While fears of a retail invasion by the twogiants, Walmart and Amazon, continue to hauntdomestic retailers in India, the probable mergerof Japan's SoftBank and China's Alibaba, givingrise to a third player, has given a ray of hope tosmall retailers in the online space at least...It is undisputed that India is a growing consumereconomy. To quote statistics, the organized retailpenetration is...
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.