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New guidelines on FDI in e-commerce: ‘Business model revamp likely to impact discounts, dilute consumer experience’

Nearly 35-40% of e-retail industry sales could be impacted due to the tightened policy, says Crisil

Written by Pranav Mukul | New Delhi |
January 15, 2019 1:34:29 am
According to the new regulations issued in December by the Department of Industrial Policy and Promotion (DIPP), online marketplaces with foreign investments will be prohibited from selling products of companies where they hold stakes.

A potential overhaul of business models put in place by large online retailers to comply with the new guidelines for foreign direct investment in e-commerce could result in lesser instances of large scale discounting and a sub-optimal customer experience due to weaker control over the supply chain ecosystem, according to senior executives of e-commerce companies and market experts.

According to the new regulations issued in December by the Department of Industrial Policy and Promotion (DIPP), online marketplaces with foreign investments will be prohibited from selling products of companies where they hold stakes and will also be barred from getting into exclusive marketing arrangements, effective February 1.

A top official at a large e-commerce platform told The Indian Express that on account of the tightened policy, there would be lesser incentive to price the products competitively thus not deviating from the maximum retail prices that are decided by the manufacturer. “If we have lesser control over our supply chain ecosystem, it could hamper customer experience of online shopping. If we do not control the ecosystem, we cannot do much about bricks being delivered instead of mobile phones,” the marketplace executive said on condition of anonymity.

The top two e-retailers – Walmart-owned Flipkart and Amazon India – accounting for about 70 per cent of the e-retail industry revenue generate about half of their sales through group companies, according to ratings agency CRISIL. “Following the restriction on equity ownership in sellers, e-retailers will need to make changes in their supply chain and may alter business model in several ways, including adoption of franchisee model, thereby leading to increase in the cost of compliance as they strive to adhere to revised guidelines in less than 40 days,” CRISIL noted in a report released on Monday.

As per the existing practice, online marketplaces control the supply chain through two models that have been quashed by the new guidelines. For Amazon India, Cloudtail India Pvt Ltd is the largest retailer operating on the platform. Cloudtail is 99.99 per cent owned by Prione Business Services – which is a joint venture between Amazon Inc. and Infosys co-founder N R Narayana Murthy’s Catamaran Advisors. Another large seller on Amazon, Appario Retail, is a wholly owned subsidiary of Frontizo Business Services that is a joint-venture between Amazon India Ltd and Ashok Patni, the co-founder of Patni Computer Systems.

The second model, adopted by Flipkart, is through controlled sellers such as Tech-Connect Retail Pvt Ltd. These are sellers that have a majority of their inventory sold to the group companies of the marketplace entity. By purchasing bulk of a seller’s products, a marketplace is able to control factors such as inventory, pricing and supply chain.

The new rules prohibit an entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies from selling its products on the platform run by such marketplace entity. Further, they also bar e-commerce marketplaces from exercising ownership or control over the inventory. Inventory of a vendor will be deemed controlled, it said, if more than 25 per cent of purchases of such vendor are by the marketplace or its group companies.

On the other hand, a group of smaller sellers on online platforms pointed out that enforcing the new norms would be a challenge without which the regulations would not change much. “While marketplaces are now revenue neutral, their questionable set up has distorted the entire retail sector. Nothing is going to happen by new press note unless government enforces the provisions,” a spokesperson for All India Online Vendors Association said.

The new guidelines require marketplaces to furnish a certificate along with report of a statutory auditor to the Reserve Bank of India confirming compliance of the norms by September 30 every year, for the preceding financial year.

The altering of business models notwithstanding, the online retailers are expected to see their revenues hit by Rs 35,000-40,000 crore annually representing 35-40 per cent of the sales, according to estimates by CRISIL. The highest impact, it said, is expected on electronics and apparel segments that account for a bulk of their revenues. CRISIL’s estimate suggests that if brick and mortar retailers lap up even a fourth of the impacted sales of e-retailers, it would lead to topline gains of Rs 10,000-12,000 crore for the traditional retailers. According to some estimates e-commerce still comprises less than 5 per cent of the country’s total retail pie.

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