This article is more than 2 years old.

December 29, 2014 This article is more than 2 years old.

India’s fledgling online retail business announced its arrival in 2014.

In October, there was Flipkart’s “Big Billion Day” sale followed by Google’s three-day online shopping festival. In all, there has been a dramatic rise in number of unique visitors and merchants, and rapid growth in product categories on offer that included holiday packages, motorcycles, and even homes.

This year also saw valuations of some of the larger players touch a billion dollar mark, with Flipkart valued at over $10 billion after a new round of fund raising in December.

All this frenzy of activity in the e-tail (electronic retail) space expectedly caught the Indian government confused—while the brick and mortar organized retailers were left frothing at the mouth.

Some may even wonder if there is an e-tail bubble in the making.

And as we enter 2015, it is likely that the central and the state governments will continue to remain mired in examining the non-issue of foreign direct investment in retail sector. Instead, the more urgent need is to develop a contemporary policy framework that makes India’s consumer products distribution infrastructure more efficient.

The romance of investors with e-tail (and e-commerce) sector is likely to get even more intense, and its penetration even more ubiquitous.

Some may even wonder if there is an e-tail bubble in the making. But other than questioning the valuations of some of the players, the fundamentals of the e-tail sector in India are very sound.

Yet, for all its recent celebration and hype, online retail will only account for a small share of India’s overall consumer spending next year—and even a decade later.

What is India consuming?

India’s current consumer spending on merchandise—and hence the size of India’s retail market—is about $525 billion.

If India sees a real GDP growth of 7% CAGR (Compound annual growth rate) in the next 10 years, and the consumer price inflation remains around 6% CAGR in the same period, India’s merchandise retail spending will touch about $1,100 billion by 2020. By 2025, this could grow to $2,100 billion.

For getting a better understanding of how India’s e-tail sector may evolve, it is important to understand what India is currently consuming and how that consumption is split between rural and urban.

Almost two-third of India’s retail spending (not total consumer spending that also includes services such as housing, healthcare, transportation, education etc.) is on food, followed by almost 9% on apparel, then jewelry, and only about 5% on consumer electronics, including mobile handsets.

That’s the consumption pattern currently—and it’s unlikely to change dramatically over the next decade.

Of India’s retail spending, rural markets (spread across 660,000+ villages) currently account for almost 52%.

And even by 2025, rural spending would still account for 43% of spending.

Growth everywhere

India will see very strong growth in all channels of retail: the traditional independents, the modern corporatized chains, and e-tailing not only in the coming 10 years but indeed, even much beyond that.

Those who fear for the demise of traditional retail from corporatized retail (whether Indian or foreign owned) and now from e-tail, should stop fretting. Indians, who are currently consuming $479 billion worth of merchandise from the independent mom and pop stores, will consume four times that amount from the same stores by 2025.

The corporatized retailers do not have much to fear either. Instead, they are likely to increase their own collective revenues (only from physical stores) from about $46 billion today to over $100 (excluding e-tail) billion by 2020. By 2025, that number could hit $345 billion.

The online pie

Notwithstanding its immense appeal in metro cities and large urban centers—and notwithstanding its immense appeal for categories including mobile phones and consumer durables—e-tail will have a fairly small share of the overall retail spending in India.

The reasons are not too difficult to fathom.

Firstly, total consumer spending is dominated by food—and of that, more than 50% is accounted for by perishables that include dairy, vegetables, meat, and fruit.

Secondly, almost 50% of the total consumer spending is still spread across the entire rural India where it is yet not likely that e-tail will make a big impact (while e-commerce would comprising of services such as financial, entertainment, information and education etc.).

Within the dozen largest Indian cities for certain categories, e-tail will become an even more significant player.

And the most important impact categories for e-tail—consumer electronics, durables and appliances, apparel and footwear, and furniture—account for just about 18% of the total consumer spending on merchandise.

This spending, however, is spread well across urban and rural India through several hundred thousand independent stores as well as the brick and mortar corporatized retail department stores, hypermarkets, and specialty stores.

So, within the dozen largest Indian cities for certain categories, e-tail will become an even more significant player. But, from the overall consumer spending perspective, the share of e-tail channel by 2020 is expected to be around 3% on a net sales value (and perhaps 4% by gross merchandise value) and no more than 10% by 2025.

What next

Finally, will the sector see any significant consolidation in 2015?

It is more likely that a few giants like Reliance, Tata Group and the Aditya Birla Group could enter the sector through the organic route, while large organized brick & mortar retailers such as the Future Group, Shoppers Stop and Lifestyle will intensify their multi-channel play.

Moreover, 2015 should also see launch of several hundred new e-tail startups focusing on single product categories and niche segments. Consolidation in this space may happen only in 2017, or even later.

Till then, India’s e-tail sectors promises continuation of “acchey din” for select category of service providers such as logistics and packaging companies, for tens of thousands of job seekers—and for million of consumers.