100% FDI in e-commerce marketplaces — What to expect?
Providing a much awaited clarity in definition and what’s legitimate, the Indian government has finally allowed 100% foreign direct investment (FDI) in online retail of goods and services under the so-called “marketplace model” through the automatic route on 29 March, 2016, effective immediately. This is a welcome change as it seeks to legitimise the sprawling and exponentially growing e-commerce industry in India. An explicit position from the government on where it stood with reference to e-commerce has been long overdue. So far, the government had already allowed 100% foreign investment in business-to-business (B2B) e-commerce. The marketplace model, as the changes imply, applies to retail e-commerce — i.e., business-to-consumer, or B2C.
Observed by laymen and practitioners as a move that will provide a certain relief to ecommerce companies such as Flipkart, Amazon and Snapdeal, the notification however imposes new rules/conditions that are contrary to present business models of many. In broad sense, the notification tries to provide a level playing field to the wider retail sector, taking into cognizance the concerns of brick-and-mortar rivals as well.
According to the new definition accorded by Department of Industrial Policy and Promotion (DIPP), the marketplace-based model of ecommerce involves providing an information technology platform on a digital and electronic network and acting as a facilitator between buyer and seller.
As per above, the functionality of a true marketplace should be understood as analogous to a stock exchange. Like the latter, the primary function of the true marketplace model, as per the above definition, should be to provide a ready channel for the sale and purchase of goods and services. At the same time, it should balance the counter party risk on both sides by putting into place appropriate checks and controls around payments, fraud, product quality, amongst others. A third important function is to ensure sufficient supply and demand, what is called liquidity in terms of a stock exchange, to ensure that the online channel is a win-win for both sellers and buyers through sufficient demand and options to buy with a large assortment.
Besides the above definition, some of the key imposed conditions are as below:
- Marketplaces can’t offer discounts on their own. Such discounts, if any, have to come from the vendors on the platforms.
- No single seller, or its group companies, can account for more than 25% of the total sales on any of such marketplaces.
- Warranties and after-sales service will be provided by sellers and not the marketplace companies
- Contact details of sellers need to be displayed online
If all above conditions are met, then 100% overseas investment in the form of FDI will be automatically permitted.
The above notifications, while simple in understanding and application, have far reaching implications on the current market-landscape and impact the entire retail industry in India.
Some of the key implications are as below:
Big NO to the inventory led format: The new definition essentially means that an online marketplace can’t be the owner of goods sold in any way and that it can just work like an online aggregator which connects customers to sellers, therein providing technology, logistics, fulfilment, payments as the services.
Government feels that if any portal is providing discounts on goods it’s holding, then it amounts to inventory-based model, which is in contradiction to the marketplace definition.
Though this ends the uncertainty over the business model, it calls for radical changes in the present structure and state of some of these marketplaces.
All marketplaces like Myntra and Jabong which are selling own goods under private label or the online grocery marketplace, Big Basket, which out rightly purchases goods are at contrast with respect to compliance. Complying with the new notification implies changing their core business principles and strategies. This transition can be painful and expensive.
Since FDI is prohibited in inventory led marketplace format, such models will need to disappear.
Establishing a level playing field- The notification will help restore the balance of power between offline and online retail. It will restrict online marletplaces’ ability to offer deep discounts in a bid to grab more customer share of the total retail market. By limiting the duality of a marketplace as a retailer, a marketplace would not be able to control product pricing any further.
This move will indirectly benefit online marketplaces as well as they would no longer need to engage in insane level of cash burn by selling goods below cost. Until now, this was not a possibility. In an attempt to gain and retain more customers, better funded marketplaces were resorting to high levels of deep discounting which newer or less funded peers were finding difficult to match upto. It was like a race to bottom with the player with deepest pockets poised to win the game. This is now over. Product and service quality will be the key differentiators for the various marketplaces from now on.
To bring things into perspective, the era of deep discounting is already fading off in online retail.
Present sourcing mechanism can’t work anymore — Flipkart’s largest seller WS Retail Services Pvt. Ltd generates more than 40% of the company’s sales while Cloudtail India Pvt. Ltd, the biggest seller on Amazon India, contributes even more.
Like Flipkart and Amazon, many marketplaces were trying to concentrate orders and sales amongst a few sellers to better control the pricing, inventory, dispatch timeliness, first and last miles and returns experience.
With the new notification, this however changes. Marketplaces will need to spread the sales across a wider set of sellers. This bodes well for the seller and customer eco-systems as not only will it provide more opportunities to new sellers but even lead to better and real price discovery with multiple sellers for any product.
NO to offline aspirations through stores — The new definition narrowly enlists a marketplace’s objectivity as providing an information technology platform on a digital and electronic network and acting as a facilitator between buyer and seller. This implies that an online marketplace can’t expand its presence and operations to offline retail through physical
Since a store would require an inventory to be held as well, if not for consignment mode of stocking, the new notification limits online marketplaces’ aspirations to venture into offline retail.
This also augurs well with government’s earlier stated position that FDI in e-commerce should not become a backdoor entry for multi-brand retail. As per the existential policy, 51% FDI is permitted in the multi-brand retail sector. Since a marketplace means a multi-brand retail format, online and offlline multi brand retail should not be seen in the same light.
This is just the primer to the evolving e-commerce landscape industry in India. These are early days. There might be amendments and exceptions. But those are speculative in nature. Hence, this is the most updated stance as of now. Wishing marketplace model the best in coming times.
