FDI in e-comm: End of pseudo marketplace models, say experts

While the new policy for foreign direct investment (FDI) in the fast-growing e-commerce sector has been welcomed by several lobby groups and offline retailers, experts note that a few implications of the new guidelines could leave some online players in a fix.
The Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce and Industry, on Tuesday, allowed 100 per cent  FDI in online retail of goods and services under the marketplace model, but kept the inventory-based model of e-commerce out of its purview.
However, two conditions attached to the approval, in particular, could exert pressure on some e-tailers, as they will have to restructure their businesses to comply with the law. The first being that no one company or seller on a marketplace can now account for more than 25 per cent of the total sales generated on the site. Second, e-commerce entities operating a marketplace model can no longer influence the retail prices of goods or services.
“This will ensure that the pseudo marketplace models run by a few e-commerce companies will be forced to rationalise their pricing and discounts,” says Craftsvilla.com Founder & CEO, Manoj Gupta.
Commenting on the bar on retail price manipulation, CEO Third Eyesight, Devangshu Dutta, notes, “Buying market share through discounts is a game for the deep-pocketed, and aggressive discounting is also now explicitly in the Government’s cross-hairs. While the focus within e-commerce companies had already started shifting to smaller discounts, the new policy will force them to think harder and act quicker.”
In addition to this, the cap on seller contribution on total sales generated on an e-commerce marketplace site could also complicate matters for market leaders Flipkart and Amazon, experts point out.
Sellers like Cloudtail and WS Retail account for a major chunk of sales on Amazon and Flipkart, respectively. While Cloudtail is a joint venture between Amazon Asia and Infosys founder NR Narayana Murthy’s personal investment vehicle Catamaran. WS Retail was set up by Flipkart co-founders Sachin Bansal and Binny Bansal in 2010.
“Marketplaces such as Amazon and Flipkart have very large shares of their business being contributed by inventory sales from their own (‘arm’s-length’) entities. These companies will have to rethink their business mix and business structures to comply with the law. However, platforms that present a diversified merchant base would certainly have a clear path to invest further in India,” Dutta states.
Emails sent to Flipkart regarding the impact of these implications went unanswered, while Amazon India told Indiaretailing Bureau it is still studying the changes and would issue a press statement soon.
Even as e-tailers scramble to interpret and implement the new rules, investors feel that the latest policy announcement is a breath of fresh air for e-commerce firms that have been struggling to attract funding since the beginning of 2016.
“E-commerce players have already raised significant foreign funding. However, there are still many multi-billion dollar funds yet to be injected. With regulations in place, we can see a fresh infusion of funds in the market,”Managing Partner, Unicorn India Ventures Anil Joshi, tells Indiaretailing.
“E-commerce entities should now look to build a profitable ecosystem rather than revert back to old, predictable strategies,” Joshi asserts. “Currently, e-commerce accounts for a mere 2-3 per cent of modern retail in India and has barely scratched the surface. There is a huge market potential and demand, especially in tier-II and III towns that are still waiting for these companies to make an entry.”
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