MADURAI, India — The future of India’s booming e-commerce market is in the hands of small-time customers like 27-year-old Gayathri Rajamansingh.
Each Sunday, the owner of a small hair salon browses the Shopclues website from her home, hunting for bargains. Recently, she fixed on a floral-print sari, a traditional Indian one-piece garment, and clicked “Buy Now.”
Ms. Rajamansingh’s impulse purchase of the 199 rupee ($3.06) sari, set in motion a logistical operation that is complex and costly. Delivering the item involved a three-day, roughly 1,200-mile journey from Surat, in the western state of Gujarat, to her home in Madurai, in the southern state of Tamil Nadu. More than 30 people moved the package, through two overnight truck journeys, a long-haul flight and, finally, a motorbike to her doorstep.
It cost Shopclues 45 rupees to deliver the sari to Ms. Rajamansingh, or about a quarter of the item’s price.
Many Indian e-commerce startups spend as much as 30% of their net sales on logistics, according to New Delhi-based consulting firm Technopak, way more than the 11.7% Amazon.com Inc. spent delivering packages in the U.S. last year. In China, market leader Alibaba Group Holding Ltd. doesn’t shoulder any shipping costs, which are split between merchants and buyers.
Indian e-commerce firms must figure out how to turn a profit in a country fraught with logistical obstacles — including bad roads, shoddy trucks, monsoon floods, corrupt state-border officials, overcrowded airports and complicated tax rules. Shopclues made money on Ms. Rajamansingh’s sari — 33.40 rupees — but overall, it doesn’t make enough to cover wages for employees or rent for its offices. Like its competitors, Shopclues relies on investors to stay afloat.
Most have deep pockets thanks to a flood of cash from venture capitalists looking to build the Indian equivalent of Alibaba.
With over $3 billion in the bank and a $15 billion valuation, Flipkart Internet Pvt., the country’s biggest e-commerce player, is the world’s most valuable shopping startup. Jasper Infotech Pvt.’s Snapdeal has raised $1.5 billion and is valued at $5 billion, according to Dow Jones VentureSource. Amazon plans to invest $2 billion to expand its India operations.
Jostling for position, these players offer steep discounts on everything from smartphones to refrigerators. They are prepared to risk losses on deliveries to far-flung patrons like Ms. Rajamansingh in the hope they will become loyal customers.
India is a few years away from an e-commerce boom like the one that took place in China, according to Credit Suisse Group AG. China’s market exploded to $458 billion in sales last year from $7 billion in 2007. India’s e-commerce market is currently worth $4 billion, Credit Suisse reckons.
But India faces a greater challenge getting people hooked up to the Internet. More than one billion people — almost 85% of the population — were still without Web access as of 2013, according to a report by McKinsey & Co.
Delivering cheap saris across the country on airplanes in a few days’ time doesn’t make economic sense, said Mohit Tandon, head of strategy at Delhivery, a logistics company that transports roughly one-fifth of all packages ordered online in India. Though more expensive than trucks, air shipping is popular with e-commerce firms eager to get a hold on India’s potentially vast market.
“The wall of cash can make people do irrational things,” said Shopclues Chief Executive Sanjay Sethi. Shopclues tries to keep a tight control on its costs and doesn’t sell most items at a loss, in part because it has raised only $130 million, Mr. Sethi said.
The torrent of investment cash has started to slow and some backers are beginning to ask e-commerce companies to show they are working on profitability, said Avnish Bajaj, managing director of India operations for U.S.-based Matrix Partners.
Indian e-commerce startups aren’t expected to turn a profit immediately. After all, Amazon only began to flirt with profitability after 20 years.
Shopclues says it is focused on achieving profitability in the next year. It makes roughly 10 rupees in gross profit for every 100 rupees in sales, Mr. Sethi said.
Flipkart has said it wants to be profitable by 2017, and Snapdeal is aiming to reach profitability in the next two to three years. Neither company has detailed their plans to achieve this. Flipkart and Snapdeal wouldn’t comment on logistical costs.
Investors say Indian e-commerce companies must make more money off customers.
Shopclues is nevertheless modeling its business on shoppers like Ms. Rajamansingh.
“Our price-point play is the masses,” said Mr. Sethi.
Raising prices or delivery costs may turn away shoppers like Ms. Rajamansingh, so Delhivery believes e-commerce players will end up ditching air travel for trucks.
“People have to move to that model,” said Delhivery’s Mr. Tandon. “Right now, it’s just who blinks first.”