New Rules In The E-commerce Game

In the late 1940s till 1950, the constitution was being written. It meant framing the laws that would govern the land and various aspects within it. Fast forward 66 years, something similar is happening. But this time, it is happening with the giant we call the e-commerce sector. The country has been pretty late in framing and implementing these laws. But they still are a welcome move.

Let us first state some facts about the e-commerce sector in India to understand the situation better. This sector has been growing in India at a rate of 51% per annum. Behemoths like Amazon and Walmart are fighting tooth and nail to lay siege to the ground we call the digital consumer market. But this has brought with itself some amount of discontentment. Consumer complaints about the e-commerce sector has increased by 42% during April 2017 and March 2018 to 78,088.

The GOI, keeping all this in mind, recently announced to release an e-commerce policy draft. This draft suggested creating a regulator for the e-commerce sector. It also suggested making a new wing under the Enforcement Directorate to regulate the sector. But the idea of a new regulator might be dropped.

BACKGROUND TO THE POLICY

There are two types of models present in the e-commerce sector. These are marketplace model and Inventory based model.

Marketplace model means that the e-commerce company is only allowed to act as a platform where sellers and buyers meet and interact. This means that the e-commerce firm is a facilitator of discussions between the two elements in a market. It is not allowed to create inventory, stock management and logistics.

Inventory based model means that the e-commerce firm is allowed to make its own inventory and sell its own products on its platforms apart from products of other vendors.

In 2016, when the Narendra Modi government allowed 100% FDI through direct route, he only did so in the market place model and not the Inventory based model. This decision was taken by keeping in mind the well-being of the offline retailers as it will be their products which will be sold in the marketplace. But, the e-commerce firms with their legal hawks have found a way to circumvent around this policy. These firms now purchase directly from large brands and manufacturers, then they sell the stock to their proxy sellers, then the marketplace entity displays the products of these proxy sellers, giving them preferential treatment. All the while the e-commerce firms have a lot of stake in the proxy sellers, thus the profits of these proxy sellers is indirectly a profit of the e-commerce firm.

This strategy has hit the other “brick and mortar” retailers very hard. The marketplace entity gives deep discounts to the customers, so the customers prefer them over the offline retailers. This is the main reason that government has now decided to bring some much-needed changes to the existing policies.

THE NEW POLICY

After announcing the E-commerce Policy Draft, on December 2018, the government announced some more changes to the polices. Some might question the timing of the move and label it as an election strategy to assuage the small retail traders, who are also some of the staunchest Modi supporters, but whatever the motives of the government, this is a welcome move.

The new policy states 5 major changes, these are (i) marketplace entities cannot buy more than 25% from a single vendor; (ii) marketplaces will not directly or indirectly give discounts on products; (iii) entities in which there is equity participation by the marketplace entity cannot sell their products on the platform run by the marketplace; (iv) e-commerce marketplace entity will not mandate any seller to sell any product exclusively on its platform only; and (v) marketplaces will have to submit a compliance report to the Reserve Bank of India (RBI) by 30 September every year.

This policy had come into effect from February 1, 2019. According to the new policy, the firms cannot display products of those sellers in which they have a stake. This is done to stop the practice of giving preferential treatment to a handful of sellers. The big firms are also not allowed to give deep discounts to the customers. This will put them at a level playing field with the offline retailers.

The biggest blow to the big firms is made by the policy of “exclusivity”. The new policy changes say that e-commerce firms are not allowed to sell products “exclusively” on their platforms. Mobile phone companies like Huawei, OnePlus, Motorola and Xiaomi sell their products only through these platforms. Now, the rules have changed. These companies will now have to sell through offline retailers also. These phone companies are now using their vast networks to strike deals with offline retailers also. This is a big setback for the e-commerce firms as mobile phone sales constitutes around 50% of their total sales.

This policy will not only benefit the “brick and mortar” retailers, but also the small online platforms which were neglected as they were not able to give such levels of discounts on their products. This is a chance for them to prosper also.

AFTERMATH

The aftermath of the new policy has been pretty bloody for Amazon and Walmart. Both the companies lost over $50 Billion in market capitalization. Amazon is the bigger loser, taking a hit of $45 Billion, whereas Walmart lost $5 Billion. It is expected that both the companies will lose more in the coming week as their inventories start to run down. It has also led to drop in sales of Amazon and Flipkart by 25-35%.

 

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