E-comm policy may not stop discounting by e-tailers: Ind-Ra

The recently introduced e-commerce policy is unlikely to change the discounting model of online retailers in the near-term, says India Ratings and Research (Ind-Ra).
According to the ratings agency, further clarity is essential for the successful regulation of the sector, implementation of the policy and achieving the desired objective to bring about a level playing field between offline and online retailers.
Ind-Ra also said the traditional offline retailers are unlikely to benefit as the policy is directed towards defining and limiting the scope of operations of e-commerce business.
The policy aims to define and ring fence the marketplace operation activity of e-commerce players (e-tailers) and to distinguish the scope of marketplace and inventory based model as the Foreign Direct Investment (FDI) allowed for both the models is different, the report said.

The new guideline prohibits marketplace e-tailers from ownership of goods, and they can only act as facilitators between buyers and sellers and not influence the selling price of the goods.
This has been done "to discourage the deep discounting strategy adopted by e-tailers", but in the absence of additional clarity on policy, adherence for the same will remain a challenge, Ind-Ra said.

The e-tailers can continue to exploit the loopholes or adopt innovative strategies to extend deep discounts, till a stringent framework to prohibit and bring a level playing field with offline retailers is put in place, it added.
The cap of 25 per cent for an e-tailer's sale from a single vendor or group company can impact the top-line of the e-commerce firms and those with concentrated vendors will have to undergo significant restructuring of their business model, it said.

Amazon Seller Services Private Limited and Flipkart India generate major portion of their sales from joint venture vendors, namely Cloudtail India and WS Retail Services respectively, it added.
To mitigate the impact of the same, Ind-Ra believes that e-tailers may adopt multiple vendor strategy which will enable them to have control over pricing.
Ind-Ra also said the policy is a step towards safeguarding customer interest by introducing additional disclosures.
"With no influence in pricing and no ownership of the product, the e-tailers might go for backward/forward integration and strengthen their presence in the entire value chain including warehousing, shipment and logistics, among others," Ind-Ra noted.

The report pointed out that Indian e-tailers will need
to cater to two distinct categories of customers--higher-end, early adopters of online shopping, who will demand premium products and services; new users, who may typically be in tier II and III cities, and may need take more time to become loyal online shoppers.
"Assuming only urban households are currently served by e-tailers, we believe e-tailers are already serving 20-40 per cent of urban households. This is already a decent level of penetration for these companies; future growth in users, thus, will come from new urban population (migrants and new adopters), and rural customers may still take time to come under the fold of e-tailers," it said.

The report noted that the smartphone shipments to India increased steadily over 2011-14, before flattening out in 2015.
"Most of the increase in shipments was driven by utility phones, with the absolute number of shipments of basic and premium phones remaining constant over 2011-15," it said.
By 2025 Indians will spend less on apparel, household goods, personal products because spends on other essential or semi-essential expenses such as transport, communication, healthcare would increase faster.
"This may result in a slower increase in retail, and hence e-tail, spends in India," it said.