapped and there is immediate potential to reach India’s large internet user base of approximately 625–675 million people. The fiscal year ending March 2021 was one of contrasts for India’s retail market. The overall retail market shrunk by 5%, along with a 7.3% contraction in GDP. However, the Indian e-retail market saw a 25% growth to reach USD$38 billion, despite a 2-month national lockdown and multiple prolonged disruptions in regional pockets over the year. This was driven by Covid-19, which caused an increased adoption of online channels.

“This Covid-19 induced an inflection in e-retail is a global phenomenon driven by an enhanced consumer need for safety and convenience especially during elongated stay-at-home periods. This has also played out in India wherein e-retailers have been the lifeline for both consumers and sellers – enabling access to essential commodities and hygiene products to millions of households during the lockdown and providing business avenues to thousands of sellers. We expect the surge in penetration to sustain post stabilisation, as a similar trend has been seen globally.” said, Arpan Sheth, a partner in Bain & Company’s Mumbai and Washington, D.C. offices and leads Bain’s Vector Solutions Group globally.

The report, in its second edition, highlights that e-retail categories have seen disparate growth and recovery patterns during and post
the pandemic. Mobiles and electronics categories witnessed a one-time growth spurt through the initial phase of the lockdown in India.
Whereas, frequent-use categories such as grocery, household, and personal care saw continued acceleration. These habit-forming
categories, which have a high share of repeat purchases online, also benefited from a concerted push to accelerate digital sales by
leading brands that were not as invested in this channel, pre–Covid-19. Discretionary categories, however, such as fashion and travel
products saw relatively slower growth but are expected to rebound to pre-pandemic growth rates soon.

Commenting on the report, Shyam Unnikrishnan, partner in Bain & Company and leader in Bain India's Consumer Products, Retail, Strategy and Digital practices, said, “E-retailers played a mission-critical role in maintaining a supply of essential food-and-hygiene products for millions of Indian households during the lockdowns. Delivery across more than 95% of India’s pin codes allowed consumers to shelter at home and prevent the spread of disease. E-retailers have particularly been a boon after the setbacks and loss of jobs, caused by the pandemic, by helping Bharat’s small sellers and brands (especially insurgents) to reach consumers despite the widespread disruption.”

The India e-retail market is expected to grow at 30% per annum over the next five years to reach USD$120–140 billion by 2026, which is
expected to be higher than modern trade. This growth will be led by smaller towns, that account for four out of five new shoppers.
During the pandemic, reverse migration from metro cities further accelerated growth in smaller towns. In addition, women and older
shoppers have gained prominence in the online shopper base over the last year, and this trend is expected to increase the e-retail base.

According to Bain & Company, a deep understanding of the consumer’s shopping journey—from discovery to purchase—forms the bedrock of e-retail success for leading digital brands. In addition to the study of cross-category shopping habits, this year’s report focuses on the electronics category, to further analyse consumer-shopping behaviour. Key insights for brands and platforms include:

- Cut through the clutter and do it fast: Shoppers browse 10 product pages, on average, in electronics, and more than 15 in mobiles before adding any to their cart. Brands and sellers have limited time to tell their story as a visitor spends fewer than 10 minutes per visit on a platform.

- Voice and vernacular are no longer niche: 1 in 10 platform users adopt voice search, and 1 in 3 new e-retail users visit through a
vernacular platform interface. Voice and vernacular searches will increasingly become mainstream

-Gateway to online: Fashion, electronics, general merchandise, and mobiles continue to be key gateway categories for new online shoppers. Whereas fashion continues to lead as a first purchase (35%–40% new shoppers bought fashion in their first transaction in 2020), general merchandise increasingly attracts first-time online shoppers (15%–20% of shoppers bought general merchandise in their first transaction in 2020 vs. 10%–15% in 2018). 

- Influencers have a growing influence: Approximately 40% of online shoppers made at least one purchase through social media channels (e.g., Facebook, Instagram, WhatsApp) in 2020. Content creators and influencers will play an increasingly critical role in the future of commerce. 

- Digital payments are gaining fast, but cash remains key: E-retail customers are increasingly opting for digital payments and credit to complete online purchases. However, cash continues to account for 45%–50% of e-retail GMV. Use of credit is especially pronounced in electronics, with a three-times more adoption of equated monthly instalment (EMI) or credit schemes vs. other categories.

The online-shopper landscape is continuously evolving. As e-retail accessibility continues to expand, a new wave of shoppers will come
online. Many of these future online shoppers are likely already in the digital funnel—watching videos and using chat and social media
apps, but e-retailers will need to accelerate their transition to commerce. This involves a deep understanding of their needs and
interaction patterns with brands and platforms. In addition, the growing relevance of the online channel has made it a must-play and
must-win frontier for brands. Winning an outsized share of online consumer spending requires a series of investments. These include
investments in visibility, supply chain, merchandising, conversion, and key capabilities.

The report, written in collaboration with Flipkart, outlines a few mega trends that will shape the future of online shopping in India as eretailers and D2C brands look to attract and out-innovate each other to win the next generation of shoppers.

- Digital ecosystems: Digital leaders are building scale ecosystems to capitalise on the rapidly growing user base across the digital
funnel.

- Voice and vernacular: Voice-assistant apps doubled to approximately 5–6 million monthly users in 2021 (average until May). Web
pages were translated to vernacular languages approximately 50% more in 2020 as compared with 2019. Use of vernacular-language
apps continued to accelerate through the pandemic. Digital platforms will continue to invest in voice and vernacular capabilities to
attract the next generation of consumers.

- Video commerce: The video-watching user base expanded greatly during the pandemic and grew by 25% in India in the past year
alone, increasing to 350–400 million users. Hundreds of thousands of creators will help propel live-streaming and video-enabled
commerce significantly in the coming years. Multiple live-streaming commerce start-ups have already emerged in India and are
growing rapidly.

- Social commerce: Peer and community influence will play a much more significant role for the next wave of online shoppers. Millions
of smaller retailers are finding innovative ways to sell directly to consumers through many social formats. Social-led models are
empowering Bharat’s sellers and women entrepreneurs, and three of every five shoppers now come from tier 2/smaller towns. Social
commerce is expected to increase from USD$1.5–2 billion to USD$16–20 billion in just 5 years, growing at 55%–60%.

- Direct-to-consumer (D2C) and omnichannel: Accelerated by the pandemic, there has been an explosion in D2C brands in India—both
established and insurgent, which have nearly doubled from 2 years ago. Brands are looking for more ways to directly engage with
consumers and give them a differentiated experience.