ONDC's e-commerce puzzle: Food thrives but apparel and electronics lag

Fast forward to 2024, and ONDC, a decentralized protocol for e-commerce, mobility, and other online platforms, is reporting explosive growth, boasting a 436% increase in transactions. Mobility, primarily auto-rickshaw rides, is also gaining traction.

Despite this impressive progress, the platform still grapples with significant hurdles, particularly in scaling non-food categories, underscoring the complexities of democratizing e-commerce in India.

ONDC aims to break e-commerce monopolies by standardizing marketplaces, promoting local suppliers, and streamlining logistics. It wants to position itself as the 'UPI of e-commerce,' emphasizing its role as a network rather than a platform.

Growth amid challenges

The network witnessed 21.5 million transactions across categories in Q4FY24, marking a 436% increase from the first quarter of the last fiscal year, according to its FY24 performance handbook accessed by Mint.

The number of serviceable cities has surged from 250 in early 2023 to over 1,000, and the number of sellers has more than doubled year-over-year.

Food and beverage, one of the two top-performing categories on ONDC, saw an 18% increase from the previous quarter, with over 95,000 restaurants participating across 347 cities. 

Grocery orders also grew 52% quarter-on-quarter in the January to March period, with a supply of 6.5 million stock-keeping units.

“The growth has been phenomenal, and numbers are proof," T Koshy, managing director and chief executive, of ONDC, told Mint.

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However, non-food categories present a mixed picture.

Fashion, personal care, and electronics are scaling much slower than food and grocery, highlighting the challenges ONDC faces in democratizing e-commerce in a market where less than 10% of the population shops online.

Category Conundrum

Food and grocery were among the first categories to launch on the network. Orders placed through Paytm are fulfilled by local eateries and kirana stores powered by seller-side applications like Magicpin, Namma Yatri, and SellerApp.

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Marico’s Safola Store, Hero MotoCorp, and Piramal Pharma’s Wellify also joined the bandwagon last year.

An e-commerce executive, who did not wish to be identified, noted that food delivery is relatively easier to execute due to its habit-forming nature and high purchase frequency. 

Steep discounts helped ONDC attract value-conscious consumers, particularly in tier 1 regions, boosting repeat purchases. Consumers aged 18-40, who contribute the bulk of food orders, are more likely to remain loyal to a platform that offers prices ₹20-30 lower than competitors like Swiggy and Zomato.

Koshy attributes the growth in food delivery to his team’s focus in improving in customer experience, including demand generation engines and investments in customer loyalty and engagement through in-app gamification.

Despite these gains, ONDC still trails way behind Zomato and Swiggy in terms of market share.

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According to Elara Capital's research estimates, ONDC bagged 10-15 million food orders last year, while Zomato and Swiggy together generate upwards of 100 million annually based on the current run rate. 

Zomato leads the food delivery market share at 55%, followed by Swiggy, according to brokerage firm JM Financial.

Mobility has also worked for ONDC on the back of its various integrations. 

In February, Uber signed an agreement with ONDC to expand offerings. Over the last few months, metro rail boards of Chennai and Kochi have joined the network aiming to make urban mobility seamless.

“ONDC’s partnerships are making public transportation processes like ticket booking hassle free, which is bound to find many takers especially in urban areas," said the ecommerce executive.

E-commerce categories like fashion and electronics, on the other hand, are more nuanced. 

As per a report by AllianceBernstein, Flipkart leads the e-commerce market with a share of 48%, followed by Amazon.

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According to the executive cited above, product quality and grievance resolution form integral parts of the e-commerce experience.

“Big players like Amazon and Walmart-backed Flipkart have invested millions of dollars and spent several years building customer satisfaction capabilities. Accountability is a dealbreaker," this person noted.

ONDC must go the extra mile to win customer trust in India's trust-deficit market.

According to Karan Taurani, a research analyst at Elara Capital, the higher average order values of electronics and apparel make these categories much harder to crack.

Strategic shifts and adjustments

Last month, PhonePe’s Pincode—a top buyer-side application on the network—reportedly pulled out of non-food categories except unreserved ticket bookings.

A few other network participants are considering restructuring their ONDC strategy to focus on food and grocery orders, according to a person who preferred anonymity.

One participant mentioned reallocating fewer resources, including manpower and capital, to network activities, particularly in e-commerce categories like fashion and electronics.

Koshy, while not commenting on specific statements, emphasized that the network empowers brands to choose their growth strategies based on their strengths. 

“The network is formed to empower democratization, not socialism. Firms are allowed to choose categories depending on their bandwidth and expertise. Just because something may not work for one player doesn’t mean it was built to fail," Koshy remarked.

The road ahead

Last week, ONDC introduced a new incentives programme aimed at boosting demand and attracting more users to the network. 

Mint has seen a copy of the programme details.

“We run trials from time to time to trigger demand across segments, especially for the benefit of smaller players," Koshy said.

Koshy, however, clarified that the incentivization strategy was never aimed at building volume or grabbing market share, which is usually the case with e-commerce platforms that target small user groups.

“While these programmes do help users explore ONDC, it is meant to assist sellers in developing their own schemes best suited to their products," he noted.

The brand’s freedom to fix terms and conditions is the most powerful lever that ONDC offers, according to Koshy.

“Scaling takes time. Some categories will take off faster than the others. As greater number of brands join the network, we will get there," he said.

Elara Capital’s Taurani added that ONDC must invest more on customer experience which includes offering discounts for customer acquisition.

“For a user to shop loyally on ONDC, there needs to be a differentiated offering. Platforms like Amazon, Flipkart, Nykaa have spent heavily on marketing and acquiring customers, which ONDC needs to adapt," he added.

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