The revised FDI norms for foreign e-commerce companies are likely to force them to change their existing business structure. That gives domestic-owned e-commerce companies and small traders an advantage. While the affected companies will rework their model to remain compliant, and yet retain their edge, this promises to be a battle to watch out for in 2019.
On December 26, the government revised foreign investment norms for online retailers which effectively bars companies such as Amazon and Walmart-Flipkart from selling products supplied by their affiliated companies on shopping sites in India. The norms, which come into effect from 1 February, also bar them from offering special discounts or mandating exclusive rights to sell certain products.
That means e-commerce companies with foreign investments can only operate under marketplace model, and will not be able to operate the inventory model, which has so far given them more control over customer service and allowed them to sell products much cheaper than independent sellers. They have also been burning cash to offer attractive discounts to customers.
On the face of it, the changes came following repeated complaints by small traders on the deep discounts offered by Amazon and Flipkart. This saw them take share away from local businesses. While the foreign-owned retailers have independent sellers also on their platform, they also have a bunch of affiliates such as Cloudtail, Appario and WS Retail.
The proposed changes in the ecommerce norms can be seen as an attempt by the government to appease small traders ahead of the general elections next May. These traders are an important vote bank and were adversely affected by demonetisation and implementation of the Goods and Services Tax (GST).
Even earlier, foreign online retailers were barred from a direct inventory model. But they managed a find a way to operate the inventory-led model by using affiliate firms and joint ventures with local entities as vendors. The new norm now bars that as well. Besides, the new norm restricts them from offering special discounts and exclusive deals.
Under the new regime, domestic companies are not subject to these norms. Thus, locally-owned, online-only players or brick and mortar players who are expanding their online presence get an advantage.
Future Group has several tie-ups with ecommerce marketplaces, including Amazon and Flipkart. Reliance has a big retail business and has been slowly spreading its wings in the online commerce arena. It also plans to get kirana stores online. Tata Group's TataCliQ and Aditya Birla Group's ABOF could also benefit.
While foreign companies will wonder how to work under these stringent guidelines, the new rules could bring cheer to small and medium retailers. Of course, the foreign ecommerce giants may still find loopholes that they will use to circumvent these norms.
If the new norm becomes permanent, Amazon and Walmart (which acquired a majority stake in Flipkart for $16 billion earlier this year) will have to reexamine their business model. Amazon's promised $5-billion investment may also hang in balance. Chinese ecommerce giant Alibaba, which has also been planning a big-bang entry into India with its shareholding in Paytm, might need to rework its strategy.
Finally, Indian consumers has benefited from the discounts on offer at online marketplaces. They could suffer if the new norms lead to lower discounts and, therefore, higher prices. The deals and discounts that they have got accustomed to may become a thing of the past. If this leads to a shift in market shares from online to offline, then in the long term, India’s ecommerce sector may miss growth projections of crossing $200 billion revenue by 2026 from $38 billion in 2017.(DISCLOSURE: Moneycontrol is part of Network18, owned by Independent Media Trust, whose beneficiary is Reliance Industries Ltd, that also operates a retail business)