India Internet Opportunity

MAY 2017
May 2017

1 India Internet Opportunity

2 India Internet Opportunity
India Macro and Consumption
India took the path of a socialist economy after independence in 1947. The policies tended
towards protectionism, strong emphasis on import substitution, state regulated industrialization
and a dominant public sector. But India started having large fiscal deficit problems since 1985,
and by the end of 1990, it was in a state of serious economic crisis. The government was close to
a default and foreign exchange reserves had reduced to the point that India could barely finance
three weeks’ worth of imports. The country ran into the risk of precipitating into an era of
economic crisis, unemployment, despair and civil unrest - in contrast to the hope and confidence
we enjoy today of becoming a superpower by 2030.

Making a bold and uncharacteristic move, on May 21, 1991 India airlifted 60+ tons of gold to be
sent to Bank of England and Union Bank of Switzerland. Govt. of India had to take a loan from
IMF and as a condition had to “liberalise” the economy. This pivot etched 1991 into the
cornerstone of the great Indian economic turnaround, ushering-in unprecedented economic
progress. This remarkable story has been captured in several notable books. Gurcharan Das, in
India Unbound, remarks, “Although slow, hesitant and incomplete, 1991 reforms set in motion a
process of profound change in Indian society. It is as important a turning point as Deng’s
revolution in China in 1978”.

As of 2016, India is not only the 7th largest economy in world, but it is also growing faster than
its peers like China. By 2025, India is expected to surpass Germany and become the 4 th largest
economy. That India is the last standing beacon of hope amongst the emerging markets, found
resonance at 2016 WEF Davos.

Source: World bank, OECD

Economic growth aside, India is also set to reap what is now famously called the demographic
dividend, with its working age population being larger than the population that is dependent on

3 India Internet Opportunity

it. Today, India’s 65% population is below 35 years of age. With Western Europe, the US, South
Korea, Japan and even China’s aging population, could this demographic dividend offer India an
edge? As per IMF, it could add a significant 2% to the GDP growth rate of country.

World-class infrastructure, deeply rooted education systems, and pro-business government

policies among other things that define the economic progress of Europe, North America and
even the shining cities of China, are often considered lagging in the country by foreign visitors.
Frequent instances of friction between governments and industries further bring forth investor’s
concern on growth and capital risk. Govt.’s misguided tax fight with Vodafone in 2011 and West
Bengal’s tussle with Tata’s for the Nano project are two prominent examples. On the other
hand, the government never regulated the country’s IT industry, because it never fully
understood its potential. As a result, that sector flourished. A book by Gurcharan Das captured
this phenomenon in its very title: India Grows at Night.

Fortunately, the environment is changing fast, business friendly outlook and initiatives of the
Modi government is set to make the India’s economy bigger and better again. Today, India can
grow during the day too, while the government is wide awake.

Consumption Class is Growing Rapidly

Rapid economic growth has pulled millions of people out of poverty and created a sizable
consumption class. In 2015, 66M households were part of the ‘consumption class’ with annual
household income of more than $4000, which is 27% of India’s total household. This class
constituted only 7% households back in 2005.

As India continues the path of economic development, the consumption class will rise to 53% of
total households in 2025, implying a mammoth 800M+individuals belonging to the consumption
class. Another important point to be noted is the expansion of the affluent class (Globals) from
2.5M households in 2015 to 23M by 2025.

2015 real prices, Source: NCAER, McKinsey

4 India Internet Opportunity

85% of the consumption class lives in Urban areas. Urban population in India, unlike China, is
spread across a large number of cities. Only 1/3 rd of the urban population lives in metropolitan
(top 7) cities. Remaining 2/3rd of the urban population lives in 400+ Tier-II & beyond cities.
Non-metropolitan cities, consequently, will play an important role in India’s consumption story.

As Indians continue to climb the economic ladder, the composition of their spend will also
change considerably. Today, a typical household in the country spends ~45% of its income on
food, clothing and housing. In fact, food and clothing account for 70% of the total retail
expenditure in the country! As witnessed in developed economies, discretionary spend will
take up larger share of nation’s shopping basket as national income rises. For example, food (as
% household consumption) reduces from ~40% for Aspirers, to ~30% for Seekers, to <10%
for Globals. As one grows richer, a higher chunk of income is spent on looking and living better.

Intertwined with the rise of purchasing power in the society and increased aspirations of the
consumer class, has been the rise of Internet in India. Formally first launched for the public in
1995, Internet penetration in India has reached a quarter of the country’s population. In the early
2000s, Internet was limited to households with computers or neighborhoods with cyber-cafes.
With advent of mobiles (specifically smartphones), India’s means of consumption,
communication and living is being fundamentally changed.

Smartphone and Mobile Data Revolution

Smartphone and telecom advertisements follow distinct narratives in India these days. A 70-year-
old is using Google maps to locate “must see” places on his vacation in Goa. A restaurant
waiter is learning English by watching YouTube videos in his free time. A 60-year-old nervous
mother visiting airport for the first time is being guided by her son via video chat. An illiterate
family taking pride in the progress made by their child in education through online interactive
tools. These narratives are not very far from the reality in India today.

Smartphone is probably the biggest platform shift in recent times. Globally 2B+ people are
carrying smartphones in their pockets and are spending 1.5-2 hours on it daily. This shift brings
limitless disruption possibilities. Riding on this shift, large consumer companies have been built
globally - Uber, Spotify and Airbnb to name a few.

India is a key participant in the global smartphone wave with the 2 nd largest base of smartphone
users. In fact, India became one of the largest user base for some of the global internet giants
like Facebook, WhatsApp and YouTube in 2016. But long before global internet giants entered
India, one of the first major global technology company to enter the country was Siemens in
1922. Followed by IBM in 1977. But till the liberalization, there were very few multi-nationals
that took India seriously. Today, CEOs of most of the major multinational companies regularly
visit India, indicative of India’s market potential.

5 India Internet Opportunity

Declining smartphone prices and affordable prepaid plans along with nominal charges for
limited data usage has been a key driver for rapid penetration of smartphones in countries like
India. While Apple reimagined the smartphones in a way nobody could have thought, Android
changed the economics of smartphones by making their OS open source.

When erstwhile Rajiv Gandhi brought the PC to India in 1980s. It heralded a new era with the
great hope of changing life of Indians. But PC penetration was mostly limited to large
corporates. Even today less than 5% of consumers and SMEs own PCs due to the high cost of
ownership. With 300M users, smartphone has become the personal computing device of choice
across income classes and age demographics.

Source: IDC, Cybermedia Research : India Mobile Handset Market, Counterpoint Research, Statista

Average smartphone price in India declined by 35% from $200 in 2013 to $130 in 2016. At the
forefront of driving price disruption are Chinese companies who commanded 35% share of
smartphone shipments in Q1CY2017. Indian smartphone makers like Micromax, Intex and Lava
held the fort for a while, but recent entry of Chinese phone makers has eroded their market
share significantly. Within 2 years of India entry, Xiaomi has already become 2nd largest
smartphone brand by shipments.

6 India Internet Opportunity

 Source: Counterpoint Research Market Monitor

While smartphone holds great promise, its true potential can be harnessed only if combined with
high speed (3G/4G) data connectivity. Despite having 300M smartphone users, India has only
120M 3G/4G subscribers. One of the key inhibitors has been the cost of data, which is at $3 per
GB per month. $3 is fairly high, considering the ARPU (average revenue per user) in India is $2.
The launch of Jio is already changing the game. Jio’s 4G data tariff costs $5 for 30GB data and
voice is free. In the first 6 months of launch Jio acquired 100M subscribers, rapidly taking the
market share away from incumbents. This is forcing other telecom operators to reduce the cost
of data and voice.

In most developed markets, telecom operators get more revenue from data than voice. In India
telecom players get 50% of revenue from voice and 20% from data. But in the next 3-4 years this
balance will reverse and data will become a major contributor to the topline. It is estimated that
500M subscribers will consume average 10GB data per month as compared to 120M subscribers
consuming average 1GB data per month in 2016. This is 40x increase in total data
consumption.

7 India Internet Opportunity

 Source: Quarterly reports of Indian telco (Airtel, Vodafone, Idea, Aircel),
Reliance Jio Investor presentation, E&Y Future of Digital Content India, Jan 2016

The 4x increase in 3G/4G connected smartphone users and 40x increase in data consumption
will open massive opportunities for consumer internet companies. Depending on the sector - e-
commerce, digital media or financial services - companies will still be required to solve India
specific challenges. But a strong foundation is being laid through rapid smartphone and 3G/4G
mobile data penetration for internet economy to thrive.

E-tail: Current State and Way Forward

India presents a curious case when it comes to retail. At $630B in size, India is among the top 10
retail markets in the world. However, this huge market is still largely unorganized with modern
retail commanding a rather small market share of 10%. With 14M retail outlets, India has one of
the highest number of outlets per person (11 per thousand).

It’s been a decade since India embarked on the journey of organized retail, but it has not yet
been able to make its mark beyond the metropolitan cities. The sector had been stifled by archaic
FDI policies till recently. Despite being one of the largest sector in the country, only in 2006
India began to open retail for FDI. Even then, it allowed up to 51% ownership only in single
brand retail. China in contrast has allowed 100% FDI in both single brand and multi-brand.

In 2011, the next phase of reforms took place allowing 100% FDI in single brand retail and 51%
in multi-brand retail. But these reforms were accompanied by few complicated conditions. Eg:

8 India Internet Opportunity

Single brand retailer should source 30 percent of its goods from India. All multi-brand and single
brand stores in India must confine their operations to 53-odd cities with a population over one
million. Multi-brand retailers must have a minimum investment of US$100 million with at least
half of the amount invested in backend infrastructure.

Modern retails under penetration is also driven by poor economics, lack of adequate affordable
rental space and capex requirements to scale.

In Tier-II and beyond, ~94% of retail sales still happen through unorganized retail
shops.

Source: McKinsey iConsumer China 2016 Survey, IBEF, Knight Frank – Think Retail 2016

Today, E-tail is ~2.5% of the retail market. In China and US, E-tail is 13% and 8% of their retail
markets respectively. The excitement for entrepreneurs is palpable, given the large opportunity
that exists to deepen the roots of e-tail in India.

Internet holds the promise to fundamentally change the way consumer aspirations and service
needs are addressed. Foundation has been laid in form of rapid expansion of digital
infrastructure across our cities and villages. Expectedly, digital infrastructure has made significant
inroads into Tier-II & beyond towns at a rate much faster than its physical counterpart.

E-tail, a $15B market in 2016, was almost non-existent in 2012. From 2012 to 2015, it went
through a rapid market creation phase - growing at more than 100% YoY. In 2016, sales top 3
E-tail players combined has already surpassed the sales of top 3 offline retailers. But it is still a
nascent and concentrated market where 70% of sales comes from top 7 metro cities and 65%
of sales comes from a single category - Electronics.

9 India Internet Opportunity

 Source: Redseer Consulting - E-tailing Revolution in India

As E-tail market enters the next phase of growth, following needs to happen:

● Expand shopper base beyond metro

● Increase online share of non-electronics retail spend

Shopper Base Expansion

Tier-I constitutes only 10% of India’s population and 20% of retail sales. For E-tail to expand
the shopper base, it needs to go beyond Tier-I cities. In China, Tier-III & IV cities contribute to
50% of E-tail sales. In fact, it is believed that E-tail generated 40% new consumption spend in
Tier-III and IV cities in China, as those parts of the country never had access to such a large
assortment of products before.

As E-tailers embark on the journey of getting to the next 200M shoppers, there are a few
nuances that makes these next 200M shoppers different from 60M early adopters.

English is not a dominant language

India has only 125M people who can read/write/speak English. As one goes beyond Tier-I, the
non-English speaking population will form a sizable share of target consumer class. Is also
believed that more than 90% of India’s new internet users will be non-English speaking.

10 India Internet Opportunity

Most e-tailers don’t have a strong regional language offering. These users may occasionally buy a
thing or two online when available at discounts. But to drive a behavioural change and gain
sizable share of their wallet, it is important that users are engaged with E-tail platforms in the
language of their choice. These users would find it difficult to comprehend product descriptions
and user reviews written in English.

Unfortunately, it is not a simple translation problem. The language most people speak on daily
basis is very different from the pure form of language that most translation engines are trained
on (see the example below)

Most Hindi speaking people will not understand the product description as translated by Google
translator above. Adding to the challenge, E-tailers also have little control over the content.
Product content is uploaded by sellers and reviews by users.

For E-tail to expand beyond the large cities, E-tailers need to make concerted efforts towards
serving the regional language users.

App retention is challenging

Affordable smartphone (sub $100) segment has 50% share of total smartphone shipments in
India. These affordable smartphones typically have 8GB memory. Large share of next set of
online shoppers will be users of these affordable smartphones.

8GB capacity in today’s era is like using a computer with 512MB RAM. With Android OS
footprint getting bigger and increased usage of high definition media, typically 85% of 8GB
capacity is occupied by OS, Whatsapp and Media. With 1.3GB memory left for third party

11 India Internet Opportunity

apps, these phone users have only 6-8 third party apps on the phone. This is a huge
challenge for any internet company. Average 90 days uninstall rate for these 8GB phones is 80%.
Until a frequent usage behaviour is established, app retention will be incredibly difficult.

Source: Frost & Sullivan

While it is good to have an app strategy, but it cannot be the only strategy. Having responsive
and engaging mobile web interface is going to be critical. Various other approaches are being
taken, including chat commerce and single app interface for multiple apps, to solve the app
retention problem.

Category Adoption Beyond Electronics

India E-tail today probably looks like any other E-tail market in its nascent days, where
standardized product category like electronics has a significant share of the market.

Source: Statista, Digitalcommerce360, China Internet Watch, Kalaari Estimates

As market evolves, other categories will witness growth in online adoption. Although various
categories will go through their own natural adoption curve, E-tailers have opportunity to play a
role in accelerating the pace of adoption through technology and value delivery innovations. For

12 India Internet Opportunity

example, online grocery player Yihaodian in China has set-up 1000 AR enabled stores in parking
lots, parks and in front of famous landmarks. It helped the company take advantage of high
footfall at these places for customer acquisition, while continuing to be a pure online player.

Source: Kalaari Estimate, CII-BCG Study - “Retail transformation: Changing Your Performance Trajectory”

Driving higher online adoption of non-electronics is not only important for the growth of E-tail
market but also critical for favorable economics. Electronics is a low margin and discount driven
category. First time shoppers probably will start with buying electronics online. It is then
important that E-tailers can retain those consumers, build loyalty and get higher share of their
wallet spend. In developed E-tail markets like US and China, electronics has only 16-17% share.

Foundation has been laid in the form of digital infrastructure. E-tailers’ ability to innovate to
serve the next 200M shoppers and drive higher online adoption of non-electronics categories

13 India Internet Opportunity

will be the key to the growth of E-tail market.

Our Learnings
Having significant investment into the e-tail sector, we’ve got our own set of experiences and
learnings. Following are a few key learnings:

● For high involvement categories such as Furniture, Fashion and Jewelry, having offline
presence will be necessary to build brand and trust among consumers.

● Except electronics and fashion, all other categories are still in market creation phase with
<2% online penetration. Market leaders will be required to make significant investments
to drive large scale change in consumer behavior.

● Mobile will drive majority of E-tail sales. Optimizing mobile experience (especially
mobile web) for each customer touch point including navigation, search & filter, product
page and payments will be critical to drive conversion. Conversion rates for Indian e-tail
player are abysmally low, improving product experience will be key part of the strategy to
drive higher conversion and lower acquisition cost.

● Even within established online categories such as Electronics and Fashion, new models
will emerge to cater to different consumer segments and needs - Rentals, Internet first
brands, Offline to online, Social and Content commerce, Luxury goods among others.

● Cost of customer acquisition is high for most segments fueled by hyper competition.
Building loyalty and driving high customer lifetime value will be important for
sustainable growth. Relentless focus on customer experience and KPIs such as NPS and
Repeats will be important operational metrics to track for companies and investors.
Amazon prime is a great example of customer stickiness and loyalty building.

● CoD was an important innovation to fuel the growth of e-tail, 60% of e-tail sales happen
through CoD. But it is also believed to be one of the key reason for high return rates.
For most e-tailers return rates are in range of 15-25%. With UPI, Aadhaar and Bharat
QR share of of digital payments need to increase. It will be critical to bring down cost of
managing cash, reverse logistics and excess inventory.

We continue to be bullish on the sector, and believe it holds strong long term potential.

14 India Internet Opportunity

Digital Payments
India has traditionally been a cash heavy economy. Cash to GDP ratio is one of the highest at
12% and this has been a huge burden on the economy. Cash has given rise to a shadow
economy, which is estimated to be ~30% of GDP. Foregone tax on shadow economy is ~3% of
GDP and cost of managing cash is 1.7%. So overall, cash is costing India almost as much as
the country’s fiscal deficit.

When it comes to adopting a dominant mode of digital payments, we have seen examples of
countries taking different paths. Debit/Credit Card is the dominant digital payment method in
the US with almost 100% card penetration. However, mobile wallets dominate in China due to
low card penetration. In 2016 China mobile payments volume stood at $3.2T as compared to
$212B in US.

Riding on the dominant payment method, large tech companies were created. In US, it was
Stripe riding on card penetration, while in China it is Alipay and Wechat pay driving 90% of
mobile payments volume.

India is still nascent for any form of digital payment. While debit card penetration is high,
number of average POS transactions per debit card per month stands low at 0.3-0.4. And 85%
of debit card transactions in value terms are ATM withdrawals. One of the key reasons for such
low debit card POS usage has been low POS penetration.

Source: RBI

While India has ~14M retail outlets, there are only 2.2M POS terminals. India has one of the
lowest POS per 1000 debit cards ratio at 2.4. The ratio is 13 in US, 14 in China, 33 in Australia
and 15 in Brazil. According to RBI estimates, India needs 10x more POS terminals to sufficiently
serve the current card user base.

15 India Internet Opportunity

In Nov 2016, Indian government took a game changing policy decision of scrapping 86% of
India’s currency to curb shadow economy and drive aggressive digitization of payments. A large
uptick in both forms of digital payments – cards and mobile wallets - is visible due to
demonetization. Both modes of digital payments – cards and mobile wallets – will continue to
witness growth due to very low digital payment penetration.

Source: RBI

But something else happened in 2016-17 which will play a pivotal role in defining which way will
India go when it comes to the dominant mode of digital payments. The answer is probably going
to be neither cards nor mobile wallets. It may be a government led mobile payment system based
on Aadhaar + UPI (Unified Payment Interface) + Bharat QR + BHIM (Bharat Interface for
Money).

16 India Internet Opportunity

The progress made by government in the direction of making it a default payment system has
been unprecedented:

● 1B Aadhaar cards have been issued in 5 years.

● 250M Bank accounts were opened under Jan Dhan Yojna in the last 3 years. This is 50%
of the total 500M bank accounts in India.

● BHIM (UPI based mobile payment app) was launched 7 weeks from announcement of
demonetization. The app has had 18M downloads within 3 months of launch.

● Launched Bharat QR as a standard QR code for merchant payment acceptance. Target

to get 10M merchants to accept UPI payments through Bharat QR in 12 months.

Source: NPCI

Having launched six months back, UPI is driving transactions worth ~$300M per month. In
value terms UPI payments have already reached 30% of mobile wallet transactions and 3% of
card transactions. Although 80% of current UPI payments are P2P payments, once Bharat QR is
rolled out, merchant payments are expected to form the significant volume of UPI transactions.

Although these are nascent days of UPI transactions, it will not be surprising if UPI surpasses
cards and become dominant mode of digital payments in the next 18-24 months. 2016-17 will
probably go down in history as the year that changed India’s payment landscape forever.

17 India Internet Opportunity

E-commerce Logistics  —  Riding the wave
Discovery of wheel in the 4th millennium BC is considered one of the greatest inventions in the
history of mankind. Since then the humble wheel has been the driving force behind industrial
revolution, and logistics has been the backbone of economic growth across the world. Logistics
spend now commands a considerable share of the world’s GDP at 10%. Logistics spend in India
stands at 13% of GDP as compared to 18% in China and 8.5% in US.

In the modern era, the logistics industry is

built on four modes of transportation — Air,
Water, Rail and Road. Air and Water mainly
for foreign trade, and Rail and Road for the
domestic trade. 90% of foreign trade happens
through water in India. Established in 1845,
Indian railways is the second largest railways
network in the world and key contributor to
the domestic logistics industry. Prior to the
e-commerce era, logistics was largely a push-
based system with suppliers pushing raw
material to manufacturers, who in-turn distribute finished goods to end consumers via
distributor/stockist and retailers. The demand was largely driven by a few verticals such as
Pharma, FMCG, Auto and White goods, and they preferred to manage their own logistics or
outsourced it to regional 1PL or 2 PL Logistics Service Providers (LSPs).

Contrary to the traditional manufacturing supply-chains, e-commerce delivery gets triggered

upon customers placing the order and is time sensitive with stricter SLAs. Logistics is a key
enabler of e-commerce and a source of competitive advantage and differentiation for e-
commerce companies. India e-commerce has grown at an astounding pace over the last 3 years,
touching a GMV of $15 billion and has given rise to a new category of e-commerce focused
logistics companies. Traditional logistics involved movement of goods from manufacturing hubs
to consumption centers via a linear routing mechanism. E-commerce logistics is combination of
one-to-one, many-to-one and one-to-many routing based on goods availability and destinations.

The logistics needs of e-commerce firms are evolving rapidly. This involves scaling up to meet
service levels, increased focus on tier-II and tier-III cities, COD and reverse logistics.

18 India Internet Opportunity

 In India, e-commerce logistics
constitute 10% of the AOV
(Average Order Value) which is ~
$2/order. The comparable logistics
cost per order in China is $2.2 but
with 3 times higher AOV. Cost of
deliveries is high in India due to
some unique challenges that the
market presents. Industry suffers
from high return rate with an
industry average of 20–25%, and
logistics cost of returns is ~1.5 times
the forward logistics costs. Nearly
50% of orders are on COD (Cash
on delivery), and COD is believed to
have a high correlation with returns. For the industry to grow sustainably, logistics cost need to come down to 6–
7% of AOV.

Logistics Service Providers

It is estimated that a package in India is handled by at least 20 people before it reaches the
destination. Whereas in a developed country a package would be touched by about 3–5 people.
Prior to e-commerce, the domestic express service market was largely unorganized and
fragmented. The existing traditional 3PL players had limited capabilities to cater to time sensitive
delivery and service levels demanded by e-commerce players, which resulted in captive logistics
arms being seeded by the large e-com players. Even to this date 70% of deliveries for Amazon
and Flipkart are executed through their respective captive logistics entities.

In the last 3–4 years, 3rd party 3PL

players have emerged to take
advantage of scale and efficiency
through a technology first
approach. Within the 3PL LSP
market, e-commerce focused
players like E-com Express and
Delhivery have 30% of the market
share. Both types of LSPs, captive
and 3rd party, are looking to
expand their capabilities through
strategic investments. Also, large e-
commerce vendors have made
strategic investments in other
logistics players in this critical market and invested in startups. In complex categories such as

19 India Internet Opportunity

furniture, jewellery and grocery, e-commerce players still largely rely on captive logistics.
Top e-commerce players across the globe have adopted different approaches to logistics. Alibaba
relies heavily on 3rd party 3PL players. It has 47% stake in a logistics technology provider
Cainiao, which works with many 3rd party 3PL players to handle the logistics needs of e-
commerce players in China. Amazon on the contrary has captive logistics arm that heavily
leverages USPS, UPS and FedEx. Alibaba’s rival in China JD.com has recently hived off its
captive logistics arm into a separate business unit to serve the needs of other e-commerce
players. Indian e-commerce market today is served by a mix of captive and 3rd party logistics
players, and only time will tell which way India will incline when it comes to building the e-
commerce logistics — captive or 3rd party.

Unique challenges and opportunities

Last mile and Line haul contributes to 90% of the

logistics cost for e-commerce players. 80–90% of line-
haul is by air due to time sensitive nature and service
commitments. This is highly unsustainable in the long
run and a shift to rail/road is inevitable. The other
challenge unique to India is the lack of address
standardization, and 20–30% of addresses given by
customers have inaccurate pin codes. It is estimated
that on average a delivery person ends up making 2–3
calls to a customer and spends 5–7 minutes more per
package delivery just to find the customer location.
Also, the average number of delivery attempts per
shipment is estimated to be as high as 1.4. These
contribute to the inefficiencies and add to the
increased cost of logistics for e-commerce players.

20 India Internet Opportunity

 E-commerce growth over
the next 5 years will be
driven by demand from
Tier-II and beyond.
Shipment volume from
these areas is expected to
grow from 13% to 40%
by 2020. The challenge is
that the demand from
Tier-II and beyond will
be highly disaggregated
because it will be
originating from more
than 4500 small cities and
towns. Building a scalable and efficient logistics network for such scattered demand and supply
will require innovative business models from logistics players.

Hyperlocal logistics

India has traditionally been an

economy dominated by
hyperlocal demand. Most of
the needs of consumers are
typically served by stores
within a 5km radius. The
emergence of young digital-
first families looking for quick
convenient options augurs
well for the hyperlocal
business story. Fundamentally
hyperlocal logistics is driven
by high frequency categories
which are time sensitive or
provide convenience. Hence restaurant and grocery have emerged as major categories, followed
by pharma and concierge services with business models across B2B, B2C and C2C. Hyperlocal is
expected to have a hyper growth of nearly ~12x by 2020 to $3.9 billion.

21 India Internet Opportunity

Unit economics has been a major challenge for hyperlocal logistics companies. Unlike the
developed markets, the AOVs are lower. Also, traditionally local kiranas and restaurants have
offered free delivery in India, hence the willingness to pay for delivery is low. Adding to this
complexity is the lack of address standardization and traffic congestion in large cities, leading to
lower utilization of delivery executives. Increasing AOV (group orders) and pooling of orders as
density increases could be the key to break through the unit economics conundrum in
hyperlocal.

Logistics will be at the heart of India’s internet growth story. Be it the customer experience or
business economics, logistics will have a role to play. The sector is up against multiple challenges
including poor infrastructure, non-standardization of addresses and high labour attrition to name
a few. It will require deep domain insights and heads down execution to win this market. We’ve
already seen multiple entrepreneurs faltering even after raising large sums of capital in the space.
But more the challenges, better the opportunity to innovate and disrupt. It is still a large market
opportunity up for grabs, but requires relentless focus on execution and long term value
creation.

Conclusion
The story of India’s internet story is yet in its 1st chapter only. It has already begun to catch the
imagination of entrepreneurs and investors both domestically and globally. The market so
important that global internet players are entering with the motto of winning it whatever it take.
Indian players will continue to face fierce competition from global counterparts with advantage
of global learnings and access to large pool of capital. To fight out the battle, Indian
entrepreneurs will require access to large source of growth capital and management talent pool
capable of taking

1 India Internet Opportunity

AUTHORS

Vani Kola
Darshit Vora

Vinod Shankar
Naman Narain

© May 2017 Kalaari Capital Advisors. All rights reserved.

The Report has been complied for information purpose only. The Report is based on current public information that we
consider reliable, but we do not represent it is accurate or complete. The information, opinions, estimates and forecasts
contained herein are as of the date hereof and are subject to change.

ABOUT KALAARI CAPITAL

Kalaari Capital is an early-stage, technology-focused venture capital firm with
$650 million in assets under management. Since 2006, we have empowered
visionary entrepreneurs building unique solutions that reshape the way Indians
live, work, consume and transact. Along with capital, we focus on long-term
partnership with entrepreneurs to help unlock large value through disruptive
innovation.
2 India Internet Opportunity