India e-commerce industry faces consolidation

Market saturation has put the brakes on the country's e-commerce industry, which is expected to undergo significant amalgamation over the next six months. "Unlikely" more than 15 of 53 independent entities will survive.

About 70 percent of venture-funded Indian e-commerce companies will disappear over the next six months, as the local industry undergoes significant consolidation.

According to Allegro Capital's report "VC investments in Indian e-commerce", over the past three years, 49 venture capital firms had invested US$853 million in 53 e-commerce companies. There will be massive consolidation among these 53 companies over the next six months, wrote the report's authors--Allegro's digital media practice director, Deepak Srinath, and researchers Aravind G.R, and Srikrishna Swaminathan.

"It is unlikely that more than 15 will survive as independent entities by 2014," the report cautioned. Allegro reasoned that India's online shopping market was saturated and growth only driven by increasing average revenue per user.

This would limit a market player's ability to raise follow-on funding, commonly referred to as a Series B round.

"Now that the land grab is over, Series B and follow-on rounds will continue to be a challenge for most e-commerce companies except category leaders and the big three or four horizontal players," noted the report, in which the researchers revisited their findings in a previous report published in December. 

While there were nine follow-on investments between January and May 2013, totalling US$155 million, over that same period there were no Series A investments.

Investors are eyeing mergers in order to salvage their ventures, according to the Allegro researchers.

"In calendar 2012, the key deals were horizontal e-commerce players acquiring category firms. In 2013, the emerging trend is Tier-2 players merging and raising funds to compete effectively against leaders," they wrote.

Silicon Valley-headquartered firm Accel Partners, which previously invested in Facebook, was India's most exposed venture fund with 10 investments in this market space.

Eventual survivors will look very different, but they will also enjoy huge rewards, the report noted. 

By 2016, the Indian e-commerce market is expected to hit US$13 billion, growing from US$1.1 billion in 2012. This will be driven primarily by growth in marketplace models, making up two-thirds of the projected figure, as opposed to the current model in which online shops own and manage their own product supply chain.

Also, offline brands will shift their operations online. "We expect horizontal players to generate significant business from marketplace models in the future," the Allegro resesarchers wrote.

In February, U.S. e-commerce giant Amazon had urged the Indian government to consider relaxing an online retail law that currently forbids its Indian subsidiary, Junglee.com, from selling directly to consumers.