Inflation a drag on ecommerce juggernaut

After multiple crests and troughs since the outset of the Covid-19 pandemic in India, ecommerce is seeing consumption growth moderating across categories, especially segments considered to be discretionary, multiple senior industry executives and analysts told ET.

According to estimates from data platform PGA Labs, ecommerce daily shipments are expected to grow 20% annually in the ongoing financial year. This is a lower rate of annual growth compared with the last two financial years when the ecommerce industry faced lockdown-induced roadblocks but the virus outbreak increased shopper migration to online platforms, resulting in at least 25-30% annual growth.

According to sellers, ecommerce, and logistics executives, the ongoing Prime Day sale event on Amazon India and similar sales on Flipkart haven’t seen a significant uptick over last year even though discounts are higher when compared to non-sale days this year.

“There is a definite slowdown in consumption and that’s across online and offline. There is usually a sale even after March but that hasn’t happened this year. It may still pick up by the time festive season sales kicks in but inflation and rising economic uncertainty has pushed back non-essential purchases,” said a senior executive at one of the largest third-party logistics firms.

These trends emerge at a time when large fast-moving consumer goods (FMCG) companies have also
expressed concerns over falling volumes. Last week,

(HUL) managing director Sanjiv Mehta told ET that has seen volume declines and inflation has added to the stress.

Muted outlook

“If you look at the quarterly data of the top consumer goods firms–they are showing sales are under pressure. It is natural that it’s reflecting on online platforms now,” said one of the ecommerce executives cited above.

A founder of a leading electronics accessories brands said while preparations for festive season sales have started, the outlook for growth is muted compared with last year.

Mobile phones, which comprise a large part of sales for ecommerce companies, have been affected the most and the category has dragged overall growth down, said a top executive of an online retail firm.

“We usually clock 50% growth in festive sales. I am not anticipating that this year based on the current environment and that’s showing in the advance stocking plans for the Diwali season,” the entrepreneur added. This is echoed by other brands, which indicated that the first six months of the year have been muted and the sale period is crucial for brands and platforms.

“The platforms are slightly more conservative than last year when it comes to inventory planning for the festive season,” said Deepak Gupta, COO of personal care brand Bombay Shaving Company. “Growth estimate is lower by 15-20% over last few years’ festive sales spike over pre-sales period.”

PGA Labs told ET that, in the next six months, daily shipments would reach an average of around 9.5 million compared with about 8.3 million in the last six months. “The 15% growth in the latter part of the year is due to the upcoming festive sales in October (during which volumes grow by 30-40%),” the market research firm said.

An Amazon India seller said home and kitchen products were registering higher sales on Prime Day compared with a business-as-usual day, but beauty, personal care and health care have slowed. For Amazon, Prime Day in India was crucial last year as it came in between two waves of Covid-19. A report by Counterpoint Research said the deep discounting by Amazon in the US during this year’s Prime Day on July 12-13 reflected the slump in consumer demand. Prime Day in India was across July 23-24.

“It is a flat year overall in ecommerce and what has happened is that there has been a lot of revenge shopping in offline retail, so we have seen the highest-ever sales in our offline channel, but as a result of that online has stagnated and across-the-board brands are seeing that,” said Vineeta Singh, cofounder and CEO of Sugar Cosmetics.

However, Ashutosh Sharma, VP of research at Forrester, told ET that the coming festive season would be “much bigger than the previous years” as not only were more people comfortable with online shopping but they are also emerging from the shadow of multiple Covid-19 waves. He said the impact of inflation may not dampen sales during the festive period. The festive season starts in August with Raksha Bandhan, Janmashtami and Ganesh Chaturthi, and goes on to Dussehra, Durga Puja and Diwali, followed by Christmas.

“This festive season is going to be a bit more intense compared to 2021, which had only seven auspicious wedding dates,” Sharma said. “This year we will have 12 dates in November and December and many weddings (close to one in five) which were postponed in 2021 are likely to happen in 2022.”

Amazon India and Flipkart didn’t respond to queries.

Slow on financing?

Ecommerce firms, over the years, have been focusing on offering financing options to consumers for large purchases, especially high-end smartphones and large appliances, which are typically costlier than fashion, grocery and other products.
Besides offering buy-now-pay-later (BNPL) and equated monthly installment (EMI) payments, both Flipkart and Amazon also have co-branded credit cards for consumers in partnership with banks.

Industry executives told ET that BNPL players are expected to assume a cautious approach toward loans in the coming weeks.

“There is currently a slowdown in growth in digital lending due to the macro headwinds,” said a digital lending sector executive. “There might not be a degrowth, as compared to last year, but caution is prevailing especially as the industry is awaiting the final guidelines for digital lending guidelines, with banks and NBFCs wanting to go slow on this segment.”

ET has reported that card-based
fintechs have run into rough weather following regulatory tightening by the Reserve Bank of India (RBI). Startups such as Slice, Uni Cards and others had been gaining prominence across ecommerce platforms for various EMI deals.

While
macroeconomic changes have made BNPL startups cautious over loan recoveries, many are still waiting for the central bank’s final guidelines on lending rules before hitting a pause altogether.


Long-term prospects

According to the report by PGA Labs on the Indian ecommerce logistics industry, growth will be driven by the retail market, which is expected to reach a size of $145 billion by FY26, with about 15 million daily shipments.

“The increased internet penetration has also played a pivotal role in boosting online purchases. In India, it (internet penetration) reached approximately 50% in 2020, up from 20% in 2018,” said Abhishek Maiti, director, PGA Labs. The number of smartphone users is expected to reach 859 million by the end of 2022.

Demand from tier II and tier III towns is driving ecommerce sales volume with about 46% of total shipments coming from such areas in 2020 compared with 25% in 2015. As
demand from smaller towns rises and more direct-to-consumer brands proliferate, the importance of third-party logistics players focussed on ecommerce will increase. This includes companies such as Delhivery, Ecom Express and XpressBees among others.

“The ecommerce industry is positively influencing the growth of the ecommerce logistics market in India,” said Maiti. “The online-focused players partner with third-party logistics providers to manage delivery, inventory, packaging, shipping, warehousing, and tracking issues. Almost 60% of the ecommerce logistics market is outsourced, providing headroom to specialised logistics service providers and consolidators.”