Deep discounts and exclusive deals on e-marketplaces like Amazon and Walmart-owned Flipkart will soon become history. E-tailers got a major shock on Wednesday evening after the government came up with a review of the policy on foreign direct investment (FDI) in e-commerce sector. While clearly defining e-marketplaces, the Ministry of Commerce and Industry barred such platforms from selling products offered by companies in which they own a stake. Additionally, e-commerce companies will not be allowed to enter into an agreement for exclusive sale of products any more.
The government’s move isn’t surprising and was expected considering a lot of complaints were lodged by seller associations and many lobbies were pursuing it very aggressively.
Speaking to DNA Money, Sanchit Vir Gogia, chief analyst, founder and chief executive officer, Greyhound Research, said, “Measures were expected but not of such aggressive nature. Prima facie, this will be a dampener for a lot of e-commerce companies who will not be able to bypass the new rules anymore,” he said.
Globally, it is common practice for e-commerce companies to operate with their own brands and trading companies and this business strategy is not exclusive to India alone. However, what Amazon and Flipkart were doing in India was became a major threat to offline retailers and that necessitated the government intervention.
“Predatory pricing was very aggressive from the e-commerce companies and in many ways they overdid the entire strategy. What they did wrong was kill the competition in totality,” said Gogia adding that the new rules are expected to set a level playing field for pure marketplace operators allowing small traders to start trusting and using these platforms more aggressively.
Industry experts are of the view that new steps and measures taken by the government may create issues akin to Zomato, which is under fire for charging 33% as commission from restaurant partners. Similarly, Amazon and Flipkart could start getting aggressive on charging the sellers on their respective platforms.
“Charges and commissions for using the platform could increase considerably. Secondly, they will take a very aggressive stance on the advertising strategy. Accordingly, their attempt to collect data will also increase as they will have to monetise it. How else will they get revenue?,” said Gogia.
The new provisions are expected to reduce the delta between online and offline pricing. This basically means online will not be able to offer anything beyond convenience. “No trader will shave off so much of their profits. So this could mean more parity in pricing between online and offline. While that’s a good thing, it’s not really so considering how much money has already gone into Flipkart and Amazon,” said Gogia.
Experts believe that impacted e-commerce companies will get busy restructuring their business model, shareholding and transactions. In fact, the e-marketplace operators are expected to get creative on the entities being floated by the promoters to sell on the platform. “This will definitely throw a spanner in the works for these companies. They could bring in a friendly third-party for the vendor entities and continue to be in business and provide aggressive pricing for the marketplace. The e-commerce companies will have to do some amount of attunement to be able to do business in the new reality, rules and regulations prescribed by the government. Businesses will now have to plan their model around the new reality,” said Gogia.
Sanchit Vir Gogia: Sanchit is the Chief Analyst, Founder & CEO of Greyhound Research, a Global, Award-Winning, Technology & Innovation Research & Advisory firm. To read more about him, click here.
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