E-retailers search for a way out of policy riders

As online players cope with new rules on pricing and sales,some say it could be business as usual

The initial euphoria over the easing of foreign investment rules for e-commerce players has now waned, and many industry watchers have started to wonder whether the new rules are meant to open up the sector or introduce fresh hurdles.

The riders, primarily two of them, could come in the way of doing business for e-commerce players, who so far have not flinched from raising dollar funds from marquee foreign investors, hard-selling their eye-popping sales GMV (gross merchandise value), or burning cash to woo consumers with deep discounts.

So what did the National Democratic Alliance government do that got the e-commerce industry excited last Tuesday? Well, the government attempted to remove policy ambiguities for the e-commerce sector. So far, the Department of Industrial Policy & Promotion (DIPP) had maintained that FDI was not permitted in e-commerce. The policy did not make a distinction between marketplace (where a platform owner hosts sellers and acts as a facilitator between the buyer and the vendor) and the inventory-led model (where the platform owner holds inventory and sells directly to the buyer).

This greyness had allowed several e-commerce marketplace players to exploit the loopholes in the policy to source foreign funds; these players described themselves as technology enablers rather than e-retailers to circumvent the rules.

The DIPP policy has ended this ambiguity. It said 100 per cent FDI would be permitted in e-commerce marketplace, and that no FDI would be allowed in inventory-led e-commerce businesses. While the policy cheered companies, which had anyway tweaked their business models to turn marketplace conformists, the riders threatened to rock their world.

Aamir Jariwala, secretary, E-commerce Coalition, argues that "unnecessary restrictions on the number of sellers and sole responsibility on them for warranty and guarantee will throttle the growth of the industry.''

Jariwala is referring to the guidelines in the policy that says no vendor can generate more than 25 per cent of the total sales of any platform, and that guarantee and warranty of products will be the responsibility of sellers rather than that of the platform owners.

The biggest hurdle
Of these, the 25 per cent cap is the toughest to handle, especially for companies like Flipkart and Amazon. WS Retail is the most dominant seller on Flipkart, accounting for at least 50 per cent of the online retailer's sales. For Amazon, Cloudtail exceeds the 25 per cent cap, analysts say. This must change. Also, since the policy clearly says that inventory-led model will not have any FDI, several niche portals, especially in the fashion vertical such as Koovs, Jabong and Zivame, will have to rejig their business formats.

There's another rider in the policy that is drawing a lot of attention from online buyers and vendors alike. The platform owners (read Amazon, Flipkart, Snapdeal, Paytm, Myntra) cannot directly or indirectly influence pricing of products, so as to ensure a level-playing field in the sector. Analysts interpret the condition as an end to deep discounts and mega sales that make winners out of e-commerce companies.

But without those discounts and mega sales, why will shoppers go online? This has been a big question worrying many. There are signs the government is going to take any violation of the pricing rule seriously. Replying to questions on the discounting issue from reporters, DIPP Secretary Ramesh Abhishek said that if companies violate this condition, the "government knows how to deal with them".

This warning has struck a jarring note on a policy that is meant to open up a sector which has attracted as much as $5 billion foreign investment in 2015. Roughly, e-commerce has drawn an estimated $10 billion foreign investment so far, with 2015 getting the largest chunk. Goldman Sachs recently forecast e-commerce in India will surpass $100 billion (including travel) by 2020. Leaving travel out, it is estimated to become a $70-billion industry by 2020 from $16 billion today.

A differing view
However, many government officials say the intention of the policy is not to upset the applecart. In fact, they agree that it is not the government's business to intervene in pricing matters as it's a market-driven mechanism.

Analysts and consultants too believe government should let market forces determine the prices. Arvind Singhal, founder, Technopak, a retail consultancy, says most of the conditions in the e-commerce policy are practically impossible to execute.

Singhal argues it will be business as usual for e-commerce companies even after the FDI policy. "Discounts will continue," he says. As for the 25 per cent sales cap on vendors, companies will work around it. "There are many sharp lawyers to help companies,'' he adds.

Discounts rule
Singhal may be right. So far e-commerce players have refused to bow down, at least when it comes to slashing discounts. American e-commerce giant Amazon has been showing the way, sending out mails on deals and discounts for its spring sales. Given its big ambitions for India, it is unlikely the company is going to slow its promotional events. It announced $2 billion in investments in July 2014, and it has maintained that "there's an open cheque book for the India market''. Also, in February, Amazon increased its authorised capital from Rs 8,500 crore to Rs 16,000 crore, according to data with the Registrar of Companies.

Other online firms have sent out feelers too. However, they are not banking on discounts alone to increase their market footprint. Sanjeev Mohanty, CEO & MD, Jabong, says a discount-led strategy never helps build true customer loyalty. The idea is to offer a combination of quality products with good promotion, he adds.

At the same time, the industry also needs more changes. Today, the rules vary from brick and mortar multi-brand to single brand and wholesale retail. The FDI announcement holds hope for more reforms in the retail sector as a whole.