Everyone hates e-commerce

Well, almost everyone, other than consumers and investors in e-commerce firms, that is

Mihir Dalal, Shrutika Verma, Sapna Agarwal
Updated10 Oct 2014
Matters seem to have come to a head on Monday when Flipkart sold $100 million worth of products to 1.5 million customers in 10 hours during its Big Billion Day sale. Photo: Bloomberg<br />
Matters seem to have come to a head on Monday when Flipkart sold $100 million worth of products to 1.5 million customers in 10 hours during its Big Billion Day sale. Photo: Bloomberg

Bangalore/Delhi/Mumbai: Consumers may love them, but e-commerce firms in India, several of which operate under contentious (but not illegal) structures to get around the laws, have attracted the ire of brick-and-mortar retailers—even some companies that sell on such sites but do not wish to offend constituents of their distribution networks.

They have also attracted the attention of taxmen and the government.

Earlier this week, Tamil Nadu became the second state after Karnataka to take a dim view of the way e-commerce companies that run marketplaces believe they should be taxed.

Offline retailers, including the man who was once hailed as India’s Sam Walton, Kishore Biyani of the Future Group, claim e-commerce companies are indulging in predatory pricing.

And it is only a matter of time before the government, which has received several complaints to this effect, may decide to get involved in regulating online marketplaces, which don’t own inventory; they simply connect small merchants with buyers and take a cut on every deal.

Matters seem to have come to a head on Monday when Flipkart, promoted by Flipkart India Pvt. Ltd, sold $100 million worth of products to 1.5 million customers in 10 hours during its Big Billion Day sale.

The sale was marked by snafus and irked several customers, prompting an apology from Flipkart’s founders Sachin Bansal and Binny Bansal.

Amazon’s Indian arm has a similar sale planned between 10 and 16 October.

Mint first reported on 9 September that a lot of shopping this festive season—the period between mid-September and early January—is likely to happen on e-commerce sites, many of which were lining up huge discounts to attract users.

The companies have to aggressively build market share to justify and increase their valuations. E-commerce companies are popular with investors; Flipkart has so far raised $1.25 billion this year, and its rival Snapdeal, promoted by New Delhi-based Jasper Infotech Pvt. Ltd, $233 million. Amazon.com Inc. has said it will invest $2 billion in its Indian operations over the next few years.

This discounting hasn’t gone down well with brick-and-mortar retailers.

“Any transaction is governed by certain terms. We expect partners to adhere to the terms so that the brand is protected and the consumer feels that he is getting a good deal everywhere,” said Rakesh Biyani, joint managing director, Future Retail Ltd.

The e-commerce companies themselves claim it’s just business as usual.

“Discounting is a tool for retailers and e-retailers to move the inventory, to get customer attention or to liquidate stock. It can be misused and that is the reason for so much hue and cry,” said Praveen Sinha, co-founder and managing director of Jabong.com.

Jabong is part of Germany-based e-commerce group Rocket Internet and is valued at €388 million, according to share sale documents filed by Rocket.

Online-offline faceoff

“Flipkart is an e-marketplace that provides a platform for MSMEs (micro, small and medium enterprises) and brands who wish to connect to millions of Indian customers without having to step out of their house. Sellers are the ones who decide on the pricing of their products—and only they can change these prices in our system. Discounting during sales is not a new phenomenon and it helps sellers attract a larger customer base from time to time and grow their business,” said Ankit Nagori, senior vice-president at Flipkart.

That may be the case, but companies are finding it difficult to balance the interests of their online distribution partners with those of their offline ones. And e-commerce only accounts for a fraction of the organized retail market.

Online retail in India is worth $3.1 billion, or 10% of the organized retail market, and is estimated to grow to $22 billion, or over 15% of the organized retail market, in five years, according to a November 2013 report by brokerage CLSA.

“If this is a one day promotional affair to benefit and reward the consumer, then it’s all right, but if this becomes a regular feature the equilibrium across different retail channels will get disturbed; it is important to maintain price parity,” said Shantanu Dasgupta, vice-president, corporate affairs and strategy, at Whirlpool of India.

And most companies are very clear on whose side they are on.

LG India Pvt. Ltd sent a letter to vendors on 6 October, a copy of which is with Mint.

“The company has not authorised any e-commerce company/ web portal to sell LG product(s)—TV, audio products, home appliances, air conditioners and mobiles in India,” the note said.

It added that the firm does not take any “responsibility for the genuineness of any LG product(s) sold through e-commerce companies/ web portals in India, and retains the right of not extending additional services/ warranties to such products”.

Electronics retailers are particularly suffering because of e-commerce. Popular brands such as Motorola and China’s Xiaomi are available exclusively online, through Flipkart.

Xiaomi, which has been selling roughly 60,000 phones a week through Flipkart since September, expects to sell over 400,000 of its feature-packed budget phones this month, a company executive said. Motorola Solutions Inc., which had lost out to Samsung Electronics Co., Micromax Informatics Ltd and others over the past few years, has seen a dramatic turnaround in its fortunes this year after it started selling exclusively through Flipkart. The US-based firm sold 1.6 million units of its Moto E, G and X models from February to September in India.

Winning market share

E-commerce platforms currently contribute to a double-digit share of smartphones sales in India (by volume), and have a potential to reach close to a quarter of incremental sales, according to an August note by Jayanth Kolla, an analyst with research firm Convergence Catalyst. “The growth of these players is currently at the cost of large format retail, organized retail, exclusive brand and large multi-brand outlets in the urban areas. But, this channel has the potential to relegate a significant portion of the conventional smartphone brick-and-mortar retail distribution channel to rural areas,” Kolla said.

In the US, Amazon.com Inc. and eBay Inc. faced similar problems from the traditional supply chain when they were fast expanding in the 2000s and they continue to be criticized for steep discounting practices and, in some cases, sales of unauthorized and even fake products.

Still, Amazon offers the lowest prices in most categories and in the latest quarter, the company reported sales growth of more than 26% in North America, significantly higher than any of its offline rivals such as Wal-Mart Stores Inc., Best Buy Co. Inc. and others. Best Buy has had to shut stores, change its management and accept lower margins to survive while Walmart is aggressively increasing its online business.

Jabong’s Sinha sees such conflict as part of a transitory phase.

“There is a channel conflict that is happening and since e-commerce is a new channel, it will take time for the two to understand each other.”

Indeed, many executives at consumer product companies and brick-and- mortar retail establishments speak of so-called omni-channels, or those spanning offline and online.

“If we have to be successful in the future we have to build an omni-channel strategy. It is already seen in the mature markets with retailers like Gap and Target, they are all large online. Except for Amazon, there are no other pure play e-commerce companies in these markets,” said J. Suresh, managing director of Arvind Lifestyle Brands, which sells brands like Flying Machine and Excalibur as well as licensed brands such as Arrow and Tommy Hilfiger and is in the process of launching American apparel brand Gap next year.

“Unlike India, where, of the top 50 e-commerce companies, at least 46-47 are pure-play
e-commerce companies, in the US besides Amazon, most e-commerce companies are offline modern retailers that have got into e-commerce,” said Amitabh Mall, partner and director at consultancy firm Boston Consulting Group,

“It will change here too. All modern retailers will have to have a plan for ecommerce in India,” he added.

Future Group, Rakesh Biyani added, would have its own online channel in the next 6-8 months.

The conflict between online and offline retailers isn’t unique to India. Nor is the confusion over how e-commerce companies here are to be taxed.

Tax issues

The three major e-commerce companies operating in India—Flipkart, Amazon and Snapdeal—all host marketplaces.

That’s primarily because Indian law doesn’t allow foreign direct investment in e-commerce sites that sell directly to customers but allows it in marketplaces that link sellers and buyers. The marketplaces also provide services such as payment and delivery systems.

That model is beyond any definition that can be found in Indian tax laws.

For instance, in Karnataka, the tax department wants Amazon to pay value-added tax (VAT) on products from third-party sellers it stores in its warehouse in anticipation of selling them to customers. Amazon keeps a cut of the sales and passes on the rest to the sellers who then pay VAT. The state’s tax department claims that the ownership of products passes to Amazon when stored in its warehouse, and that the e-commerce company should be responsible for paying VAT.

Tamil Nadu’s tax department is beginning to think along the same lines.

In many cases, tax departments do not really understand the model of e-commerce companies.

Binod Kumar, commissioner of commercial taxes in West Bengal, said that while no violation has been brought to his notice so far, many states had expressed concerns about e-commerce at a meeting of all tax commissioners in New Delhi in September. There has to be a uniform taxation policy for e-commerce companies across India, he added.

Gujarat’s finance minister Saurabh Patel said over phone that his state, too, is closely monitoring e-commerce companies for tax compliance. “We have initiated this process for about a month now. We are examining whether e-commerce companies are selling their products by sourcing them from outside the state or from within the state. If the product is shipped outside Gujarat, 2% CST (central sales tax) is levied and if it is sourced within the state then accordingly VAT is levied.”

Regulatory scrutiny

The tax issue underlies a larger structural one that has already caused trouble for Amazon’s Indian operations and Flipkart. On Monday, Mint reported that Amazon’s stake in a joint venture it has with N.R. Narayana Murthy’s Catamaran Ventures could draw regulatory scrutiny.

The Wall Street Journal reported earlier on 5 September, that the firm could be investigated for possible violation of India’s foreign investment rules and selling directly to consumers.

Flipkart’s structure, too, is being investigated by various agencies, media reports have said. The company has always maintained that its structure is in compliance with the law.

The tax- and structure-related issues could be amplified in coming weeks by offline retailers and traders, forcing the government to react.

Late last year, small business owner Hari Rastogi, who used to distribute Samsung and Dell Inc. products to brick-and-mortar retailers in Karnataka, got over 4,000 small offline retailers selling books, electronics and apparel together, and formed an industry body called ‘We Will Act’ to lobby against e-commerce firms.

Such action has intensified in recent weeks.

On Wednesday, the Confederation of All India Traders, a lobby group, appealed to the trade minister, seeking a probe into the business model of e-commerce companies. “We have also asked for the formation of a regulatory authority to monitor and regulate the e-commerce business and look at the tax-charging procedures of e-commerce companies,” said Praveen Khandelwal, the body’s secretary general.

Citing numbers that Mint couldn’t immediately verify, Khandelwal said that in the past six months, a third of the body’s 60 million traders had seen business fall 20-35% on account of e-commerce. If this continues, he warned, 100 million people could lose their jobs.

Pricing in risk

On Monday, following Flipkart’s sale, trade minister Nirmala Sitharaman said “we have received many inputs regarding Flipkart episode. Lot of concern have been expressed and we will look into it”.

She didn’t specify whether the complaints were from customers, traders, or brick-and-mortar retailers. “Now there are many complaints. We will study the matter...Whether there is a need for a separate policy or some kind of clarification is needed, we will make it clear soon,” she added.

On Thursday, a commerce ministry official who spoke on condition of anonymity said that complaints had been received from some retailers’ associations and individual users, who had problems while making purchases.

But he said that there had been no significant movement on this immediately.

It is unlikely that the government will curb e-commerce in anyway, said Mahendra Swarup, managing director and partner at Avigo Capital Partners and former head of Indian Private Equity and Venture Capital Association, an industry body.

Nor would the threat of action by regulators or taxmen affect investor sentiment, he added.

“These are the risks of doing business in India and investors have priced them in. Investors will keep pumping huge amounts of money as long as e-commerce is popular with consumers, which it clearly is.”

Vidhi Choudhary and Suneera Tandon in New Delhi, Maulik Pathak in Ahmedabad and Aniek Paul in Kolkata contributed to this story.

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