E-commerce | CCI lens on deep discounting could be a double-edged sword

The e-commerce landscape continues to attract regulatory attention. The latest is the Competition Commission of India (CCI) reportedly keeping a close watch on deep discounts offered by e-commerce marketplaces.

“Deep discounts could make some businesses unviable as it erodes the value of products and services in the mind of the consumer if done for extended period”, the Economic Times quoted CCI chairperson Ashok Kumar Gupta in its report. The development comes at a time when e-commerce marketplaces are gearing up for their special discounted sales timed around the festival season.

Heavy discounts are not a new thing. The concept of deep discounts became a common phenomenon soon after e-commerce companies like Amazon entered India in 2013 and home-grown Flipkart (now owned by Walmart) started operations in 2007.

Initially, e-commerce companies took the discounting route to attract Indian consumers who were new to buying things online. This resulted in consumers benefiting while e-commerce companies continued to burn investors’ money. This has undoubtedly played a key role in the rapid penetration of e-commerce even if it is still as low as around 5 percent (Source: RBC Capital Markets, August 2019).

Heavy discounts, and exclusive selling rights over certain products have given e-commerce companies an edge over brick-and-mortar retailers since companies like Amazon and Walmart-Flipkart started operations. And, brick-and-mortar retailers have since been complaining that their deep discounting practice has been impacting their businesses. However, how much loss they suffered has not been quantified.

Despite the hue and cry, discounts continued. Some of the big offline retailers have started offering higher discounts to get back customers. This is the first time CCI has decides to look into the matter.

Will CCI’s intervention bring an end to discounts online? Discounts will stay, but their quantum may come down. If CCI finds unfair practices being employed by online retailers, there will be action against offenders, and offline retailers may find less reason to complain against online retailers.

But, it may not end here.

The Confederation of All India Traders (CAIT), which is the lobby group for brick-and-mortar retailers, has written a letter on September 13 to commerce and industries minister Piyush Goyal, citing that discounts offered by e-commerce firms sometimes go up to 80 percent of the maximum retail price (MRP) of a product which the association believes is a violation of the foreign direct investment (FDI) regulation as such activities do influence pricing.

India does not have a proper policy to regulate e-commerce firms. However, a few notifications by the government linked to FDI in e-commerce have outlined few important things to control activities of e-commerce companies in India. Besides, a draft national e-commerce policy was released in February.

According to these norms, existing and proposed, India allows e-commerce marketplace operators to only undertake business-to-business transactions with sellers registered on these platforms. The e-commerce marketplaces are barred from operating inventory-led models and they cannot sell products directly to consumers.

Restrictions on the inventory-led model are designed to prevent e-commerce marketplace operators from influencing prices through heavy discounts. Even the CCI has sought details from all e-commerce companies operating in the country on how inventory-led models function.

The decision to bar foreign-owned e-commerce companies from selling through their affiliated companies and offering heavy discounts on shopping sites was taken by revising FDI norms that came into effect on 1 February.

The government initially took these steps in an effort to appease small traders ahead of the general elections in May. These traders, who formed an important vote bank, were adversely impacted by demonetisation and implementation of the Goods and Services Tax (GST).

Interestingly, the new norms are only applicable for foreign-funded e-commerce companies, and domestic companies in the online commerce space are not subject to these norms. In recent times, domestic brick-and-mortar retailers too have been ramping up presence in the online space.

It is expected that the CCI will look at all e-commerce companies when it looks at deep discounting practices. But, there is no clarity as of now.

And, if deep discounts are forcefully taken away from the system, growth of e-commerce in India is bound to slow down drastically. And, India’s ecommerce sector may end up missing growth projections of crossing $200 billion revenue by 2026 from $38 billion in 2017.