This article has been published in ETRetail.com under the section ReTales- Blogs by Retails Gurus
The ongoing battle between online and offline retailers, led the government to finally usher a new FDI policy (through its press note no. 3 of 2016) for e-commerce business model for the B2C marketplace, which is expected to transform the sector.
Under the revised policy the inventory-based e-commerce business model, where inventory of goods/services is owned by the e-commerce player, has been expressly excluded from the FDI policy.
Two predominant issues arising from the new regulation which has left the e-commerce players disgruntled are,firstly, the cap on sales from one vendor or from group companies of the e-commerce players being fixed at 25%, and secondly, the deterrence on e-commerce players from influencing, directly or indirectly, the sale price of goods/services and the requirement forthem to maintain a “level playing field”. However, tosome extent, the policy gives an unfair advantage to Indian owned domestic marketplaces, which will have no restrictions at all.
Cap on sales from one vendor comes across as a strong restriction, as the majority portion of sales of most e-commerce players comes from one main vendor, who also happens to be a related/group company of the e-commerce player. Take for example Flipkart, whose majority sales are from WS Retail, which earlier used to be a subsidiary of Flipkart. Similarly in Amazon’s case, Cloudtail India Pvt. Ltd., a joint venture between Amazon Asia and Catamaran Ventures is the biggest contributor (around 40%) to its sales. The majority sales (around 90%) for Myntra are contributed by Vector e-commerce while for Jabong its through Xerion Retail.This cap would ensure that inventory-based e-commerce business model is not carried on in the garb of a marketplace e-commerce business model. E-commerce players would have to go back to their drawing boards to take a relook at their structures.
The restriction on directly or indirectly influencing sale price of goods/services and requirement of maintaining a “level playing field” will be a greater hurdle for e-commerce players to overcome since one of the main attractions for shopping on online marketplaces is the incredible discounts offered. The restriction and requirement would impact, though not expressly prohibit, the discounting methods used by e-commerce players. A blanket ban on discounting by e-commerce players cannot be the purpose of the said press note since that would put them at a disadvantage and in fact overturn the “level playing field” requirement in favour of brick-and-mortar retailers, which could not be the government’s intention. The e-commerce players will have to be innovative and woo customers by offering, subscription/loyalty point /lock-in program, cash back incentive program, free gifts etc.
The policy is not foolproof and the marketplaces are going to enter into opaque contracts with the sellers and they are going to find ways of influencing prices indirectly by compensating the sellers with marketing commissions or kickbacks. We are already witnessing the trend of exclusive launches by the e-commerce players, where marketplace is investing in brand-building of the seller/products, attracting customers, showcasing products and indulging in all kinds of marketing and/or promotional activities on “behalf” of the sellers and the seller giving huge discounts to the customers and is selling its product exclusively through such marketplace.
The contents of Press Note No. 3 of 2016 have not yet been notified by the RBI and made into law, in the form of amendments to the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations, 2000. Whilst the corresponding amendment is likely to be a matter of course, e-commerce players still have some time to rework on their organization structure (especially the players having large single-seller/inventory-based models) and discounting strategies. The e-commerce players will be facing a lot of uncertainty and will also have to face the future legal challenges. The Competition Commission of India (CCI) will be the appropriate regulatory authority capable of determining whether the prices of goods/services was being influenced in the e-commerce space or a level playing field is being maintained by e-commerce players or e-commerce players are being engaged in unfair trade practices.
Due to the accelerated growth of the Indian e-commerce market, various market regulators will be keeping a close eye on the operational dynamics of the entities operating in the e-commerce market. In such a scenario, the government’s effort to put to rest certain basic questions pertaining to the commercial practices of such online retail companies is laudable, however entirely burdening the e-commerce players with the responsibility to ensure fair play to the advantage of brick-and-mortar retailers, is not fair.
It will not be as easy for a bricks-and-mortar retailer to win online. Online retailing requires an entirely different mindset and skills. However, in order to survive, online retailers will have to cut wastage, create efficient and lean business, develop new markets and take brands to markets where it’s hard to reach, develop vendors and pass on the benefits to the customers.
For the Government, the key is to develop a policy with a road map. The Government should not be dictating businesses what they can or cannot do especially if it is not an essential life-saving commodity. No one is forcing the marketplaces to offer the discounts. It is a business decision and there is no reason to assume that it will go on forever. It is expected that the regulations will most likely evolve by the time it becomes a real threat.