FDI guidelines on B2C e-comm positive for brick-and-mortar players

The government has opened up 100 per cent FDI under the automatic route for business-to-customer (B2C) e-commerce

The new guidelines for foreign direct investment (FDI) in e-commerce could bring back a needed demand push into traditional ('offline') retailers.

The central government has allowed up to 100 per cent FDI under the automatic route for business to customer (B2C) e-commerce but with conditions. Among those likely to gain are Future Retail, Aditya Birla Fashion & Retail (ABFR, which operates Pantaloons), Trent, Shoppers Stop and V-Mart Retail.

First, the definition of a marketplace model for e-commerce restricts entities from stocking inventory and mandates that they mainly act as facilitators between buyers and sellers. Second, conditions restricting the vendor sourcing limits to not more than 25 per cent of sales from one vendor or associate companies and prohibiting B2C e-commerce entities from influencing the selling price would create a level field between online and offline retailers. Currently, companies such as Flipkart and Amazon which predominantly operate as inventory-based B2C retailers significantly cross this threshold.

Amarjeet Singh, partner, tax at KPMG, says these are smartly drafted guidelines and bring regulatory clarity for the traditional stores, particularly the smaller ones. “Deep discounting offered by e-commerce retailers has to go away and restricting the norms on vendor sourcing will also remove the concentration risk for these players.”

While these moves largely work in favour of offline retailers, the extent to which they could bring footfalls back into brick-and-mortar stores seem debatable. This probably explains why stocks such as Future Retail, ABFR (which has partnered with Snapdeal for online retail) and Trent, which rose 1-1.5 per cent intra-day on Wednesday, ended the trade with minimal gains. Shoppers Stop, though, rose a little over two per cent.

While experts such as Singh feel sophisticated buyers are likely to stay with online retail, given the shopping convenience, others differ. Niket Shah of Motilal Oswal Securities says with a level field created between online and offline retailers, as the deep discounting practice of online sellers will not exist, the offline ones will see improved demand. An analyst from a domestic brokerage (not willing to be named), while agreeing with Shah’s view, said the December quarter revenue growth of 11-30 per cent of the traditional ones was an example of how sales return to the traditional format when discounts dry up from online players.

“FY15 was a bad year for offline retailers, as online retailers were offering 50-60 per cent discount for festive and end-of-season sales. In FY16, discounts significantly came down and in the December ’15 quarter, the price differential between online and offline players narrowed to 5-15 per cent,” he says.

After the positive quarterly results, stocks of ABFR, Future Retail, Shoppers Stop and Trent have gained by seven to 11 per cent in the past month. However, the Street is also cautious on whether this is sustainable, as the quarter's performance was on a relatively lower base.

Analysts believe the March quarter might also be good for these companies, due to summer sales and pent demand. However, it is the first half of FY17 which will indicate if the new guidelines for online marketplace retailing do change things for the brick-and-mortar stores. Also, with their legacy pain points such as high real estate and overhead costs persisting, much hinges on a significant revival in demand.

For now, by Bloomberg estimates, the major offline retailers are expected to post 12-31 per cent revenue growth in FY17, while their operating margins might rise a notch from their current levels.