It was not such a merry Christmas for some of the leading e-tailers in Indian market in 2018. On 26th December, 2018, DIPP came up with a policy amendment (press note 2) around the Indian ecommerce market. While India has had a policy around the ecommerce industry since 2015, the last two versions have been not so welcome changes for the wider e-tailing ecosystem.
What has been lacking is the objective evaluation of the impact of e-tailing industry on wider retail ecosystem, and how and what needs to be done to a) protect the interest of the small Indian retailers, b) protect the India’s interest in digital economy and c) enable the ecosystem to work in a way which furthers the start-up and new age ecosystem in India. Most of the policy creation have not been very transparent or objectively defined.
Which leads to confusion on the intention and impact. And also, possibly raises question marks around India’s policy stability in the new age sectors. The new policy specifically has mentions around a) Ownership and control over inventory b) Equity participation and control over inventory c) Fair dealing with sellers d) Exclusivity arrangements with sellers.
Nuts and bolts of the Indian e-tailing ecosystem
India cumulatively sold USD 24 billion of consumer goods online in calendar year 2018, this was ex of the platform cancellations, return and non-delivered goods. At USD 24 billion the e-tailing is about 2.8% of the USD 850 billion of Indian retail market, which is fairly miniscule – but is growing at 35%, which is 3X of the offline retail.
But a simple double click on the etailing GMV presents a fairly clear picture that the composition and the behavior of the USD 24 billion is extremely different from the USD 850 billion of offline retail. 50% of the online GMV comes from the mobile phone vs. ~4% of the overall retail, 20% of it comes from the large goods and other electronics vs. ~4-5% of overall and 15% comes from apparel vs 8% of overall. Grocery accounts for <1% against the overall contribution of 65%. So, essentially the e-tailers are selling mobile phones and white goods, which is not expected to change significantly in next -3-5 years.
The USD 24 billion is being sold between the inventory and the marketplace model. Inventory model includes the in-question seller base which might be controlled or have the indirect equity infusion from some of the market place. Currently 50% of the GMV is being sold through the inventory model and 50% through the marketplace model.
It should be noted, that while India allows 100% FDI in the B2B ecommerce but B2C ecommerce has to be restricted to the market place model with guidelines around sellers’ control and ownership. So the 50% of the India’s online GMV is clearly not in line with the spirit and intent of the Indian e-commerce policy. But in defence of e-tailers, this has been the case since the beginning and, despite knowing this the companies have been allowed to operate, there is USD 30 billion of FDI ploughed in the market and Indian Tax departments have happily collected the taxes post the mega acquisition of Flipkart by Walmart – and the deal was cleared by government just 6 months back.
When the e-tailing platforms sell goods through various sellers, depending on the kind of seller agreement and consumer feedback they have, the sellers are pushed up or pulled down on the listings. And when customers choose to buy from one of these sellers, there can be further the discount/cashback lever which can used by the platforms to influence the choice of the sellers to the customers.
Platforms manage the seller selection to ensure that customers get to buy from a seller who gives the assured product and service quality. And also influenced by the commission rates or push to certain brands where they have exclusive tie ups. There is a further layer of services being offered in form of the loyalty program which offers faster/discounted delivery along with other perks.
Again, these are the top ups to ensure the seamless customer experience and hence faster adoption of this nascent market. It is well established that consumers love to shop more from the predictable inventory led model against the uncertain marketplace – at least on the lead categories. There are niche product segments and customer groups which are open to pure market place model – which is sub 20% of the overall Indian e-tailing market. This is the peculiarity of the Indian e-tailing market unlike the China and US where the marketplaces rule in big way.
Fast forward to 2023 and the e-tailing market is expected to cross the USD 100 billion GMV mark, but would still be under 10% of the overall Indian retail market then. The so-called inventory model is expected to be 50%. The contribution of product category is expected to change, going mobile light but still very different from the offline retail, major differences being Grocery, Clothes and non-electronics will still be under-penetrated. Essentially 2023 is expected to be scaled up version of 2018, with no tectonic changes around the composition and how the business is being done in the e-tailing part of the world.
Whose cheese have the e-tailers moved?
Coming to the issue raised by trade associations against the e-tailers. The key points raised by trade associations is – e-tailers through their predatory pricing and used of exclusive launches hurting the interest of millions of small retailers in India. There are series of questions which needs to be looks in, to substantiate the claims of the trade associations. 1) Is the GMV being done by e-tailers at the cost of offline stores or it’s the accelerated growth – the latent demand 2) Who are getting impacted the most, small retailers or the larger organized ones 3) Which sellers will gain from USD 50+ billion of online market place sales by 2023.
Based on the consumer buying behaviors and various researches we have run, it is clear that a large part of the sales which happens in the head categories is due to the latent demand being fulfilled by e-tailers and not the cannibalization of the offline business. For e.g. smart phones, is one such category which got created due to the immense push of e-tailers along with their ability to bring India specific brands and model to the market. Had there been no e-tailers, India’s smart phone growth would’t have been so high.
Since there is a pull for smartphone as a category and certain brands – there is an increasing demand from the offline stores as well. The growth rate of online as well as offline smart phone since 2012 is a key indicator of the same. Similar trends have been observed in the large paneled LED TV, low cost washing machines and other white goods market. So essentially the 70%+ of the GMV is helping the market grow and not cannibalize the same.
Add to it the additional USD 50 billion + opportunity which will open up by 2023 for the seller ecosystem across India to sell products on the e-tailing platforms. This would mean close to 2 million sellers having significant portion of their sales coming from the platform and a 4 millions of them will get exposed or listed on a digital platform for the first time.
Our research shows that most of these sellers are small retailers and have gained significant amount of business due to e-tailing as an addition sales channel. The volunteered attrition from the portals is negligible and the satisfaction with platforms is more than of an offline marketplace and seller relationship.
But off-course there is some sales which inventory-based players are doing at the cost of other retailers, who are they. Based on our research we see that the large organized retailers are contributing the most to the online GMV of e-tailers, cannibalization of small retailers is negligible and unsubstantiated on size. The points raised by associations around small retailers losing business to e-tailers have still not been validated and should be further researched for sure. What is clear though that the e-tailers have accelerated the growth of certain categories which has benefited the overall retail ecosystem. Off-course the ones who have gained more are the digitally savvy ones.
How will new rules impact the e-tailing ecosystem?
The dichotomy of the current situation is, a new age tech enabled industry is tried being regulated from a traditional policy approach. This makes the regulation less relevant and lesser on change it can bring in. The last draft of policy was not able to bring about any considerable impact on the e-tailing ecosystem, apart from forcing the platforms to restructure the inventory model and their relationship with seller ecosystem.
While the new policy is potentially trying to plug in the gap, but it seems that there are still avenues to circumvent the guidelines, and hence platforms operate in a way which might not adhere to the spirit and intent of the policy. There are four key pillars to the current press note, with a varying degree of hurdle for e-tailers, but none seems to be unsurmountable.
- a) Ownership and control over company: This leads to additional capital burden on the sellers, to acquire the inventory, since the inventory cannot be owned or purchased from market places, which is common as of now. But sellers can still buy the inventory which have the ‘prescribed’ demand on platform on their own – as long as it is not supported by marketplaces – either in form of equity infusion or guidance to buy only a certain kind of inventory.
- b) Equity participation and control over inventory: There is limited clarity on whether the subsidiaries of Indian owned and controlled company (with minority equity participation from a Marketplace or its group companies) can carry out business on the marketplaces. Unless there is a further clarification, there is company structure which will let e-tailers operate the inventory pretty much in same way as they are doing now.
- c) Fair dealing with sellers: Every marketplace either physical or online will have a differentiated offering for the sellers on it premises. Which will be largely driven by the business impact they bring in short to long term. It is structurally a titanic task for compliance to check, verify and to come a conclusion that the fair dealing has not happened. While this might lead to widen up the umbrella of perks and preferences rolled out to the sellers but, policy does not and cannot force it one rule for all sellers under a platform.
- d) Exclusivity arrangements with sellers: Again this is fairly vague in terms of what exclusive arrangement means. While a platform cannot force the brands and sellers to be exclusive, sellers/brands can decide to be exclusive on a platform. Again there is enough parallels of the same in offline world. Further does it mean that the seller can be on two platforms of the group, or can do a significant majority from one platform and have a mere presence on other offline/online platforms. This is not something which a policy maker can dictate on how you run your business, and moreover is extremely challenging for compliance to vet it.
How to deal the digital with policy?
Across the world we see there are increasing amount of conflicts which are happening between tech companies and the regulators. And increasingly both sides are struggling to find a common ground – on what should be the right policy framework which regulators can enforce and tech companies can find justified. And hence follow it in spirit and intent.
India is still at early stage in its digital evolution but moving very fast. Policy makers need work on a framework which guards India’s interest and at the same time doesn’t compromise on the digital journey. We have seen this story being played multiple times in past, whenever there is rapid transition in a sector incumbent pushes back the change. And it’s almost always “You cannot stop the idea whose time has come”, government can shape the way it impacts the country and the people. So from here government would need to look at a) Understand the unbiased and full impact of the digital on the Indian ecosystem b) State the position it would like to take as a country c) look at how some of the progressive nations have dealt with similar situation d) come up with a bottoms up regulation which is based on its unbiased view. And may be have a regulator like TRAI which can create enough deep understanding and knowhow of the sector so that the policies are driven by keeping long term view in mind and not through protests done by associations.