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E-commerce policy unlikely to impact Business Model

2016-04-11


The Government’s recently introduced e-commerce policy is unlikely to change the discounting model of online retailers in the near-term, says India Ratings and Research Pvt Ltd (Ind-Ra). While the policy is a step towards regulating the E-commerce industry in India, gaps in the policy framework continue to exist.

It believesfurther 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 the offline and online retailers.Ind-Ra believes 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 new guideline prohibits marketplace e-tailers from ownership of goods, thus act as facilitator’s between buyers and sellers and not influence the selling price of the goods; this Ind-Ra believes is a move by the ministry to discourage the deep discounting strategy adopted by e-tailers.

However in the absence of additional clarity on the policy, adherence for the same will remain a challenge. 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.

The cap of 25% for an e-tailer’s sale from single vendor or Group Company can impact the top line of the e-commerce firms. E-tailers with concentrated vendors will have to undergo significant restructuring of their business model. E-tailers namely Amazon Seller Services Private Limited and Flipkart India Pvt. Ltd generate major portion of their sales from joint venture vendors namely Cloudtail India Pvt Ltd and WS Retail Services Pvt Ltd respectively.

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 believes the policy is a step towards safeguarding customer interest by introducing additional disclosures. Guidelines to disclose applicability of warranty/ guarantee when sold through the e-tailer will help bring clarity and transparency in the sector.

This is a move to empower the manufacturer/ seller’s towards positioning their brands, thus addressing concerns over deep discounts offered by online retailers which are impacting their brand’s reputation.Ind-Ra believes that with the introduction of a more comprehensive policy and its successful implementation thereafter, e-commerce could transform itself into a more mature market, focusing on optimising efficiency over grabbing customers by offering deep discounts.

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. E-tailers may focus extensively on customer convenience, by extending value added services, payment flexibility, concessional shipment and delivery.

These developments will ultimately benefit customers in the form of better efficiency and establish a more differentiated and sustainable business model.As per the guidelines issued by the Department of Industrial Policy and Promotion on FDI in e-commerce, FDI is not permitted in the inventory-based model of e-commerce. Under the marketplace model, FDI up to 100% under the automatic route is permitted in Business to Business e-commerce.

FDI is permitted in the Business to Customer e-commerce, subject to specific conditions. In order to clear the ambiguity, the policy also defines the two models. Inventory model involves possession of goods and services by the e-commerce entity and inventory of the same, while marketplace model involves acting as a facilitator between buyer and seller.