The Indian e-commerce market is expected to hit $200 billion by 2026. This will be predominantly facilitated by increased internet and smartphone penetration, with a total user base expected to reach 829 million by 2021, up from 560 million in 2018. Diving deeper, we see that most of this will be driven by the sales of electronics. While India’s e-commerce sector is still at a nascent stage, it is set for a high rate of growth, and by 2022 it is projected to be worth over $71 billion.
To put it plainly, there are mainly two big players when it comes to India’s e-commerce retail: Flipkart and Amazon. While Paytm has entered this space with its Paytm Mall, it has not reached the level of adoption of Flipkart or Amazon. This is one of the cruxes of the Draft National e-Commerce Policy: The government believes that given the nascent stage of the e-commerce space and the overall potential, this growth needs to be protected in a controlled environment. The main argument of this policy is that the current “marketplaces” in India are not technically marketplaces. To be a marketplace, an e-commerce platform has to provide a technological platform for the buying and selling of goods and can act as a “facilitator” between a vendor and consumer. An e-commerce platform operating on a marketplace model needs to have an IT infrastructure, such as computers and internet, and may provide logistical support, such as warehousing and payment collection, to the vendors it hosts.
The problem is, Amazon and Flipkart are following the “inventory” model, wherein the e-commerce player owns the inventory it is selling directly to consumers. For example, Amazon used to own 49% of Cloudtail and Appario — both Indian entities that are also the largest sellers on Amazon India. They account for some 500,000 products sold on Amazon. Another example is when Flipkart owners created WS Retail, the largest seller of goods on Flipkart, and then spun it off as a separate entity.
The Draft National e-Commerce Policy is centered around five pillars:
1. A marketplace cannot buy more than 25% from a single vendor.
2. An entity that has a major equity partnership with a marketplace cannot sell its products on the platform run by that marketplace.
3. A marketplace cannot mandate any seller to sell any product exclusively on its platform only.
4. A marketplace cannot directly or indirectly give discounts on products.
5. Each marketplace must submit a compliance report to the Reserve Bank of India every year.
The term “e-commerce” has also been fluidly defined here — it covers buying, selling, marketing or distribution of goods, including digital products and services, through an electronic network. The policy is agnostic of delivery of goods, including digital products, and services encompassing both online and traditional modes of physical delivery. It also encompasses all forms of payments against such goods and services that could be made online or through traditional banking channels (i.e., checks, demand drafts or cash on delivery).
At face value, there are clear roadblocks that stand out for traditional e-commerce players:
• A marketplace cannot buy more than 25% from a single vendor. On February 1, when the policy went live, more than 300,000 products from Cloudtail and Appario (everything from sunglasses to home cleaning products) were removed from Amazon India. While these missing products were finally “restocked,” most of them are now sold by other vendors and not from Amazon’s preferred partners.
• An entity that has a major equity partnership with a marketplace cannot sell its products on the platform run by that marketplace. To mitigate this issue, Amazon had to reduce its stake in both Cloudtail and Appario from 49% to 24%, while suspending its Amazon Pantry service, since Pantry was largely run by a select few local affiliates.
• A marketplace cannot mandate any seller to sell any product exclusively on its platform only. Believe it or not, this one hurts the most. Despite electronics being the dominant force in e-commerce retail sales, it is smartphone sales within this category that are driving most of the volume. This subcategory is such a major revenue driver for e-commerce players that all major entities have exclusive partnerships with smartphone makers. For instance, Flipkart had an exclusive partnership with Xiaomi to the point where most of Xiaomi’s new models for India were only sold via Flipkart. These exclusive partnerships allowed e-commerce players to offer deep discounts for smartphones, thus driving adoption but cutting into their margins.
And this is where the hidden potential of the much-disputed e-commerce policy comes in:
• A marketplace cannot directly or indirectly give discounts on products. E-commerce firms’ margins in the smartphone and electronics categories have been in the low single-digits, whereas other categories such as fashion, FMCG and home furnishing products attract margins of 25-35% on an average. In 2018, the cash burn on smartphones hung at 15% for these players; however, it was expected to drop to 12% by March 2019 mainly due to this policy. By 2023, it is expected to come down to 5%. The limits on discounting will also facilitate a change in focus of the type of products sold, making the revenue share of other segments rise significantly. According to findings from a study by RedSeer, from 2015 to 2018, e-commerce players were only focused on rapidly adding sellers as each tried to become the leading marketplace for India. However, it was evident that smartphones were the key driver in this growth. While additional sellers were added rapidly, the product mix relied heavily on the sale of smartphones and electronics via direct brand partnerships.
As a part of the e-commerce community, I am focused on the North American market, but being from India, I’ve been inclined to staying abreast of the current events there as well. I believe that this e-commerce policy is important considering the sheer size of the Indian market. Understanding how the world’s largest democracy decides to handle such situations is critical because having knowledge about what is happening outside the United States will provide an advantage to American businesses when it comes to standing out among the crowd.
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