Death to discounts @e - commerce rules

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The Department of Industrial Policy and Promotion’s (DIPP) recent press note allowing 100% FDI in marketplaces model of ecommerce which do not carry inventory is going to produce serious ramifications on the way the sector has hitherto conducted business. For the first time, the government has clarified what a “marketplace” actually is. The marketplace model is defined as an information technology platform managed by an ecommerce entity on a digital and electronic network to act as a facilitator between buyer and seller.

For the uninitiated, India currently allows up to 100% FDI in single-brand retail and 51% FDI in multi-brand detail. FDI is not allowed in ecommerce retail trading, which is popularly known as business-to-consumer (B2C) model. In business-to-business (B2B) ecommerce model, 100% FDI is allowed. All major ecommerce retailers such as Flipkart, Amazon, Ebay and others claimed to operate on B2B model and merely as a provider of technological and logistical support to retailers. Most of these companies allegedly routed their business through their holding companies as a B2B activity, which was a major grey area, while raising significant amount of investment for their operations which allowed them to offer huge discounts to consumers. The brick-and-mortar (B&M) retailers have raised their sustained concerns on the so-called B2B model from last few years urging the government to push reforms and create a regulator within the sector.

Government Says No Discounts

Although the DIPP has allowed 100% FDI in marketplaces, but it comes with riders which could potentially adversely impact the flourishing of ecommerce sector in India. The first major provision is that marketplaces are now prohibited from offering discounts on their own, which is a major setback for a sector that has thrived on the marketing strategy in attracting customers. To add to that, no single retailer or group company on a marketplace can contribute more than 25% of the total sales. This apparently has been aimed at the shadowy holding companies of ecommerce players and to broaden their seller base.

The new clarity on FDI rules, however, has been greeted with both cynicism and as well as cautious optimism depending on the side one picks. Physical retailers, both large-chain groups as well as small traders, who have long lost their pricing power due to the aggressive marketing of e-retailers have welcomed the DIPP move terming it as the beginning of a level-playing field. Armed with these new rules, the B&M retailers could see improved profit and cash flows from a situation what seemed like an existential crisis, in particular from the last two years. Many of these retailers survived by reorienting store profiles, increasing private labels, and shifting focus on medium-and-smaller cities and towns to survive ecommerce invasion. They will now be able to recalibrate business strategies as per their long-term goals.

The Ultimate Loser: Indian Consumer

The ecommerce sector has so far given a muted response as the new set of definitions and rules add to their pile of problems. And broadening their base of sellers is the least of their problem. On the contrary, expanding the seller base will help them and offer greater choice to their customers. The more daunting task for many large and small ecommerce companies is to deliver returns to investors with many of them reportedly under tremendous pressure to deliver profitability. This, in turn, will affect their ability to raise funds and impact market valuations, which was perhaps the most dynamic aspect of the sector and India’s recent growth story. Many of the start-ups floated by young entrepreneurs were able to make their way within a maze of discouraging regulations and in the process raise billions of dollars of foreign investment. As companies offered steep discounts, the ultimate beneficiary was the Indian consumer.

In that sense, many independent market experts view the DIPP press note as anti-consumer and reminiscent of economic micromanagement which characterized the pre-1990 license raj era.  They have termed policy retrogressive and far removed from the Modi government’s stated intent of improving the ease of doing business or generating employment. . This is when the ecommerce sector has generated jobs, creating seamless business environment, giving fillip to logistics and technology driven sectors. These companies have helped small manufacturers reach a national or global market when they create an ecosystem to offer a range of services including financial help, market intelligence, promotional advice, logistics and delivery.

Politically Motivated In Favour Of Physical Retailers ?

Most importantly, singling out marketplace model for 100% FDI eligibility while keeping other ecommerce models untouchable raises questions on the current ruling dispensations’ motive. It is common knowledge that the BJP government has openly backed big Indian retail traders and lobbies representing mom and pop stores. What is the way forward? Many experts view the distinction between retail and ecommerce as needless and artificial separation.

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