INSIGHT

New Rules for e-Commerce

Levelling the playing field?

Online commerce in India has tripled in the last five years, to USD 35 billion, and by 2026, the government expects it to top USD 200 billion. Fuelling this growth are rising smartphone penetration, cheap and fast data and attractive online prices. From 199 million smartphone users in 2015, there were 340 million in 2018, a figure that is expected to grow to 762 million by 2022. Meanwhile, data prices have fallen 93% in the last few years, while data usage has jumped: today, the average user consumes 8.7 GB a month compared to just 0.3 GB in 2014. Another growth driver has been the rampant practice of deep discounting by e-Commerce majors. Two recent policy shifts – a tweaking of the FDI rules and a draft National e-Commerce Policy – could, however, upturn the competitive landscape, impacting not only its short-term growth, but also its overall shape.




FDI in marketplace sites is allowed, but not in inventory-based models…

Navigating the roadblocks: hybrid e-Commerce models


e-Commerce models fall into two broad types: marketplace, and inventory-based. Under the first model, the entity provides an IT platform and essentially becomes a facilitator between buyer and seller – though it may provide support services such as warehousing, logistics, order fulfilment, customer support and payment collection. Under the second model, the entity actually owns the inventory and sells directly to consumers. While India permits up to 100% FDI (under the automatic route) in marketplace e-Commerce businesses, it completely bans it in inventory-based ones.

…so e-Commerce majors have forged a ‘middle path’

 ‘Foreign’ players like Amazon, and homegrown-but-now-majority-foreign-owned ones like Flipkart ostensibly employ the marketplace model. Over the years, however, they have ended up as hybrids, either creating or investing in subsidiaries that drive a large share of their sales. For example, Amazon has invested in two ‘in-house merchants’ (Cloudtail and Appario), and Flipkart in one (WS Retail). These merchants leverage their owners’ huge ‘war-chests’, using the money to offer discounts that drive market-share growth.




Narrowing the scope for ‘in-house’ vendors…

New regulations to plug the gaps


The new FDI rules, which were announced in December but came into effect on February 1, will change all of this. No longer will marketplaces that have any FDI investment be allowed to sell products from merchants in which they own an equity stake. Nor can they enter into exclusive contracts with sellers, or have any single vendor account for more than 25% of their total annual sales. Instead, they will have to offer a level playing field to all sellers. They will also need to submit a report, each September, to the RBI, confirming compliance with these guidelines.

…and tighter rules on data handling…

 On top of this, the Department of Industrial Policy & Promotion (DIPP) in end-February issued a draft National e-Commerce Policy for public consultation and feedback. Aiming to stimulate the domestic digital economy, promote exports via e-Commerce and protect consumers, the policy sets new rules for data-handling, and around product authenticity. It will make it mandatory for sellers to guarantee the genuineness of a product and its warranty coverage. To curb the spread of fake products, e-Commerce platforms will need to take approval from the trademark owner before listing luxury goods, cosmetics or goods that have a potential health impact. If and when it becomes law, it will require all e-Commerce websites (and apps that are downloadable in India) to have a registered business entity in India as the ‘importer on record’, i.e., the entity through which all sales in India are transacted.

…which bars certain types of data transfers…

 Crucially, the proposed draft rules issued by DIPP will ban cross-border data flows arising from either of two sources:
  • Data collected by IoT devices installed in public spaces; and
  • Data generated by users in India on various sources, including e-Commerce platforms, social media, search engines, etc.

…limits the scope for others…

 Businesses that collect or process ‘sensitive data’ in India and store it abroad will be prohibited from sharing it with any third party or country. Prior approval will be required to share such data with a foreign government, and in turn, businesses will have to comply with data requests from the Indian authorities. These restrictions apply even when the customer has given explicit consent to share his or her data.



…but allows for some exemptions

 Assessing the impact: On e-Commerce sites…

The new FDI rules – and, from a slightly longer-term perspective, the draft e-Commerce policy – will impact online commerce, consumers and product companies at multiple levels. Start with the e-Commerce marketplaces, which will have to immediately divest their stakes in ‘in-house vendors’. Amazon has already done this, for instance, by offloading its 25% share in Appario to a VC-backed company, though one of its non-Indian arms continues to hold a 24% stake. Flipkart began the process a while back, gradually reducing its dependence on WS Retail. This will make it harder, but not impossible to sustain the ‘cash burn’ policies of the past. It will also impact strategic tie-ups, such as one between Shopper’s Stop and Amazon, and a proposed one with Future Group, in which Amazon had acquired a minority stake. New investments in local vendors will also slow or grind to a halt. An end to marketing exclusivity, in turn, means that marketplaces will lose what clout they might previously have enjoyed with product companies, which will now have to spread their sales across multiple platforms. The upshot is that smaller marketplace sites, both new and existing (such as Snapdeal), as well as standalone, single-brand websites, could get a leg up.

Ownership structures will change, impacting the ability to offer ‘deep discounts’

 ‘Foreign’ players like Amazon, and homegrown-but-now-majority-foreign-owned ones like Flipkart ostensibly employ the marketplace model. Over the years, however, they have ended up as hybrids, either creating or investing in subsidiaries that drive a large share of their sales. For example, Amazon has invested in two ‘in-house merchants’ (Cloudtail and Appario), and Flipkart in one (WS Retail). These merchants leverage their owners’ huge ‘war-chests’, using the money to offer discounts that drive market-share growth.

Data flows may narrow, limiting the scope for cross-selling

Yet the biggest impact on business models will probably be felt when the new e-Commerce policy comes into force. This will block data exchanges with global consumer behaviour-tracking platforms, which leverage big data, artificial intelligence and machine learning to generate insights that drive cross-selling. So, for instance, general web queries or social-network posts will no longer feed as easily into targeted ads for third-party products and services marketed on e-Commerce sites. One way around this will be for companies to invest in local data-centres and to tweak their analytics models to enable data to stay within India at all times. A potential benefit, which the government appears to be counting on, is domestic job creation and IT infrastructural investments. In fact, a proposal within the new rules will give small firms and start-ups in this area ‘infant industry’ status, which brings various forms of protection and preferential treatment.



Stronger consumer protection, but less scope to secure a ‘deal’

 …and vendors, consumers and product companies
For consumers, vendors and product companies, the FDI rules are a mixed bag. The requirement for e-Commerce sites to guarantee product authenticity will improve people’s confidence in online transactions and could serve as a longer-term growth driver for the industry as a whole. On the other hand, buyers may no longer enjoy the generous – albeit unsustainable – discounts they have grown accustomed to. Mega-sale days like Flipkart’s ‘Big Billion Days’ and Amazon’s ‘Great India Sale’ could become a thing of the past, but more generally, the scope to offer cut-throat prices will narrow. Resultantly, impulse buying may suffer. In the short term, the new rules may even slow the relentless march of online sales and provide a respite to brick-and-mortar retailers. To help stem the tide, e-Commerce platforms will work more closely with banks and credit-card companies on financing options, including EMIs and cash-backs.

Lower commissions in general, but bigger product companies stand to gain more than upcoming brands

 For vendors, and for product companies that list their goods on marketplaces, an end to exclusive tie-ups means having to diversify sales across more platforms. With more ‘competition’ for their goods, they may be able to get away with paying smaller commissions – currently in the range of 5-15% – to marketplace sites. On the other hand, a squeeze on discounting could benefit larger companies, who have deeper pockets and can thus live with smaller margins, more than the small and mid-sized firms. Large, established brands have a better chance to consolidate and drive up their market share, while smaller, upcoming brands, which have so far piggybacked on marketplace sites, will face an uphill task. In time, this may undermine general competition in the consumer-goods space, narrowing choice and pushing up prices.

…so e-Commerce majors have forged a ‘middle path’

 ‘Foreign’ players like Amazon, and homegrown-but-now-majority-foreign-owned ones like Flipkart ostensibly employ the marketplace model. Over the years, however, they have ended up as hybrids, either creating or investing in subsidiaries that drive a large share of their sales. For example, Amazon has invested in two ‘in-house merchants’ (Cloudtail and Appario), and Flipkart in one (WS Retail). These merchants leverage their owners’ huge ‘war-chests’, using the money to offer discounts that drive market-share growth.

THINK TANK