February 1, 2019 a Landmark for Offline retail
For the last few years, there was a hue and cry in the traditional IT channel community in India regarding price disparity between the online and offline marketplace. The E-commerce platforms were attracting buyers with hefty discounts and offers which in turn were affecting the traditional distribution model. Various IT associations across the country pleaded for justice but it was unheard. The offline channel community has always looked upon the government to intervene so that justice should prevail in terms of a level playing field in the market.
Ultimately, the new Foreign Direct Investment (FDI) regulation in E-commerce introduced by the Government of India, which came into effect from February 1, 2019 has instilled hope among the offline channel community. As per the policy, E-commerce platforms will be barred from selling products in which they own equity or form exclusive marketing arrangements with sellers, or indirectly influence the price of their products.The policy has also refrained companies from selling more than 25 percent of their sales via any single E-commerce marketplace.
This step has been taken by the government to ensure a level playing field and fair competition among the different retail channels. The E-commerce rules allow 100 percent FDI in the marketplace model,but they cannot hold inventory that it sells and should bridge the gap between the buyers and merchants.
However, E-commerce companies often manipulate the marketplace by procuring goods using exclusive market agreements with specific brands and then selling those goods to controlled sellers. This in turn helps the cash rich companies to offer huge discounts and attract buyers.
Post implementation of the new policy, VARINDIA garnered feedback from the traditional offline channel community representatives - IT associations across India to understand their views about it.
Opinion on new FDI rule
The new FDI rule that has come into effect from February 1, 2019 has been welcomed whole heartedly by small retailers across India, especially the IT channel community. The move has been a respite for the brick and mortar stores who were till date perishing under the steep discounts offered by the giant online marketplaces. The new rule is like a new ray of hope for those small retails which generate employment for the country and also contribute to the growing GDP of India.
The new regulation has put a stop for online marketplace in manipulating with prices of products and the huge discounts offered during the festivities. It has also barred the marketplaces in stocking huge inventory from a single vendor and selling of exclusive products.
“The amendments in the E-commerce Policy of Government of India, which came into effect from 01st February 2019, are with the view to debilitate 'might is right" of E-commerce giants, begetting unfair deep discounts to mislead unsuspecting customers. These amendments are a result of raft of representations made by various trade Associations including FAIITA,” says Saket Kapur, General Secretary, Federation of All India Information Technology Associations (FAIITA).
“The new FDI rule which debarred online marketplaces from manipulating the price of products or offer deep discounts, selling products exclusively on a platform and barring them from stocking a quarter or 25 percent of their inventory from a single vendor is a welcome move by the Government of India. It will definitely provide a level-playing field to the Indian offline sellers and channel partners,” believes Alok Gupta, President, Progressive Channels Association of Information Technology (PCAIT).
It is considered to be one of the effective moves taken by the Government of India towards protection of interest of the small retailers who were suffering under the malpractices of the online marketplace.
“We feel this is the first effective pro active steps from the government for protecting our market from the steep discounts and foreign money burn. Companies like Amazon and Flipkart are now looking to include more third-party sellers into their system,” feels Pratheesh Mathew, Secretary, Confederation of Information Technology Associations (CONFED-ITA).
The new rule has also crashed the monopoly of the cash rich giants who has their stake in online retail biggies. It has also affected the privileges which the big companies used to enjoy.
“The new E-commerce rule is set to benefit small retailers - both offline and online, breaking near monopoly of cash rich giants like Amazon and Walmart who had their stakes in retail giants like Cloudtail and Appario which gave them preferential treatment, “says Pankaj Shah, President, Association of System Integrators & Retailers in Technology (ASIRT).
Reiterating the same, Gunasegharan K, President, Infotech Software Dealers Association(ISODA) says, “It is a wonderful move by government. It is encouraging small medium companies to participate in the market place and thus avoiding monopolistic move by biggies. If this is strictly implemented with letter and spirit I am sure discounting in big way will not happen, which will surely increase footfalls in brick and mortar companies.”
“Trade was waiting for such relief from nuisance of E-commerce since long. This is the least government could have done to offer level playing field to all Small and Medium size entrepreneurs,” says Samir Parekh, President,Trade Association of Information Technology(TAIT).
Believing in the new regulation, Naveen Gupta, President, Jammu Computer Dealers Association (JCDA) says,“It is a good move by government and it really affected and decreased the gap of price. The regulation will definitely protect the interest of the brick and mortar stores and will curb the price parity.”
Effects of the new regulation
The effectiveness of the new rule is quite promising. With the implementation of the new regulation, online players have to rework on their marketing strategies to attract buyers. The prices of IT products at online platforms are almost at level playing field now with the MOP.
“The E-commerce Large Market players have to rethink their India strategy and some products have already gone offline. Prices of many IT products have become comparable with offline MOP (Market Operating Price). I read this week that Future Group has tied up with 7-Eleven, a Japanese Group, to expand their business through small Retail footprint stores,”observesPankaj Shah of ASIRT.
The regulation has hit hard on the private businesses of the E-commerce platforms. It is also going to affect foreign investments in India. The international biggies have invested enormous amount of money in the Indian market but with the regulation in place, it will hamper their business growth in the country.
“One of the biggest impacts is on the private label business built by Flipkart, Amazon and Myntra. The new E-commerce rule has discouraged foreign investment. Amazon has invested billions of dollars in India operations and Wal-Mart spent $16 billion this year to buy Flipkart. While Amazon and Flipkart were thriving, they were creating a large number of warehouse and supply jobs. The new rule has put restrictions on them which might dampen their business growth and thus hit investment and reduced jobs for Indians,” views Hiren Shah, General Secretary, Federation of IT Associations of Gujrati (FITAG).
Difference has been felt by the IT channel community after the FDI regulation. The prices of the products have become reasonable, which is a noticeable aspect in the business.
“After the regulation, we are feeling the difference, prices shown on E-commerce portals have a reasonable difference because earlier these companies were burning the cash and gave huge discounts from their pockets,” says Mahinder Aggarwal, President, All Delhi Computer Traders Association(ADCTA).
Not only prices of the product are at level-playing on the online and offline stores but the massive discounts which were offered to the consumers has also been reduced. Moreover, it has infused optimism among the retailers and the channel partners.
“The changes are already evident as the online marketplaces have reduced their hefty discounts and removed many products from their platform, whereas there is a sense of optimism in physical stores owners and channel partners. As it is only a month since these new regulations came into existence, it is too early to comment on the business growth and profits generated by the offline sellers,” highlights Alok Gupta of PCAIT.
With similar views, Pratheesh Mathew of CONFED-ITAs ays,“We found major impact in online portals immediately after the implementation of new policy. The exclusive sellers like Cloudtail, WS Retail all have increased their pricing in their listing immediately and we can realize no more enthusiasm for the customer to go with their listings.”
Effectiveness of the regulation
The new rule is not only protecting the interests of the retailers but also helping consumers to get a touch and feel experience so that they can be sure of the product before buying. The vendors are also shifting their focus towards the channel community.
“It will be the first step to bring in fair competition between convenience offered by E-commerce platforms and the touch and feel offered by Brick & Mortar Stores. In my view only after number of iterations, this problem can be permanently rooted out,” says Saket Kapur of FAIITA.
“The regulation is working from day one, and not only it protects the interest of brick and mortar stores, but it also helps customers to buy after having a look and feel and buy confidently, knowing who is responsible for support.With this policy in place, vendors/brands have now shifted focus to support their offline channels. Really hope and wish good sense will prevail,” says Samir Parekh of TAIT.
It is a fact that the Indian economy is immensely dependent on the brick and mortar stores. It creates job opportunities for the people and so the channel community believes that the government should protect their business interests and create a level playing field for them.
“Brick and Mortars are the sources, who created jobs for government and Indian economy is running on their shoulders. It’s a fact that government never shown concerns for these brick and mortars and always giving incentives to bigger industries. We are not hoping anything special from the present or upcoming government, we just want it should give us a level playing field with these multi-national funded E-commerce giants,” wishes Mahinder Aggarwal of ADCTA.
It is expected that if the regulation is implemented effectively, it will not only regulate the pricing policy and deep discounts but will also eradicate the malpractices in tax compliance by the online platforms.
“If the new E-commerce Regulation is implemented in full then predatory pricing policies, deep discounting and malpractices in Tax Compliancy by sellers on E-commerce marketplace will be restrained which in turn will help brick and mortar stores with level playing field. This will ensure continuity of jobs of lakhs of employees and their families will get true peace of mind,” highlights Pankaj Shah of ASIRT.
If implemented in an effective manner, the new rule indicates that good time will come (“Achhe din aayenge”) for the channel community. It will create a level playing field for them and it will mechanise the distribution model and also bring price control in the market.
“The new norms will definitely going to ensure a level playing field and pave way for fair competition between different retail channels. These regulations will act as a catalyst for traditional distribution models and help bring about some kind of price control in the market.
According to a study by rating firm Crisil, the new rules can create a level playing field which could impact sales worth ₹35,000 crore to ₹40,000 crore for the country’s top online retailers. Whereas physical retailers are expected to lap up ₹10,000 to ₹12,000 crore in the top line in FY20.
These figures ensure that the brick and mortar store owners will witness improving revenues, profitability and better cash flows in the near future and they could be in for even better times ahead,” opines Alok Gupta of PCAIT.
The IT channel community of India is not against E-commerce but they highly condemn the money burn and the price disparity of the online marketplace. They believe the interests of the traditional channel should be protected by the government and hygiene should be maintained in the market.
“We strongly believe that this regulation will help the interest of our traders in the country and gave more sanity to the market in terms of reality in price. Domestic traders are the back bones of Indian economy, government always should protect and safeguard them from the foreign giants.
We are not against any form of OLS sales but we are against the money burn and price disruption funded from foreign companies in OLS portals,” puts forward Pratheesh Mathew of CONFED-ITA.
Being optimistic, Gunasegharan. K of ISODA says,“Yes it will curb price parity between both the channels. Lifeline of Indian markets is the small and medium business which provides employment too.”
Vendors or principal companies also feel that both online and offline channel should function without disturbance. The principal vendors are also taking initiatives for a peaceful co-existence of both the channel by signing Memorandum of Understanding (MoU) to ensure price parity.
“I think the price parity will be the guiding force for principal companies too, who will want both online and offline Channel to co-exist without much disruption. In our IT industry we have already seen these principals making sincere efforts and have signed MOU with FAIITA to ensure One Price through All Channels, though it may take time to stabilise but in the long run it will help benefit all players in the eco-system,” underlines Pankaj Shah of ASIRT.
To sum up
After analysing the feedbacks from the IT associations pan India, we conclude that this move by the government has been viewed in an optimistic way by them. They also expect the revival of business in coming days when the policy will be effectively implemented. The channel community has welcomed the move and is expecting a level playing field in the market. They are also hopeful that the nuisance that is prevailing in the market will also come under control.
But it should also be kept in mind that the deadline for feedback submission on the draft policy on E-commerce has been extended. The E-commerce platforms operating in the country will have time till March 31st to submit their feedback on it.
Keeping aside all the assumptions, it is evident that the policy will be effective if it is brought into action properly. “It is a direction towards curbing the menace. The reprieve will last only as long as the canny E-commerce portals are able to find a work around thus shifting the balance of convenience in their favour,” concludes Saket Kapur of FAIITA.