India’s story of liberalization takes us back to 1991; the year when the country implemented reforms in its economic policies with the intention of making the economy more market-friendly on the global front. This was achieved by expanding the role and participation of private players and foreign direct investment. As the Indian economy transformed into an open space, the same percolated into the e-commerce industry. Owing to the liberalization regime adopted by the government for over a decade, the country was seen as an investment hub for a global online marketplace.
India became one of the fastest growing markets for e-commerce. This can be substantiated from the fact that the e-commerce industry witnessed 21 private equity and venture capital deals worth $2.1 billion in 2017 and 40 deals worth $1,129 million in the first half of 2018. Its e-commerce revenue from $39 billion in 2017 was pegged to grow at an annual rate of 51% until 2020, the highest in the world. Coupled with the ongoing digital transformation through increasing smartphone and internet penetration where India’s total internet user base is expected to increase to 829 million by 2021 goes to show the revenue generating a potential of the sector.
Indubitably the e-commerce industry stands shook on account of specific restrictions imposed by the Department of Industrial Policy and Promotion through the implementation of press note 2 from February onwards. The tightening of the ecommerce sector was undertaken with an objective to put an end to fair and non-discriminatory practices and provide a level playing field to both domestic and international players. Under the new norms, e-commerce companies with FDI will find it difficult to offer deep discounts or hold exclusivity over products due to restrictions on controlling inventory and equity interest.
While FDI is not permitted in the inventory model, the marketplace model would be rendered to be inventory based if a vendor overshoot 25% of purchases from a marketplace or any of its entities. In other words, the inventory of a vendor who goes beyond the cap of 25% will be seen to be controlled by the e-commerce marketplace, preventing the vendor from selling their products on that site. This will render companies like Amazon and Flipkart incapable of making bulk purchases from its units. The rules also bar any entity in which an e-commerce firm or its group companies have a stake from selling on their platform. The government has also prohibited e-commerce firms from pushing merchants to sell any product exclusively on its platform. The sellers can, however, can choose to have a preferred online partner.
A disruption in the deep discount model of e-commerce is also sighted owing to the change that e-commerce entities providing a platform will not directly or indirectly be able to influence the sale price of goods or services. Services such as logistics, warehousing, marketing/advertising, payments etc also have to be rendered by the e-commerce marketplace in a fair and non-discriminatory manner. Further, cash back facility provided by marketplace entities buyers is required to fair and non-discriminatory. This raises ambiguity as what falls under the purview of being non-discriminatory has not been clearly stated. Lastly, an e-commerce marketplace entity will be required to furnish a certificate and a report of the statutory auditor to the RBI by 30 September each year, for the last financial year.
The new rules that were in the works for a while were met with opposition and lobbying by entities including Amazon, Flipkart but garnered support from brick-and-mortar stores and domestic websites like Snapdeal, ShopClues and small trading bodies which saw this as a fair chance, free of any discrimination.
Khandelwal added that the traders’ body was demanding that the government bring domestic players also under the ambit of the policy. “The policy has certainly helped to end some confusion but a lot more clarifications are needed. We have prepared an exhaustive feedback memorandum on the draft which has been submitted to the government. We will try to make it a balanced policy where business opportunities should be available to everybody without any discrimination and there has to be a fair level playing field”, he said.
With the govt’s firm hold over the e-commerce sector, online entities can be seen to be reeling from the heat in the last one month. Despite attempts at extending the last date for complying with the new norms, they have been in force since 1 February and are here to stay.
The e-commerce rules were in the works for a long time but it’s only after the government’s iron hand over implementing them that things have become real. The rules are a mixed bag and have been finalized after years of consultations that resulted in minor tweaks along the way. Big companies and those that were already visibility strong in the market such as Amazon, Flipkart, Snapdeal etc were well prepared and armed to cope with the hit but this cannot be said for companies that were not in anticipation of the new rules.
It must be considered that platforms that were caught off guard may face a tougher time than others for the lack of preparation of systems at their end to cope with the same. Depending on their size and appetite for investment, they may need to redirect their limited resources in revamping their business model in line with the updated norms. This may result in more than an initial disruption including increased investments over the change in business model, legal costs, and adoption of advertising/promotional strategies as funds required for compliance may have been allotted to other areas or not be readily available.
There isn’t a question about the new rules being either good or bad for one over another in the retail sector as they’re a mixed bag. The only difference being that one company may take longer to adapt than the other that saw it coming and was better prepared.
We welcome this. The draft of the policy was long awaited and its release indicates the intention of the government to legitimize the e-commerce in the country. However, the major lacunae are the policy does not cover domestic e-commerce players. If domestic ecommerce players are allowed to do business on their own perception, then it creates an uneven level playing field, which there was till now. So, ecommerce entities should be treated as one and there should not be any discrimination.
Amazon India, the leading and one the most popular multi-brand website suffered an initial setback owing to the developments under the new norms. The impact has been manifold including a restriction on control of entities, offering discounts and having exclusive tie-ups with brands. With its older business model no longer relevant, the company which had lobbied the government to scrap the draft policy can be seen to be adapting by re-strategizing and finding ways to counter stiff competition from domestic rivals such as Snapdeal and Reliance for whom the new norms are a welcome change. There are several damage control techniques that Amazon displayed as it recognizes the need to transform from its business model from a retailing led model to a service led model to cope with the new rules.
Within days from the implementation of the new norms from 1 February onwards, the company’s action was swift. Exclusive products were temporarily taken off the platform and restructuring stake in holding companies was the order of the day. A wide range of Amazon exclusive products from its leading vendor Cloudtail India in which Amazon owned a 49% stake was off the platform. These included its Echo speakers, Kindle devices and Fire TV Stick. Another vendor in which Amazon held a stake, Appario Retail had been taken off the platform. This can be deduced to the former being a JV between Amazon and Infosys co-founder NR Narayana Murthy’s Catamaran Ventures, while the latter a JV between Amazon and Ashok Patni Group; both in which Amazon owned a stake of 49%.
Amazon may not be joyous about the new rules but it can be seen to be powering through turbulent times to ensure steady compliance. By reducing stake in both holding companies, Cloudtail, and Appario Retail to 24% under the updated norms, it was back to business after the temporary hurdle. The company’s grocery delivery service, AmazonPantry that it had plans to scale up was also temporarily derailed in the aftermath of implementation of the new norms.
CFO Brian Olsavsky has maintained that the company that has invested over $5 billion in the online business in India has found itself in a fluid situation right now but the country still remains a great long-term opportunity for it.
While several reports at the offset predicted a steep fall in growth in the future, most experts see it only as a temporary setback in revenue for a few months. As noticeable, the new rules jolted the sector into initial disruption for a few days last month but the same is being countered by the companies through an alternate business model and a shift in legal strategy. In terms of market growth, a short trend that’s been observed is that the growth of the e-commerce sector will slow down slightly but will still be significant.
Retail experts are also of the view that such brands are targeting brand promotions through upcoming events such as the cricket World Cup to smoothen the impact of retaliating against the earlier deep discount policy. Web-focused smartphones and electronic brands including OnePlus, Thomson, Kodak, BPL, Vu that relied on aggressive online promotions, and exchange offers, cash-backs claim to not have suffered in their sale figures.
There are ways to work around what is being considered as a setback for now as the e-commerce companies can look at incentivizing more sellers to attract them to their platform.
Another important factor to be considered while deciding the extent of market fluctuation is whether an ecommerce company is in for the long haul. In the long term, the market dynamics seem strong and the picture is far from gloomy as it may appear now. However, there are some interesting implications that one can expect. To begin with, the number of players in the marketplace can be seen to be increasing so more people are expected to ride on the e-commerce wave that’s happening. This will over time lead to enhanced visibility for sellers whose complaints of low visibility to the buyer upon a search will be addressed.
A long-term implication of the new ecommerce rules is that it will allow diversification of shopping categories which were earlier driven by the sale of smartphones and electronics that were typically dominated by marketplace players.
There are also a lot cropping up now that did not exist five years back including advertising spend revenue, and there have been talks to provide financial assistance to their sellers, leveraging digital market spend alternate revenues. Through the continuing trend of lesser cash burn in the last few years, one can expect heavily invested e-commerce giants eyeing the Indian e-commerce market as a long-term destination to be around.
“The draft ecommerce policy is an important initiative towards framing a consolidated framework that will guide digital commerce over the next many years. We are in the process of evaluating the draft and will provide detailed submissions to DPIIT later this month. We believe that this consultative process will help provide an enabling and predictable policy environment for digital businesses in India”, a Snapdeal spokesperson said.
Apart from Amazon, Walmart owned Flipkart is another platform that was severely bruised by the new e-commerce rules and is working towards making changes to its business model to ensure compliance. It has been reported that it is in talks with offline retailers and distributors of Samsung, Xiaomi, and sellers of FMCG products in order to host them as sellers and comply with the new ecommerce rules. To make sure that its sales remain under the 25% mark, it is interested in sellers with revenues of Rs 1000-2000 crore and who do not conduct large parts of their business online.
Flipkart’s subsidiary Myntra can also be seen to be restructuring its business to sell brands through third parties rather than brands they may have tied up or had an equity stake in. Their commitment to complying with the updated regulations is reflected through fashion brand Chemistry now being sold on its platform by Wiztech, while AKS and Anouk sell through FashionTech and Mango is sold by WandWagon. Other private labels are being sold by sellers including Unistand and Mayazen.
Amid looming fear about the future of the Walmart-Flipkart deal, the international entity is seen to be more cautious and restraint than Amazon on the updated ecommerce norms. Unlike the former, it has not made as many immediate changes and is waiting for the sector to settle down a bit. Walmart CEO Kalya Krishnamurthy in light of the new e-commerce rules said that they were unfazed by the new rules and were confident in the long-term potential of the Indian e-commerce sector. However, the parent company later decided to take a step back and wait before infusing fresh capital into Flipkart.
Homegrown firms such as Snapdeal, ShopClues, Shop101 had been strong supporters of the draft policy which encourages a level playing field between international and domestic players. Now that the policy is in place for implementation, these firms can expect to be accorded similar treatment as other foreign players like Amazon and Flipkart. These companies have together persisted that the new policy is implemented promptly and no extension be given on demands of other players to prevent further damage to the sector. Their complaints were persistent around the fact that the old policy was not competitively strong as it resulted in putting foreign players in an advantageous position over them owing to deep discounting and ownership specifics.
Most domestic companies have welcomed the new rules but are in the process of evaluating them through a consultative process with the government.
Bengaluru based startup, Qtrove.com that operates as a curated marketplace selling unique and non-mass-produced products from small entrepreneurs is also expected to benefit from the new policy as it can expect more visibility. Following a more horizontal no inventory approach, it relies on a ‘no-discount no sale’ policy, as its products are unique, selective and handmade. Aiming at expansion plans into more categories of products including travel accessories, personalized stationery, keto products, and vegan products, it is looking at intensifying its seller network which will be a smoother task under the new framework of rules.
While Amazon is currently transitioning into the new e-commerce framework, its plans to dominate the Indian e-commerce sector are likely to be ambushed by a new homegrown e-commerce platform that will be jointly launched by Reliance Retail and Reliance Jio and is moving fast towards this ambition. Mukesh Ambani owned RIL will be investing in this venture that would support 1.2 million shopkeepers in Gujarat. The venture is also expected to benefit under the data localization requirement under the rules.
Ambani’s vision is simple. He aims for consumer offerings including telecom, broadband, media, entertainment, and retail to contribute close enough to the conglomerate’s revenue as its prime business areas of energy and petrochemicals. It has been claimed that the venture will operate through a vast network of small merchants in the state of West Bengal and already has over 3 million square feet of warehouses to ensure smooth functioning once launched. Partnership with mom-and-pop stores, local grocery and distribution stores is also under works.
In order to set up a vast support network that will fuel the new platform, Reliance acquired a logistics startup Grab and software firm C-Square. Following this pace, RIL acquired three more start-ups including a vernacular platform Reverie Language Technologies, an Indian services aggregator, EasyGov and a multiphysics simulation service SankhyaSutra Labs.
With the new e-commerce rules barring Amazon and others from owning inventory beyond the fixed cap and ruling out the possibility of offering deep discounts, Ambani’s homegrown venture hold the possibility of being Amazon’s closest and strongest competitor in the future. Many aspects of the rules around the market place are still being worked out but its ability to offer bundled services in a sector that will take time from recuperating from the new rules stands unbridled.
Another domestic competitor on the turf of the newly emerging e-commerce sector is Baba Ramdev owned Patanjali that has tie-ups with popular platforms like Amazon, Flipkart, BigBasket, Grofers, Shopclues. The brand that is bullish on the swadeshi wave is eyeing various models including online sales for its exclusive apparels it is going to launch soon. The apparel range will be sold through its ecommerce platform that is to be launched by end of 2019 and is likely to also be available through Flipkart, Amazon and Paytm. It can be expected that its other brands such as the womenswear brand Aastha, unisex sportswear brandLivfit and menswear brand Sanskar will also be roped into its e-commerce platform.
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