How the New Rules for E-Commerce Will Impact E-Tailers and Offline Retailers?

The new rules can benefit numerous brick-and-mortar players those who have had a tough time competing against online giants

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By Rahul Agarwal

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Following various complaints from offline traders and small businesses that foreign-funded online companies were violating the existing FDI norms, the DIPP which is the nodal agency for formulating FDI policy revisited its previous regulations and, on 26 December 2018 announced new rules with a stringent policy for foreign-owned E-Commerce Marketplaces (ECM's). In a marketplace model, ECM act as platforms for vendors to sell their products whereas, in the inventory-based model, ECMs own and sell products. In the earlier policy of 2016 related to e-commerce marketplaces (ECM), the marketplace model of e-commerce was permitted 100 per cent FDI excluding the inventory-based model. The new policy protects the interests of offline retailers, whereas it has given a body blow to the to e-commerce marketplaces (ECM) such as Amazon and Flipkart.

Key Highlights of the New Policy:

  • An entity owned by an ECM cannot sell its products on the platform run by the same ECM.

  • Sales in an ECM or platform have an upper cap of 25 per cent of total sales, through a single vendor.

  • It puts a restriction on exclusive partnerships with brands or providing favourable services to a few vendors.

  • The new rules put a condition that ECMs may not "directly or indirectly influence the sale price of goods and services" which could impact hard on the rapid growth of online revenue through the blockbuster seasonal sales promotions with heavy discounts.

  • Now all the ECMs will have to submit an annual compliance report with these guidelines to the Reserve Bank of India.

To comply with the previous guidelines and be eligible for FDI at the same time, Foreign ECMs did not hold inventory or sell products directly to consumers, alternatively, they established affiliates (through joint ventures with local investors) that operated as inventory-holding companies. For instance, Amazon had Cloudtail Retail and Appario, whereas Flipkart had WS Retail, RetailNet and Omnitech Retail. These companies became among the largest vendors on the platforms of the respective ECM.

A Setback for Global E-Tailers:

This move has already caused a shakeup in operations of Walmart-owned Flipkart and Amazon, both the firm accounting for about 70 per cent of India's e-retail industry revenue, generate about half of their sales through group companies. As per a PwC report, the new e-commerce policy could lead to a USD 46 billion loss terms of sales by 2022. The revised guidelines have a prescribed adherence period of fewer than 40 days from the date of implementation which was 1 February, the new draft will lead to, higher compliance costs and slower revenue growth for the two leading foreign ECM's, consequently:

  • ECM's have to aggressively restructure their business models to be compliant with the new rules.

  • ECM's will have to divest their stakes in local inventory holding companies.

  • Foreign ECM's would have to re-strategize their domestic acquisitions, the inorganic route for rapid growth has been literally plugged

How the New E-Commerce Policy Gives a Push to Offline Retail?

The new rules can benefit numerous brick-and-mortar players those who have had a tough time competing against online giants. Small retailers stand a good chance to get empanelled with ECMs, since the latter would now have to source and sell a vast majority of their products through "independent" vendors. This will also positively impact the organized offline retailers such as D-Mart, Aditya Birla Fashion and Retail, V-Mart, Reliance etc. Consequently, if product prices are set to become almost uniform across all selling channels, customers may favour physical stores hence boosting offline sales.

Due to the restrictions on ECMs of 25per cent of inventory sourcing from a single vendor, manufacturers will have to sell their products to all marketplaces. This will enhance the availability of a product on a number of portals, leaving the customer with more choices, unlike in the past, when a product was exclusively available with one or two major e-tailers. It will also lead to a reduction in customer acquisition costs for not so large ECM's. The new policy is supposedly designed to create a level playing field for all e-marketplaces; the policy will cut monopolies and help smaller e-commerce players to grow their businesses

It has to be remembered that even in the age of this e-commerce boom, small businesses play a vital role towards employment generation and contribution to India's GDP and therefore the interests of smaller players have to be protected. The government has to come up with a new draft policy soon that will incorporate the feedback from all stakeholders, on its part the government has to play a balancing act and come up with a policy which both promotes equitable growth and does not stifle innovation in the space which has seen exponential growth over the last few years.

Rahul Agarwal

Director, Wealth Discovery

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