How Indian online marketplaces brought start-ups to the bazaar

It's fair to say that India was a bit behind in e-commerce. Until recently, low Internet penetration rates, both among consumers and small businesses, have held back online sales. Today, however, business is booming, especially for marketplaces. New research suggests that Indian online marketplaces could generate sales of up to $350 billion a year by 2027.

The forecast, according to a new report released jointly today by consultancy Bain & Company and global venture capital investor Accel, would represent a tripling of market size from current levels. According to Bain and Accel, online marketplaces currently generate just over $100 billion in sales.

Such growth represents a tremendous opportunity for start-ups and existing small and medium-sized enterprises (SMEs) to sell their products and services through online marketplaces. Research estimates that up to 15 million of these businesses could sell online in marketplaces by 2027; this would contribute to the creation of 7 million new jobs in India and could increase the size of the country's economy by 5%.

“The accelerating penetration of the internet, especially on mobiles, the falling cost of data and the fact that people have become more comfortable with online transactions are all driving e-commerce “, explains Prabhav Kashyap, partner at Bain. "SMBs have also had to follow this path, but we see more and more of them starting to digitize."

India also has structural tailwinds at its back, says Anand Daniel, partner at Accel. “We have a very large young generation, who have grown up online and on mobile,” he points out. "We also have a sophisticated financial infrastructure, with some of the best payment rails in the world." Logistics, which used to be a challenge as marketplaces struggled to fulfill customer orders, have also improved significantly, he says.

The result, according to the researchers, is a rapidly maturing online market that is now seeing growth in several niches. They documented more than 300 such markets in categories such as retail, education, healthcare, travel, and financial services. Nearly 20 marketplaces have now achieved at least $1 billion in annual revenue, and a growing number of businesses are now profitable.

Bain and Accel expect growth to be particularly rapid among business-to-business (B2B) markets over the next five years, with online food delivery also accelerating at a very rapid rate.

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While consumer-facing marketplaces will continue to lead the way – research estimates that they will account for 40% of total sales by 2027, the contribution of B2B e-commerce marketplaces is expected to be multiplied by five from its current size to reach $55 billion. The study suggests the online food delivery industry will nearly triple to nearly $22 billion.

“The B2B sector is less mature, so naturally there is more room for growth,” Kashyap adds. "But there's also so much potential for this type of marketplace to add value - to remove some of the middlemen from the value chain and to reduce margin leakage for businesses."

Such allure, and opportunities in the online marketplace space, continue to capture the attention of investors. Funds raised by Indian marketplaces reached $16 billion last year, four times more than in 2018. The pace of fundraising appears to have slowed somewhat in 2022, in line with global caution growth on the economic outlook, as well as declines in public markets, but investors continue to circle the sector.

Daniel expects any drop in investment to be a relatively minor setback in the current success of online markets. “India is a country where trust and confidence are particularly important, but we are starting to see customers showing that trust and confidence to online marketplaces,” he explains. "We effectively replicate the experience and relationships that people have enjoyed in their local bazaars."