Photo: Hindustan Times
Photo: Hindustan Times

FDI in e-commerce: Who are we protecting?

Every time there is talk of fully opening up the retail sector, concerns are raised about how this will affect small retailers

There is a chatter that seems to have engulfed India’s retail sector in recent years, that it needs to be “protected" from the supposedly big pockets of foreign investors. Every time there is talk of fully opening up the sector to foreign companies, concerns are raised about how this will hurt the family-owned, mom-and-pop stores and the brick-and-mortar retailers.

The argument most often heard is that they will be unable to compete against the investments of the “big boys". Similar perspectives were presented at the time of regulating foreign direct investment (FDI) in retail by those against that decision.

The Indian government’s latest move allowing 100% FDI in marketplace e-commerce companies—a welcome decision overall—has brought those fears to life once again.

The opening up of the sector to FDI has come with a pre-condition that bars marketplaces from offering discounts on their own. These can only be offered by the vendors selling on the platforms. Lawmakers have claimed that the policy seeks to end what has often been referred to as “predatory pricing" by online companies, and provide a level playing field.

The competition between online and offline retailers has intensified over the past couple of years. New online entrants have tried to make a mark and capture a large market share in a relatively short time span, by offering discounts—sometimes really huge ones—especially during the festival periods. Understandably, offline retailers have been crying foul.

While the latest move is designed in some way to protect these offline retailers, there are questions about whether it is the right step and can actually achieve its objective. Here are some issues that we need to take a closer look at.

Consumers: The biggest winners of the discount-driven business model adopted by online marketplaces over the past couple of years have been Indian consumers. The move to bar marketplaces from offering lower prices would have a direct impact on the end consumer. In a free and open market, policymakers should not be telling businesses what they can, or cannot, charge for a product—especially if it is not an essential lifesaving commodity.

Businesses: No one has been forcing online marketplaces to offer these discounts. It is a business decision they have made. It may not sound right to you and me, but they must have a strategic rationale and there is no reason to assume that it will go on forever. In fact, we have already been seeing the emergence of a level-playing field based on self-assessments of the e-commerce industry on the feasibility of such discounting.

Measurability: Perhaps, the most important question is—how do you measure if someone is influencing prices? Online marketplaces and suppliers will find an alternative way to be able to offer sweet deals to consumers. For a concept that is difficult to measure in the first place, it is highly unlikely that a clause in the policy document will help solve the issue.

There is another aspect that not many people have paid enough attention to. A large part of the capital that has flowed into the online marketplace sector has come from outside India.

Venture capitalists and private equity firms have been pumping money into India despite the sector facing many hurdles and not making any money, at least not yet. The hope is that the market will bloom in the coming years, and the companies will eventually see a healthy return on their investments.

That is because the online retail market in India is yet to flourish. Here are some numbers for you to digest.

According to Internet Live Stats, only 34% of the Indian population has access to Internet. While that is more than 450 million users, what we need to understand is that among those with net access in India, only about 39 million people make online purchases. That is a very small number.

To make matters more difficult, A.T. Kearney’s research shows that two-thirds of e-commerce buyers in India are bargain hunters. Now imagine a situation where the bargains completely stop and these buyers go away as well. The market dynamics will change drastically. The big risk with the government’s latest move is that it may, unintentionally, end up raising the barriers to entry of capital into the sector. If there aren’t many buyers, and businesses can’t formulate their own pricing and growth models, some firms may think twice before putting their money here.

While it’s not the perfect argument, the net benefits on employment, consumer choice and economic productivity by the introduction of technology-enabled retailing methods need to be considered. This is especially important as current evidence for India, or globally, does not show reasonable mortal blows to organized retailers or mom-and-pop stores.

The mom-and-pop stores have long been the backbone of Indian retail. However, the advent of technology is changing the way consumers shop. The big risk is that if these stores do not adapt quickly, they will be left behind. While a majority of them are willing to use technology, many of them are unable to do so due to a variety of reasons—high initial capital cost, lack of technical know-how, unorganized warehousing and inventory management, lack of manpower, etc.

Online marketplaces provide the best opportunity for businesses facing such issues to jump on to the technology bandwagon and profit from it. Firstly, the entry barriers—capital and human resources—are lower than they would be if these businesses were to set up an online presence individually. Secondly, they will be able to extend their reach and customer base. Thirdly, they will become more competitive both from a products and price perspective. Finally, it will help improve their inventory management—slowly, but surely.

We just need to make sure that policies governing the sector are designed to facilitate the future and not regulate the past. The key, therefore, is to develop a policy with a road map for the future rather than regularizing the past.

Debashish Mukherjee is partner and head of consumer industries and retail products practice, A.T. Kearney India.

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