The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Monica Patra, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
The government allowed 100% foreign direct investment (FDI) in online retail of goods and services under the so-called “marketplace model” through the automatic route, seeking to legitimize existing businesses of e-commerce companies operating in India. However, FDI is not permitted in the inventory-based model of e-commerce.
DIPP has also come out with the definition of ‘e-commerce’, ‘inventory-based model’ and ‘marketplace model’. Marketplace model of e-commerce, as defined by DIPP, means providing of an IT platform by an e-commerce entity on a digital and electronic network, to act as a facilitator between buyer and seller. The inventory-based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to consumers directly, according to the guidelines.
A marketplace entity will be permitted to enter into transactions with sellers registered on its platform on business-to-business basis. This could, however, level the playing field with offline stores, which have witnessed a slump in footfalls corresponding to the increase in e-commerce.
So far, India has allowed 100% foreign investment in business-to-business (B2B) e-commerce but none in retail e-commerce—i.e., business-to-consumer, or B2C.
What will be the impact of the announcement:
- The discount era might become history,since the government is insisting that e-commerce companies only act as a platform to facilitate their listed vendors to sell, instead of underwriting minimum sales prices and offering discounts, and absorbing the resulting loss themselves. This could be a boon in disguise as these e-commerce players would now be forced to push only such discounts that are absorbed by their vendor partners, which in turn may bring in profitability and investor confidence in these players. On the negative side, since there is a strong possibility that online prices will now revert to levels that are comparable with offline prices; this could make online marketplaces less attractive to shoppers and investors.
- E-commerce valuation might shrink in short term– That is primarily due to the fact that these companies will no longer be able to show huge growth in revenues. Already, last month Morgan Stanley marked down the value of its investment in Flipkart by 27 percent.However, on the positive side, in the medium to long term, the profitability will recover as heavy discounts end, and that should improve investor perception about these companies, and subsequently valuations.
- Existing e-commerce players have to re-structure– DIPP further clarified that an e-commerce firm will not be permitted to sell more than 25 percent of the sales affected through its marketplace from one vendor or their group companies. Thus, companies like Flipkart and Amazon that drive majority of their sales from their related firms would face a challenge. Even though Flipkart had separated the legal ownership of its logistic arm, WS Retail, it continues to drive its sales through it. On the other hand, Amazon works through a JV of Catamaran ventures for its logistic needs. Also, these e-commerce companies will not be able to give any warranty on the products sold, thus they would also have to rework the mode of operation to that part too. The high point of this press note is complete clarity on the role that a marketplace would play. Thus, support service rendered by these e-commerce companies will give greater thrust to the investment and growth climate of such companies. Additionally, since this press note is applicable to all the marketplaces, it would have impact on not only the above stated e-commerce companies, but also service marketplaces such as Uber, Ola and others. They also have to face the challenge while offering discounts and other means for acquiring new customers.
- Level playing field for offline and also for not-so-heavily-funded e-commerce companies,since this press note restricts the role of a marketplace player. E-commerce companies have actually become retailers themselves by working around the ambiguities of the policy, offering deep discounts, which created lot of disparity.
The new policy also mandates such e-commerce companies to display contact details of the sellers online. The warranty/guarantee of products or services sold online will also be borne by the sellers, not the e-commerce company.
Amazon funds discounts by sellers indirectly through a route it calls “promotional funding”. This is how it works: Amazon recommends the amount of discounts to its sellers on products, but doesn’t force them to adopt these prices. Sellers, however, go along as Amazon finances the discounts.
Flipkart’s largest seller WS Retail Services Pvt. Ltd easily generates more than 25% of the company’s sales while Cloudtail India Pvt. Ltd, the biggest seller on Amazon India, contributes even more. Flipkart has been gradually reducing WS Retail’s business over the past 15 months as it shifts to a marketplace model. Following the new regulations, Flipkart may have to accelerate its transition.
Cloudtail India, a joint venture between Amazon.com Inc. and N.R. Narayana Murthy’s Catamaran Ventures, is now the key growth driver for Amazon India, generating at least 40% of the company’s sales in some months, Mint reported on 29 October. Cloudtail is particularly dominant in electronics and fashion sales, two of the three largest categories for Amazon India (run by Amazon Seller Services Pvt. Ltd). The new regulations mean Amazon India may have to find new sellers on its platform.
The share of e-commerce in retail is expected to jump from 2% in 2014 to 11% in 2019, while the share of physical, organized or modern retail is expected to shrink from 17% to 13%, according to a report by property consultant Knight Frank India Pvt. Ltd and the Retailers Association of India (RAI).Interestingly, the e-commerce regulations come at a time when the finance ministry is finding ways to tax e-commerce activities such as downloading of songs, movies and books, online consumption of news, software downloads and online sale of goods and services.