August 22, 2018

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Amazon Scouting For An Off-Line Partner In India

- Nayona Roy, Senior Executive – Corporate Legal [ Godrej Industries Ltd ]
- Neha Mahajan, Senior Executive – Corporate Legal [ Godrej Industries Ltd ]


While fears of a retail invasion by the two giants, Walmart and Amazon, continue to haunt domestic retailers in India, the probable merger of Japan’s SoftBank and China’s Alibaba, giving rise to a third player, has given a ray of hope to small retailers in the online space at least...

It is undisputed that India is a growing consumer economy. To quote statistics, the organized retail penetration is still at a nascent stage at 7–8%, but it is growing at a frenetic pace of 20–25% annual CAGR (compounded annual growth rate) as per the reports of Indian Brand and Equity Foundation. The Indian retail market continues to attract foreign direct investment (FDI) at an annual growth rate of 35%.

The growth of modern trade retail stores in India has seen an uptick in the last 15 years. Simultaneously, mushrooming retailers in the e-commerce space have taken consumerism to the nook and corner of India.

Increased affordability of smartphones, change in working habits owing to a demographic transition, and faster and cheaper mobile data have resulted in deeper Internet penetration in rural, urban, as well as adjoining areas within a radius of 300 kilometers of each Tier-I, Tier-II, and Tier-III cities (rurban) of India. Internet access propelled an exponential growth in multi-brand e-commerce, making it more accessible and inclusive. In addition, the Government of India’s initiatives such as Digital India, Make in India, Start-up India, and Innovation Fund are all acting as catalysts for the growth of e-commerce in India.

In the present Union Budget, USD 1.24 billion has been allocated to the BharatNet project, which promises to take broadband services to 150,000 gram panchayats. The increased digital inclusion of rural India will certainly trigger a progressive expansion of e-tailing in India. Unprecedented investments and lateral acquisitions have introduced stiff competition in the e-commerce space, particularly in marketplace models.

The genesis for the rapid growth of marketplace e-commerce models is a Policy Amendment 2017 by the Government of India & the Reserve Bank of India. The FDI regulatory position for the e-commerce trading sector with a view to bring online and offline businesses to enjoy a level-playing field made 100% FDI through an automatic route possible. The model is based on the fact that in trading as a business activity without ownership in the goods to be provided, the e-commerce operator is only offering a marketplace or a platform for multiple sellers to list their goods and sell directly to end consumers. In other words, e-commerce entities can only become eligible for FDI if they transact exclusively with sellers registered on their portal and cannot permit more than 25% sales from a single vendor on their portal. Even today, the Indian Government Policy, however, does not allow FDI in inventory-based e-commerce entities which are selling their own goods through their portals and are in control of the entire end-to-end process of trade.

In the backdrop of this cyber revolution, Indian retail has been stirred by Walmart of US contracting to buy 77% equity stake in e-commerce giant Flipkart, which was started almost a decade ago by two Indian IIT graduates Sachin Bansal & Binny Bansal.

Walmart already has a stronghold on wholesale trade in India through its cash-and-carry stores, and now, Walmart has made investments in Singapore to own a majority in Flipkart’s holding company in Singapore, thus converting Flipkart India into another subsidiary. While consumers and shareholders rejoice in this deal, it has rattled the nerves of the other channels of trade. Trade association bodies have complained that the efficacy of the existing regulatory regime of Indian trade and commerce in India has been compromised by this deal.

In India, Flipkart’s e-commerce trading activity today as a ‘marketplace model’ boasts of 100 million users and 100,000 sellers. This deal, therefore, gives Walmart immediate online access to the Indian retail market hitherto foreclosed by the FDI Regulations. This enables Walmart to not only set up an integrated retail chain capturing the larger proportion of offline wholesale/cashand- carry trade sales through its brick and mortar stores but also augment further sales revenues from online consumers.

The Flipkart acquisition development is being closely watched by its biggest competitor Amazon Seller Services, which is another e-commerce marketplace model company with large operations in India. Amazon recently entered the grocery retail business and received statutory approvals for $500 million FDI in the food sector through Amazon Pantry and Amazon Now stores. There is a buzz that Flipkart’s pole position is likely to spearhead a strategic alliance between Amazon and Kishore Biyani’s Future Group, commencing with fashion brands and then spilling over to other categories. Amazon, if market rumors turn true, would find such a partnership beneficial in creating an omni-channel presence in India. Future Group too is likely to vouch for such an alliance as a weapon to counter its immediate competitor Reliance in offline modern trade, as Reliance has already entered the online marketplace bandwagon.

The Indian online retail market contributes to only 1.5% of the total retail industry. However, the imminent competitive scenario of consolidation between the two e-commerce marketplace-dominant players has already spread threat perceptions of an impending existential crisis amongst domestic retailers and traders albeit the fact that small suppliers and home-based or small-scale entrepreneurs may still benefit out of the e-commerce players’ consolidation efforts in Indian markets. Though the FDI Policy Amendment has in-built mechanisms to insulate a market against unfair competitive tendencies of dominant players, it is yet to be seen how things will shape up for the domestic trade fraternity in the long run. Given such a fear-laden climate in domestic retail in India, the Confederation of All India Traders (CAIT) approached the Competition Commission of India (CCI) expressing their apprehensions about the Walmart–Flipkart deal.

Increased competitive rivalry and a liberalized business environment fostering innovative ideas and greater retail integration empower e-commerce marketplace platforms to challenge the classic retail on multiple parameters. First, they can capture the affluent consumer base in Tier II and Tier III cities who so far had limited access to the aspirational brands through classic retail. Second, marketplace e-commerce models need not be bothered by sectoral boundaries and can expand their range of products and services in the same customer base. For instance, taxi app Uber has launched an on-demand food delivery app service, Uber Eats, for its customers. Similarly, Amazon not only has expanded to the grocery segment but also now provides the facility of video streaming against a subscription fee through Amazon Prime. To make purchases more convenient, e-commerce portals are also introducing e-wallet services like Amazon’s Pay Balance.

CAIT fears the denial of fair market access to small retailers and traders in the offline platform through unfair means of competition such as predatory pricing and abuse of dominant position. Even online sellers apprehend discrimination as they fear that only Walmart’s products including imported goods may be promoted on Flipkart as offerings to Indian consumers. It is still a fresh memory for many followers of the retail trade story in online markets about a regulatory challenge that had earlier compelled Flipkart to sell off its stakes in WS Retail (Singapore-based retail wing of Flipkart contributing to 75% of stocks listed on Flipkart) in 2012.

While fears of a retail invasion by the two giants, Walmart and Amazon, continue to haunt domestic retailers in India, the probable merger of Japan’s SoftBank and China’s Alibaba has given a ray of hope to small retailers in the online space at least. SoftBank after its delineation from Flipkart has more capital to invest and may route more funds into Paytm merchant services or Big Basket or Grofers. SoftBank’s investment in Grofers and Alibaba’s investment in Big Basket have given both an entry into the online grocery market. It is speculated that this merger might provide some competitive insulation to small players by challenging the dominance of Walmart and Amazon. However, it could just as well result in the rise of a third dominant player, thereby completely foreclosing the entry of any new player and compelling the exit/death of existing smaller players.

The war between the two key players does become a force to reckon with and e-tail grows progressively, even encroaching into offline modern trade. However, despite these speculations and apprehensions, there is still road to cover before the e-commerce marketplace model, and the market dominance capture war between Walmart’s Flipkart and Amazon can actually engulf the dominant traditional general trade of kirana (mom & pop stores) completely. There are already synergies of such kirana stores being referred to as ‘proximal delivery centers’ of regular grocery through traditional stores being digitally integrated with various e-payment models.

In this age of transformation of Indian retail trade channels and the interplay between digi-age marketplaces and traditional stores, there will be lots of lessons to learn for retail markets and trade channels to evolve.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.

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