The recent changes in e-commerce sector
DIPP recently notified a new FDI policy for e-commerce and certain other rules <What exactly e-commerce is? Answer in comments>
What are the rules?
- 100% foreign direct investment is permitted in the marketplace model of e-commerce
- FDI is not permitted in inventory based model of e-commerce
Additional to these rules for FDI, the other rules are:
- An e-commerce entity may provide logistic, warehousing , order fulfilment, call centre, payment collection and other services
- An e-commerce entity will not permit more than 25% of the total sales should not be done by one vendor or its group companies
- The seller shall be responsible for post sales, warranty and guarantee of goods sold by it
- The e-commerce entity will not directly or indirectly affect the sale price of goods or services while maintaining a level playing field
What does it mean?
Now let’s analyse its impacts on various stakeholders, one-by-one
#1. E-Commerce Players
- Price determination- This is a grey area with unclear rules. One interpretation could be that Govt will determine the price and not the market. This could upset the markets
- Clearly defining the models- This is a positive development. The marketplace and inventory based models are now concretely and clearly defined by law
- Group companies- Group companies (Flipkart- WS Retail, Amazon- Cloudtail) are created to work around the e-retail rule which doesn’t allow FDI in B2C multi-brand retail
The companies will now have to figure out a new way to scale down sales through their group companies
- Discounts- The rule in itself is notvery clear as it doesn’t explictly spell out the terms ‘deep discounting’ or ‘discount’
Example- Amazon uses the term ‘promotional funding’ to describe its discounting model, and as is clear, technically doesn’t affect the actual price of the product
Even though the note says the rules are effective immediately, discounting has continued as is. It shows that that this is still a grey area
- Inventory based models- This model, which is effectively under multi brand retail, remains out of the FDI route
#2. The Consumer
- E-commerce companies have brought in deep competition in the retail sector by way of offering discounts
- How are the discounts funded? Part of this is funded through a cash burn, and part through operating efficiencies over the brick and mortar setup <What is cash burn? Answer in comments>
- Restraints on discounts, if workout in real, consumers will lose a lot of power in terms of price and choice
#3. Brick and Mortar Players
- Effects on brick and mortar retailers will depend on how the restraints on discount work out
- Footfalls in Brick & Mortar retail had dropped dramatically, and the pricing change may now draw consumers back
- However, e-commerce companies and strong retailer lobbies will obviously work to keep their dominance
Conclusion:
- Overall, the move is in the right direction, but it lacks strength and complete clarity on various issues (such as pricing, discounting)
- The grey area in pricing is very open to interpretation, especially on the point of determining the right price, and could be an anti-market move
- Retail sectr still remains affected by a lot of interest groups and a solid policy change to actually reform retail remains
After this, you can read this story for more insights- Disrupting the disruptors (The Hindu)