Individual sellers bear the costs of inventory, leaving website operators to focus on technology, marketing and logistics, said Mark Tanner, the founder of China Skinny, a Shanghai-based research and marketing firm.
Operating a marketplace "effectively transfers almost all of the costs, risk and responsibilities to the vendor," Tanner said in a phone interview. 'It's a pretty good position to be in for e-commerce companies.''
The value of e-commerce in India is projected to grow sevenfold to at least $22 billion by 2018, according to CLSA Asia-Pacific Markets, fueled by a doubling in the number of broadband subscribers and tens of millions of people swapping basic-feature mobile phones for web-connected smartphones.
Flipkart, India's biggest e-commerce company by sales, switched from being a retailer that sold goods on its own to a market in April last year. It now has 3,000 sellers on its system, trailing domestic rivals including Snapdeal, which says it has about 30,000. Amazon India has about 5,000 sellers.
Alibaba's success with marketplaces has been another factor in the adoption of the model in India.
Alibaba rode China's emergence as an economic superpower over the last 15 years to become a massive online market for everything from kangaroo meat to sex toys. In May, China's biggest e-commerce operator filed for what may become the largest US initial public offering ever.
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The company had a 57 per cent operating margin for the nine months ended December 31, more than double that of EBay and far ahead of Amazon, which had a margin of 1 per cent, according to a report from Bloomberg Industries. Seattle-based Amazon's lower margin is explained partly because it sells much of its own inventory, Bloomberg Industries said.
"Everyone has adopted the marketplace model, and that's why Amazon, us, and all the others are able to do business in India," said Sachin Bansal, co-founder and chief executive officer of Flipkart said in an interview in Bengaluru, the south Indian city previously known as Bangalore. "It's more suited to India in the longterm."
Indian e-commerce marketplaces get almost all their revenue from commissions they charge buyers on transactions, unlike Alibaba which is heavily reliant on advertising, said Sandeep Ladda, who runs the Indian technology practice of PricewaterhouseCoopers in Mumbai.
As the biggest Indian web retailers become stronger, they are likely to generate increasing amounts of revenue from advertising, he said.
"Globally a lot of money comes from ads," Ladda said in a phone interview."If you really want to make good money, you will need the ad pie."
Flipkart said it charges buyers commissions of 3 per cent to 25 per cent. Snapdeal levies 5 per cent to 20 per cent, it said. Amazon charges 5 per cent to 15 per cent, according to its website.
The number of Internet users in Asia's third-biggest economy is likely to grow by 60 per cent to 282 million by 2017, according to Euromonitor International, creating a wider pool of consumers willing to transact online. Annual smartphone sales are also likely to triple in the same period.
Competition in India's e-commerce market "is extremely intense" as companies regularly undercut one another's prices on everything from apparel to mobile phones, said Ruchi Sally, head of retail advisory at consultant Elargir Solutions in Mumbai.
Web retailers are keen to get customers and often sell goods for less than their cost, said Vikas Saini, who runs a wholesale business selling mobile phones and memory cards in Delhi's Nehru Place. In one instance, Saini's store sold handsets produced by local device maker Karbonn Mobiles India for 5,400 rupees ($91) each to an e-commerce operator, which then offered them to end users for 4,400 rupees, Saini said.
"I was selling some 1,700 to 1,800 phones each day that week," Saini said. "It was fantastic for me. These companies' entire business is being supported by foreign money, and as long as that keeps flowing, they will be fine."
Foreign investors hold stakes in all of the country's biggest e-commerce companies. Flipkart's early backers include Silicon Valley-based Accel Partners, which made the biggest profit of any venture firm up to that time with its Facebook investment. EBay has a stake in Snapdeal.
Competition among e-commerce operators may intensify following the election of Narendra Modi as India's prime minister last month. During his campaign, Modi indicated he might open the sector directly to foreign investment, which would allow overseas operators to sell their own inventory, as Amazon does in most countries where it operates.
Any such rule changes would give e-commerce companies leeway to run a variety of business models, probably spurring investment in their supply chains and warehouses, PwC's Ladda said. "It will surely give a boost to the sector," he said.
At Priya's San Computech store, cardboard boxes of computers and peripherals ready for shipping are stacked from floor to ceiling, leaving space for just one person to walk through. More than half of the nearly 1,000 electronics sellers in this complex now sell online, Priya said.
"Online retail is growing too fast," Priya said. "Less people are coming to the stores now, so we have to be in this e-commerce business."
- Bloomberg
