India’s Consumer Internet Waves Move towards the Rural Areas
Consumer Internet is changing the country by penetrating into different areas - consumer services, e-commerce, education and more. EqualOcean discussed startups that perform well both in the urban and rural area, especially in rural markets.
In the previous article, EqualOcean dissected India’s VC investment trends and mapped out some of star startups shining in the first half-year that raised most of the fundings. In today’s article, EqualOcean dived into some top-performing sectors and talked about the rural region-focus waves that make up as one part of India’s Consumer Internet trends.
The first half-year in review
India improved its ranking by 23 points and reached 77th on Doing Business 2019 report issued by the World Bank Last October. Incubated by the Corporate Affairs Ministry’s contributions towards starting a business, insolvency resolution and protection of minority interests, the liberalisation of foreign direct investment (FDI), the introduction of the Real Estate Regulatory Authority (RERA), tax reform towards indirect tax through the new Goods and Services Tax (GST) and so on, India’s economy has made progress.
VC market in India continues to diversify. Here are some dynamics. Financial services continued to be the top sector (in terms of deals closed) receiving USD 971 million in investment across 59 deals in 2019H1, a 42% increase over 2018H1. E-commerce sector recorded over USD 591 million in investments in 2019H1 across 38 deals (a 41% decrease compared to 2018H1). Consumer services witness a decrease in terms of both deal value and deal number, receiving USD 312 million across 13 deals (a 48% decrease compared to 2018H1), following Auto & Mobility receiving USD 602 million with 31 deals (a 42% rise compared to 2018H1).
Transportation & Logistics made its busy half-year compared to 2018, seeing USD 621 million investments across 5 deals (a 541% increase over 2018H1, driven by Softbank’s bulge investment in Delhivery).
Travel & Leisure also got popular, with 19 deals receiving USD 388 million (a 183% increase over 2018H1).
Other key sectors seeing investments include healthcare (USD 255 million across 22 deals compared to USD 197 million across 39 deals in 2018H1), Enterprise services (USD 59 million across 30 deals against USD 251 million across 39 deals in 2018H1), Food & Agriculture (USD 158 million across 20 deals versus USD 141 million across 37 deals in 2018H1), and Media & Entertainment (USD 174 million across 31 deals compared to USD 88 million across 33 deals in 2018H1).
From urban to rural areas
By 2026, the e-commerce market in India is forecast to be worth USD 200 billion, up from USD 38.5 billion in 2017, according to the government's India Brand Equity Foundation. It was in the past five years when the inflow of a large pile of capital from investors made India’s E-commerce and Consumer Internet cemented its positions as one of the most exciting sectors for innovations and disruptions.
India is the fastest-growing major Internet market today with over 500 million users, as its Internet growth has outsized the rate of economic growth. Indian Internet penetration growth grew at a CAGR of 28.6% during 2000 - 2016 compared to a GDP growth of 10.47% during the same period, according to data from the World Bank. India is also expected to have 340 million, or more than a quarter of the population (1.3 billion) smartphone users in 2018, as the picture below shows.
The overall Internet penetration in India is rising, however, remains an urban phenomenon. In June 2018, there were 195 million Internet users from rural India compared to 304 million in the urban region, according to Kantar. Rural India is lagging behind in digital connectivity owing to challenges in deployment of fixed broadband networks. Around 600 million rural Indian are poised to adopt Internet. Consumer Internet in India will be driven by rural consumers, due to fall in smartphone prices and data costs.
Learning from China
India, in the process, can learn from China, a counterpart that leapfrogged into digital era. In 2017, China has 772 million Internet users and 717 smartphone million users, with 55% Internet penetration and 51% smartphone penetration. 209 million out of 772 million Internet users are from rural areas in China, according to data collected by SCMP in a report titled China Internet 2018.
China Internet empowers rural populations with its significant contribution to the development of e-commerce, education, and media in the region. For instance, 50% of poor villages will be equipped with e-commerce capabilities; 175 million users of short video users apps are from rural China. India’s rural markets offer tremendous opportunity for business, valued at USD 852.9 million in 2011, estimated by the World Bank.
Internet giant Alibaba practiced a lot. The number of Taobao villages (Any rural village where at least 10% of households sell goods online with annual sales of at least USD 1.6 million) in 2017, accounting for 490,000 active online shops, USD 19 billion in annual sales and 1.3 million new jobs created. Witnessing the fierce competition in China’s tier 1 and tier 2 cities, Pinduoduo (NASDAQ: PDD) tapped into the immense potential of tier 3 and tier 4 cities.
These startups are changing India’s rural areas
We selected a batch of startups that cater to urban customers ranging from e-commerce companies, logistics firms, healthcare players, and content platforms. Those are performing well both in the urban and rural areas (especially in rural markets).
As a key enabling factor for the growth of e-commerce retail industry, logistics is evolving with business trends and is acting as an important lever for business growth. Flipkart, one of the largest e-commerce retailers in India, focuses on rural distribution models to cater to tier 3 and tier 4 cities, betting on that real e-commerce boom will come with increased participation of rural consumers. Days after the local marketer announced the plan, its archenemy Amazon also planned to reach to small cities and rural markets in 2017. However, the pair are both forced to take down several sellers from their platforms due to several changes made by prime minister Narendra Modi’s government last December. The new policy that takes effect on Feb 1 bars online retailers in India from entering into exclusive deals to sell products at deep discounts, mainly to protect mom-and-pop stores in India. It also stops them from procuring over 25% of the inventory from a single vendor, especially from sellers in which the companies own a stake in.
While Flipkart and Amazon are working out plans to hedge against the rules, other e-commerce players feel less concerned because its model is technically business to business, a segment not impacted by the new rules. Founded by Sridhar Gundaiah in 2011, StoreKing, aimed squarely at India's 800 million rural residents. Local retailers in the era guide residents’ purchase decisions much more than those online stores do to its customers. StoreKing realized it and created a model that mixed elements of both B2C and B2B businesses, with a primary focus to set up a holistic distribution network for the rural hinterlands. The firm provides tablets with a catalog of mostly discounted products, from which customers can choose products they need. Retailers place the order through StoreKing app and the firm will deliver goods ready for pickup to the store.
Tapping into the market with keeping retailers in its business model, the firm invests heavily in upfront payment and transportation infrastructure development but never in last-mile delivery for retailers and end customers. It helps the firm maintain steady cash flow, without worrying about high costs. Serving as the bridge between consumers in India’s villages and companies like Amazon, Xiaomi, Paytm, P&G, Patanjali and more, StoreKing raised USD 215 million this May. With the new funding, it plans to expand its business nationwide from the current ten states. To understand diversified geography in India, thus, become a big challenge for the company.
StoreKing didn’t see much competitors in the battlefield. IPay Tech India, for example, delivers goods to both stores and customers, generates USD 5.4 million annually while StoreKing is estimated to post USD 194.8 million revenue one year, according to data collector Crunchbase.
Another player that provide technology-based solutions in rural areas is Karmar Healthcare. The company provides real-time online video consultations, and delivers healthcare to users via its e-doctor clinics, mainly to solve the lack of access to quality and affordable healthcare in the rural and semi-urban areas. The firm’s CEO Jagdeep Gambhir has several years of experience in rural healthcare and previously worked with Goldman Sachs in India and the US.
Tech-driven education company BYJU’S is constantly in the spotlight since it joined India’s coveted but rarefied unicorn club in 2017. The company was valued at USD 5 billion when it raised USD 31 million from General Atlantic and Tencent Holdings early this year. Going forward, the company launched its programs in the Hindi language to capture the semi-urban and rural market in March.
Dailyhunt, a mobile application for news and e-book reading in 14 different languages of India, attracts 207 million monthly active users (MAUs). The bulk of revenue comes from display advertising and it is expected to double to between USD 80m and USD 100m in 2019. By 2021, the number of Internet users in India using local languages will be 536 million, exceeding the number of Internet users using English, according to a KPMG report. The content explorers developed vernacular contents and videos, betting on the rise of vernacular consumers in next years as the Internet in India was pivoting from an English-focused medium to an English-plus-vernacular-language medium. This vernacular-approach is another access point that other industry players should consider.