E-commerce discounts: Is the govt tying itself in knots in the retail sector?


August 11, 2016

Sulekha Nair, Firstpost
Mumbai, 11 August 2016 

The festivals are round the corner. And it is that time of the year when online discount offers start raining. If you had thought this year it is going to be different due to the change in FDI rules of the government, you should be happy that it is not so.

This year too there are online discount offers – marking the Independence Day. Some like Snapdeal’s Wish for India sale is offering up to 70 percent off to coincide with the 70th I-Day celebrations. With Ganesh Chaturthi and later Raksha Bandhan too around the corner, there are indeed reasons for the consumers to be happy.

But the question that begs an answer is are the e-commerce marketplaces flouting the rules while offering these discounts. When the government allowed for 100 percent FDI in the e-commerce sector, it stated that, “E-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods and services and shall maintain level playing field.”

The rule is clear that marketplaces should not indulge in online discount sales. So how are these companies doing this? Are they stocking up on inventory and selling goods?

Unless one knows that is the truth, there is no way one can say for sure that they are flouting the rules. Anil Talreja, Partner, Deloitte Haskins & Sells, says that the “regulators have made the law clear and no one will flout the law.”

The offline players have been in the discounting game much longer and earlier than the online players. “When malls were set up, there were many who offered goods in exchange for old clothes, newspapers, etc. They can’t complain with what the online players are doing as they did the same,” points out Prof. Pradeep Pendse, Dean, E-Business, Welingkar Institute of Management.

The physical space has been having a lot of heartburn of sorts. Any business has to be viable not just in the short term but in the middle and long term as well. But the quantum of discounts given online is unsettling the offline players.

There is no way of knowing, said an analyst, whether the discount is being offered by the online marketplace or the suppliers. “The advertisements say that the online marketplace is offering the discounts. No one says that x or y supplier on the marketplce is offering the discount and so one never knows,” points out Kumar Rajagopalan, CEO, Retailers Association of India (RAI), a not-for-profit organisation.

The government has come out with regulations at different points of time which have placed barriers in FDI in retail.

“Most of the internet companies have raised funds from venture funds and private equity which are funds sourced from overseas. Domestic players say the marketplace has created a clever structure and the latter is sidestepping or bending the law. The government has been looking at the situation for the last two years and have been looking at attracting FDI. When the government comes out with more conditions, it means more restrictions and then there are more interpretations. However, the fact is what is needed is a level playing field,” says Devangshu Dutta, Third Eyesight – a consulting firm that focuses on the retail and consumer products ecosystem.

Online players are rapidly gaining ground and offline players are jittery about the former’s growth. What is calculated to ascertain the former’s growth is GMV or gross merchandise volume to indicate a total sales value for merchandise sold through a particular marketplace over a time frame. Yet, GMV per se is not the exact right metric though it is a popular one.

Going by GMV figures, India’s retail market is around $500 billion while the online share was at $10 billion in 2015 and is expected to be in the reach of $18-20 billion in 2016.

China had a retail market of around $650 billion in 2015 and is expected to be worth $10.3 trillion by 2018, compared with the $5 trillion in sales projected for North America, according to a PwC report. The overall market of retail in China is about $2 trillion.

A discount being offered online is a tricky affair. For example, if someone who has a brand store on Amazon and decides to launch a discount and Amazon publicises it, then it is not a discount being offered by the marketplace. So within the current rules, what Amazon is doing is permissible.

On Flipkart, some brands have brand stores and if they themselves discount it, it is fine as per existing rules. Historically, the issue is how much is the brand discounting and what is the online marketplace offering on top of it, if it is.

Will the issue ever get solved? Every time an online player announces a discount, will the offline player see red? Many see it as an issue of governance.

Terming it a ‘political’ issue, Pendse of Welingkar Institute says that with the government focusing on jobs and aiming to make jobs available, the aggregated marketplace will lead to many people losing their jobs.

So will there be a middle path that both can traverse? “Depends on the government and which constituency it wants to protect,” he remarks.

Dutta says that it is a governance issue if there is a monopoly or oligopoly, as it is not restricted to one kind of business. What is needed is to strengthen governance.

As of now, the government seems to be finding it difficult to make up its mind on the issues regarding the retail sector.

(Published in Firstpost)