Sales of online retailers in India surged more than sixfold to $24 billion in 2018 from $4 billion in 2014 (Bloomberg)
Sales of online retailers in India surged more than sixfold to $24 billion in 2018 from $4 billion in 2014 (Bloomberg)

Shopping switcheroo: Life after new e-commerce norms

  • The new rules could hit online expansion, but it is still unclear if offline retailers will reap benefits. Of course, the consumer loses out
  • Amazon, Flipkart are working on new legal structures that will allow the companies to continue discounting and maintain their private brand businesses

BENGALURU: In December 2016, the founders of Flipkart and Ola railed against the financial firepower of their respective American rivals, Amazon and Uber. “What we need to do is what at some level China did. They told the world that we need your capital but we don’t need your companies," Flipkart co-founder Sachin Bansal said then. Two years later, after Bansal’s company was taken over by the American retail giant Walmart Inc., the government seems to have granted Bansal’s wish, albeit in an entirely unwitting manner.

Late last month, the government announced a new set of policies for e-commerce companies that may reshape the retail business, hurting the e-commerce giants Flipkart and Amazon India and benefitting domestic firms like Reliance and Future Group as well as small traders. The government banned online retailers from selling products of companies in which they own stakes, disallowed them from entering into exclusive deals for merchandise, put restrictions on their wholesale arms, reiterated that discounting was prohibited and instructed them to stop selling private labels, among other changes.

While Flipkart and Amazon will be hit hardest, other well-capitalized online retailers such as BigBasket, Grofers, Pepperfry and many others will also need to make changes to their operations and legal structures in order to comply with the new policies.

The new policies, which followed years of furious lobbying by small traders who are seen as a core voter base for the ruling Bharatiya Janata Party, come into effect on 1 February. Both Flipkart and Amazon confirmed that they have sought more time from the government to implement the new policies. It’s not clear if the government will agree to the extensions.

“We remain committed to be compliant to all local laws, rules and regulations. We await clarifications from the government on the new policy changes. As we seek clarity, we have written to the government requesting an extension of four months. With over 4 lakh sellers and hundreds of thousands of transactions happening daily on the Amazon India Marketplace, we need adequate time to understand the details of the policy," an Amazon spokesperson said.

Impact on e-commerce

The new measures came nearly three years after the government in a statement titled ‘Press Note 3’ in March 2016 had released similar policies that clarified the rules governing foreign direct investment (FDI) in online marketplaces. Then, it had allowed 100% FDI in online retail of goods and services under the so-called marketplace model, but had banned the inventory model. It had also disallowed discounting by online marketplaces and prescribed the maximum sales of an individual seller on any marketplace.

Flipkart, Amazon and others quickly got around those policies by adopting new legal structures. Consumers continued to enjoy discounts and Flipkart and Amazon continued to grow even as organized offline retail expanded sluggishly. It was business as usual for the e-commerce firms that were flush with funds and eager to deploy them to boost growth.

This time experts say that Flipkart, now owned by Walmart, and Amazon are in far more serious danger. If the policy is strictly implemented, both companies will have to restructure their businesses in a big way.

Amazon will be forced to give up its shareholding in two of the largest sellers on its marketplace. Amazon had also purchased significant minority stakes in offline retail firms Shoppers Stop and More. It could now be stopped from forming any business partnership with these retailers. Flipkart-Myntra, too, will have to offload stakes in some important brands on their platforms as well as give up their booming, high-margin private label businesses. Third-party sellers on both platforms will suffer because of restrictions on their wholesale arms from which thousands of sellers source merchandise.

Sales of online retailers in India surged more than sixfold to $24 billion in 2018 from $4 billion in 2014, according to RedSeer Management, a consulting firm focused on internet businesses. That fast growth in online retail has come on the back of deep discounts, exclusive partnerships entered into by e-commerce firms with phone makers such as Xiaomi, Motorola and OnePlus and the control of operations of key sellers that allow online retailers to consistently and quickly deliver original and high-quality products to customers.

All of this could end with the new policy measures.

“If the policy is implemented ‘to the T’ it will seriously slow down online expansion," said Harminder Sahni, managing director of consulting firms Wazir Advisors. “Those who stand to lose from the fallout of this policy are very clear (Flipkart, Amazon and other online retailers), but there are no clear winners. It’s not a license that has been taken away from one person and given to someone else. It’s just a chance for someone to do business, and offline retailers always had the opportunity to do e-commerce. In the end, the consumer is losing, and everybody else in between is confused."

To be sure, it’s not clear how strictly the new policy will be implemented. Apart from seeking extensions, Amazon and Flipkart are working on new legal structures that will allow the companies to continue discounting and maintain their private brand businesses, two people familiar with the matter said. Still, offline retailers, which have seen e-commerce firms lure customers away with low prices and wider product assortments over the past few years, hailed the new policy. It is widely believed that the new policy measures will benefit Future Group and Reliance Retail.

The truth behind offline gain

As if on cue, last week Reliance Industries Ltd chairman Mukesh Ambani said the company will launch its e-commerce platform in Gujarat as part of a national expansion plan. RIL has a large footprint with 4,000 Reliance Retail stores, about 50 warehouses and 4,000 Reliance Jio outlets. It plans to offer customers an omni-channel experience although the exact nature of its e-commerce plan will only become clear over the coming months. After the new policy was announced, Future Group chief executive Kishore Biyani told The Economic Times newspaper in December that “it’s a game-changer for us."

In an interview with Mint, Future Group joint managing director Rakesh Biyani said that the policies will bring about “a level playing field because the spirit of the law wasn’t being adhered to before." “But if marketplaces decide to violate the spirit once again, then again the level playing field will be put aside. As long as the regulatory authorities take the responsibility of ensuring that right practices are adopted in India, nobody should be complaining," Biyani said. He added that the company’s business plan or e-commerce strategy will not change because of the new measures. “We’ve never participated in obnoxious discounting, or in doing something that crippled the business model for anybody. For us, our share of e-commerce is very small overall. We will continue to build it over a period of time but we are very focused on a business that is more profit oriented," Biyani said.

Vasanth Kumar, managing director of department store chain Lifestyle International Pvt. Ltd, said there will be “some" benefits for offline omni-channel retailers if the policy is implemented strictly. “Instead of discounts, going deeper and further for brands that are available commonly there will be some (level playing field between offline and online). It’s not only discounting by online marketplaces that has taken away market share. Between 2014 and 2018, the square feet of organized retail doubled but demand didn’t double. New customers have definitely come but (at least some) existing customers have been getting shared between online and offline. Both factors dampened like-for-like growth for offline retailers, and when you add deep discounting to it, it became a lethal combination (for offline retailers)," he said.

Some experts, however, said it was a stretch to believe that the new policy has handed a magic wand to offline retailers.

The offline shopping experience in India is still relatively poor. The product assortment and convenience offered by online retailers to customers as well as the technology and supply chain expertise of e-commerce firms cannot be matched by offline retailers. Plus, while the growth of online retail has been significant over the past five years, it is still only about 2.8% of the overall $850 billion retail market, according to RedSeer estimates. There’s significant room for both e-commerce and organized offline retail to grow.

“A lot of categories like smartphones were actually created by online retailers (over the past five years) and then they took a big portion of that pie. For example, it was when Flipkart and Amazon started bringing in value players from China, that’s when the mobile phone market became significant," said Anil Kumar, founder of Redseer. “Yes, online retail has been growing at around 35% while offline is growing at 12%. (But) that doesn’t mean that if online goes away, the offline growth will get a few additional percentage points of growth. There’s huge room for both to grow so there’s very limited cannibalisation happening now."

Devangshu Dutta, founder of consulting firm Third Eyesight, agreed. “I don’t think we can say (the new policy) has levelled the playing field a lot because if offline retailers were so gung-ho about the online opportunity, they should have gone online in a much more aggressive manner much earlier. In any case, over the last 2-3 years, discounts by online retailers have moderated, which has given the offline players a lot of breathing space. There was a drop in footfall earlier due to discounting but after that customers came back because retail stores have their own selling points. It is not a like-for-like comparison with the online store. The demand hasn’t been impacted that much, the market has expanded to a certain extent across the board, so the offline retailers are hurting less than they were earlier," Dutta said.

Finally, the trader lobby

The new policies have been years in the making. Apart from the Press Note of March 2016, leaders such as Future Group’s Biyani and small traders, represented by Confederation of All India Traders (CAIT), have protested for years against the discounting by online retailers. Experts have pointed out that it may not be a coincidence that such far-reaching policy measures against online retailers have finally been enacted in an election year—small traders are seen as a key voter base for the BJP.

This year, pressure has increased on the government to clamp down on e-commerce firms. In August, the Competition Commission of India (CCI) said that the discounting practices by Flipkart may have to be reviewed by the relevant authorities, putting pressure on regulators to clamp down on discounts on online platforms. It was an unusual move for the CCI, whose remit is anti-trust law.

Mint had reported on 10 August that the observations by the competition regulator on the discounting practices of Flipkart may trigger a regulatory probe of all online marketplaces.

CCI made the comments while clearing the $16 billion takeover of Flipkart by Walmart. The regulator was responding to complaints by small traders led by CAIT who had alleged that Flipkart and Amazon were funding discounts and giving preferential treatment to specified sellers on their marketplace.

CAIT national secretary general Praveen Khandelwal said in an interview that the trader group wants the government to apply the new policy measures to Indian organized offline retailers, not just e-commerce firms. “We have already asked the government that whatever restrictions have been imposed on FDI in e-commerce, the same terms should also apply to domestic players; otherwise people like (Reliance) who are entering into the foray, and (other) already established players, will do the same thing that Walmart-Flipkart and Amazon, etc., were doing—i.e. predatory pricing, deep discounting, and exclusivity. Then there won’t be any meaning for the restrictions imposed on FDI in e-commerce."

He added that CAIT will meet the commerce minister and secretary next week and “we will impress upon them to ensure speedy actions in this regard."

Flipkart declined to comment. Reliance Retail did not respond to a request for comment.

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