On this episode of Digging Deeper, we talk about how the government's new regulatory guidelines will impact the e-commerce ecosystem.
The Republic Day sale coming up on the 26th of January may be the last big sale for both Flipkart and Amazon in India. This comes in the wake of the government tightening norms for e-commerce firms. The new norms are set to come into effect from the 1st of February this year.
What these new norms are; how these norms affect e-tailers and offline retailers; what these new guidelines mean for the e-commerce ecosystem, are some of the aspects we will talk about on this episode of Digging Deeper on Moneycontrol.
What do the norms say?
As Shreya Nandi and Priyanka Sahay reported for Moneycontrol last week, the government has tightened norms for online retailers, making it more difficult for them to use their nearly endless stream of foreign capital to fund high discounts, a move aimed at assuaging offline traders, who form a key part of the ruling BJP's core constituency.
A note issued by the Department of Industrial Policy & Promotion (DIPP) on December 26 said e-commerce entities which operate a marketplace will not be allowed to exercise ownership or control over inventory. Any ownership or control over the inventory will convert the business into an inventory-based model.
The rules further state that the inventory of a vendor will be deemed to be controlled by an e-commerce marketplace entity if more than 25 percent of the vendor’s purchases are made through the marketplace or its group entities. Any outright equity investment in the vendor will also bar the entity from selling on the marketplace.
Leading online players own or have invested in companies that procure goods in bulk from companies and sell them to their “preferred vendors”, which would list the same products at cheap prices.
The new rules mean that online marketplaces such as Amazon, Flipkart and Paytm, which are all funded by FDI, cannot exercise any control over their vendors or pricing strategy.
An online marketplace is any e-commerce company that only serves as a platform for buyers and sellers to meet. FDI is not allowed in any inventory-based e-commerce company in India.
The previous rule for marketplaces said that they cannot generate more than 25 percent of their sales from any one seller – a law that e-commerce firms skirted around by empaneling a slew of preferred vendors. The model would allow e-tailers to exercise greater control on the pricing strategy and offer deep discounts.
While the government’s new norms are significant, they are unlikely to be foolproof. The Express noted, "The government has said that e-commerce entities will have to maintain a level playing field, and ensure that they do not directly or indirectly influence the sale price of goods and services. The policy mandates that no seller can sell its products exclusively on any marketplace platform, and that all vendors on the e-commerce platform should be provided services in a “fair and non-discriminatory manner”. Services include fulfilment, logistics, warehousing, advertisement, payments, and financing among others."
What that may mean, for example, on cashbacks, is that select sellers on Amazon and Flipkart cannot individually offer cashbacks. As the ET noted, "Online only exclusive deals between any brand and a marketplace has been banned. This means Flipkart-Xiaomi kind of deals, where Xiaomi smartphones were sold at heavy discounts only on Flipkart, will not be possible. Services like Amazon Fulfilled and Flipkart Assured that offer superfast delivery to consumers and are available to sellers only if they meet certain conditions, may also be deemed discriminatory." Hindustan Unilever, for example, has an exclusive Brylcreem store on Amazon where it sells products not available at retail outlets; ITC Foods partnered with Big Basket recently to bring out a new range of Sunfeast noodles. Will such partnerships be allowed to continue? That remains to be figured out.
In August, the government had issued a draft policy for e-commerce companies, which garnered criticism for offline retailers. The $20 billion online commerce industry is a fraction of India’s $700 billion offline retail sector.
Funded by foreign capital, e-commerce companies have been looking to corner market share with their aggressive pricing strategies – even at the cost of incurring deep losses.
However, offline retailers still remain unimpressed with the government's year-end move.
"Instead of investigating violations by particular companies, the government has whitewashed their past sins and formed a new policy. It will be years before government investigates or penalises them. Now this compliance is conveniently postponed to September 2019," said All India Online Vendors Association (AIOVA) in a statement.
E-commerce companies such as Snapdeal welcomed the move.
In a tweet, Kunal Bahl, co-founder and chief executive officer said, "Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs. These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce."
Blow to Flipkart and Amazon
The government's move comes after local traders complained that they were being put out of business because of steep discounts that these e-commerce giants offered. 2018 has been a year of milestones in the Indian e-commerce space.
In May last year, the world's largest retailer, Walmart, added the Indian e-tailer Flipkart to its shopping cart and spent $16 billion while doing so in what is the biggest e-commerce acquisition in history. 2018 was an extraordinary year, in general, for the M&A sector in India.
According to data from the professional services firm EY India, the value of all M&As and private equity deals in the retail and consumer sector (apparel, footwear, online-offline retail, food chains, food aggregators, personal & home care, food and beverages etc) touched a massive $27 billion. This is an almost 700 perecent jump from last year’s $3.4 billion worth of transactions. The number of M&A deals too rose - from 129 in 2017 to 142 in 2018.
It was not just Flipkart. Amazon and private equity firm Samara Capital lapped up the departmental store chain More from the Aditya Birla Group for Rs 4,200 crore. The Walmart-Flipkart and Amazon-More deals are all indicative of India's growing consumer appetite, translating into a $670-billion retail market, and a growing dominance of the e-tailer segment.
The new norms issued by the government are set to threaten this ascent, or force these foreign fund-backed megaliths to rethink their strategy of expansion in India.
The majority of customers shopping online do it not just because of the comfort of not having to step out to a store but because of the deep discounts and exclusive offerings they stand to get online. The new norms will also impact private labels being sold by e-commerce companies. Over the last few years, Flipkart, Myntra, Amazon India and others have been selling private labels/in-house brands to get more customers through exclusive offerings at lower costs and higher margins, making their path to profitability smoother, and much shorter, than it would be for retail offline outlets. This could take a hit now.
Besides, the bar on e-commerce companies from selling products from entities they have a stake in, could affect Amazon as it has a stake in its two major seller entities, Cloudtail and Appario.
As the Indian Express noted, "Cloudtail India Pvt Ltd is the biggest retailer operating on Amazon, while WS Retail was the biggest seller on Flipkart. Cloudtail’s ownership shows a clear link with Amazon. Incorporated in October 2011 as Sparrowhawk Sales and Marketing, its name was changed to Cloudtail India in August 2012. Prione Business Services holds 99.99 percent stake in Cloudtail. Prione is a joint venture between Amazon Inc. and Infosys co-founder N R Narayana Murthy’s Catamaran Advisors. Catamaran holds 51 percent stake in Prione, Amazon Asia Pacific Resources owns 48 percent, and the remaining 1 percent is owned by Amazon Eurasia Holdings."
Appario is a wholly owned subsidiary of Frontizo Business Services, which is a joint venture between Amazon India and Ashok Patni, the co-founder of Patni Computer Systems. Amazon Asia Pacific Holdings owns 48 percent stake in the company.
Sounak Mitra, writing for Moneycontrol, said, "Just before Flipkart and Amazon monopolised the e-commerce market, KPMG had projected that by 2020, the e-tailing ecosystem would create over 10 million jobs, aided by the creation of a seller base of about 1.3 million. Logistics and warehousing alone would have opened up more than a million opportunities. Above all, 70 percent of the online sellers were expected to come from smaller towns.
But for Amazon and Flipkart, a large part of the logistics and warehousing businesses are captive operations. They also didn’t lead to as many jobs because the companies benefited from economies of scale. If the new policy leads to a revival of homegrown start-ups, we could see more jobs being created.
Secondly, unlike in the US, India is heavily dominated by e-commerce marketplaces, where hundreds of thousands of sellers can list their products and sell online. But only a few get the privilege of selling more, especially those who either use the services and infrastructure (such as Amazon Prime or Fulfilled-by-Amazon) or are subsidiaries.
Other sellers account for only a fraction of online sales. For companies like Snapdeal, Voonik, Limeroad, ShopClues, among others, which have foreign investment but are controlled by Indian entrepreneurs, the new guidelines will be a welcome change. As the large players sidelined the small players, the Indian-controlled e-commerce companies have had to cut jobs.
A revival could see the jobs being restored as they become more competitive. Most e-commerce companies rely on sellers for their catalogue. They didn’t have the money to buy inventory through subsidiaries. More e-commerce companies would mean more sellers, and each seller would create new employment."
The new foreign direct investment (FDI) policy could make it difficult for Amazon India and Flipkart to sell inventories worth Rs 2,000-2,500 crore each, according to a report in The Times of India.
Just to give you a sense of the marketplace as of now, $19.5 billion worth of e-commerce transactions take place in India. 75 percent of the market share is held by the top two players in the country. 80-100 million online shoppers exist in the market and the number is growing organically. 36 percent growth is projected in the e-commerce space in the next five years.
The valuation of the e-commerce retail logistics market in 2018 is $1.35 billion. So clearly, the impact of Modi's Make In India norms are going to be felt in the e-commerce space. The reactions from across the board, indicate the same.
As Business Today reported, "Kishore Biyani, the founder of India's biggest offline retail company Future Group, has hailed the government's decision to tighten the FDI norms for e-commerce companies. Biyani said it is now clear that the online marketplaces will have no option but to stick to just linking buyers and sellers on their platforms. Biyani, whose brick-and-mortar group is facing tough competition from e-retail giants like Walmart-backed Flipkart and Amazon India, said that the move could prove to be a game changer for offline retail companies."
Kunal Bahl, founder of Snapdeal, the company which got left behind in the battle between Flipkart and Amazon, clearly welcomed this decision. "Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs. These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce," he tweeted.
Secretary-General of the Confederation of All India Traders (CAIT) Praveen Khandelwal said e-commerce sites were selling products at unreasonably low prices. “They are incurring losses in a bid to get monopoly. Such practices have to stop as there are many small and medium traders whose survival is at stake. We are glad that the government has come out with this notification and it will make a difference,” Mr Khandelwal said.
Chief Executive Officer of SR Innovation Exchange said, “It is high time this large marketplace created a neutral platform and enabled a fair opportunity for smaller vendors. There is a need to avoid monopoly of single vendors.”
Flipkart, which did not immediately release a statement, has since gone on to say that the new norms will have long term implications and that, "We hope to be able to work with the government to promote fair, pro-growth policies." A spokesperson for Amazon India said, "We remain committed to a long term investment in our vision of transforming how India buys and sells and generating significant direct and indirect employment."
The USISPF (US-India Strategic Partnership Forum) has dubbed the new norms "regressive" and said that the changes would harm consumers, create unpredictability and have a negative impact on the growth of online retail in India, while also asserting that "it is not the government's business to micromanage businesses."
Small and medium-sized vendors appreciated the norm barring e-commerce firms from discrimination among vendors in any form but questioned the feasibility of its implementation by platforms. "Instead of investigating violations by particular companies in existing Press Note 3/2016, the government has washed their past sins and formed a new policy. It will be years before the government investigates or penalises them. Now this compliance is conveniently postponed to September 2019," a spokesperson of All India Online Vendors Association said.
Many small and medium online vendors that media agencies spoke to said the government should rethink on posing restrictions on vendors from selling only 25 percent of products from an e-commerce platform, claiming that the 25 percent sales restriction will be a deterrent for small vendors who work from home and are entirely dependent on sales from a specific category website.
Executive summaryWhat are the new rules?
- A related entity can no longer sell on a platform
- E-commerce portals cannot discriminate among vendors
- A single vendor cannot sell more than 25 percent to one portal
What/who could get impacted?
- Exclusive launches or sale of products (Xiami, OnePlus phone exclusive availability on certain portals)
- Benefits such as faster delivery, deeper discounts
- Cashbacks offered by sites
- Affiliated sellers like Cloudtail, Appario, etc
- Customers who may no longer get the deep discounts and exclusive offers and Flipkart/Amazon-assured programmes
- Big online sales - Big Billion Days, The Great Indian Sale, etc - may be a thing of the past.
Who stands to gain?
- Brick-and-mortar physical retail stores who get to now operate on a "level playing field"
- Smaller sellers on e-commerce platforms
- The government. Retail owners form a large part of the current dispensation's vote bank.