Why Piyush Goyal is concerned about India’s e-commerce boom

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August 31, 2024

MG Arun, India Today
Aug 31, 2024

Nearly five years after the Centre brought in norms to rein in multinational e-commerce companies operating in India, Union commerce minister Piyush Goyal sparked fresh controversy by raising concerns over the rapid expansion of e-commerce. He also drew attention to the pricing strategies used by some e-commerce firms, questioning what he termed “predatory pricing”.

“Are we going to cause huge, social disruption with this massive growth of e-commerce? I don’t see it as a matter of pride that half our market may become part of the e-commerce network 10 years from now; it is a matter of concern,” Goyal said at an event in New Delhi last week.

His comments come at a time when the ecommerce business in India is growing exponentially. Estimated at $83 billion (around Rs 7 lakh crore) as of FY22, the market is expected to grow to $150 billion (Rs 12.6 lakh crore) by FY26. The growth will be due to multiple levers: a growing middle class, rising internet penetration, the proliferation of smartphones, convenience of online shopping and increasing digitisation of payments. The overall Indian retail market was pegged at $820 billion (Rs 69 lakh crore) in 2023, according to a report published by the Boston Consulting Group and the Retailers Association of India. E-commerce still comprises only about 7 per cent of that, as per Invest India.

The Indian e-commerce market is dominated by global giants, including Amazon and Walmart (which took over Flipkart in 2018). They, along with domestic players, offer huge discounted prices compared to retail prices, which drives online sales significantly. In FY23, Amazon Seller Services and Flipkart posted Rs 4,854 crore and Rs 4,891 crore losses, respectively. Goyal’s argument is that these losses are due to their predatory pricing.

“Is predatory pricing policy good for the country?” Goyal asked, while stressing the need for a balanced evaluation of e-commerce’s effects, particularly on traditional retailers such as restaurants, pharmacies and local stores. “I’m not wishing away ecommerce—it’s there to stay,” he said. Later, he said e-commerce uses technology that aids convenience. But there are 100 million small retailers whose livelihood depends on their businesses.

The Centre has specific laws that permit foreign direct investment (FDI) in e-commerce exclusively for business-to-business (B2B) transactions. However, according to Goyal, these laws have not been followed entirely in letter and spirit. Currently, India does not allow FDI in the inventory-based model of e-commerce, where e-commerce entities own and directly sell goods and services to consumers (B2C). FDI is permitted only in firms operating through a marketplace model, where an e-commerce entity provides a platform on a digital or electronic network to facilitate transactions between buyers and sellers (B2B).

The country’s laws also stipulate that in marketplace models, e-commerce entities cannot ‘directly or indirectly influence the sale price of goods or services’ and must maintain a ‘level playing field’. Entities in the marketplace model re allowed to transact with sellers registered on their platform on a B2B basis. However, each seller or its group company is not permitted to sell more than 25 per cent of the total sales of the marketplace model entity.

Goyal said certain structures have been created to suit large e-commerce players with “deep pockets”. Algorithms have been used to drive consumer choice and preference. For instance, several pharmacies have disappeared, he said, and a few large chains are dominating the retail space. He invoked the importance of platforms like the Open Network for Digital Commerce where small businesses can sell their products.

E-commerce firms counter the argument on predatory pricing. “It is the sellers’ discretion as to what price they should sell at,” says an industry source. The e-commerce player who provides the platform seldom has a role in it, he explains. “Sellers could be doing clearance sales or liquidation of old products at cheaper prices. Some sellers also source products at manufacturing cost and park it with e-commerce firms instead of involving warehousing agents. This helps cut their overhead costs and allows them to offer lower prices on the platform,” he adds.

Some experts are of the view that the government should not step in with controls and allow the market forces to play their role in determining prices. Price controls may lead to shortages, inferior product quality and the rise of illegal markets. Moreover, the Competition Commission of India (CCI), which is mandated to act against monopolies, may be given more teeth. It is ironical that, on the one hand, the Centre wants more FDI to flow in, but places more and more controls on foreign players on the other hand. At the core are the interests of small traders and retailers, a key section of the electorate.

Others argue that the government has a role to ensure that there is fair competition. “It is not just small retailers the government would be speaking for, but for large domestic players too,” says Devangshu Dutta, founder of consultancy firm Third Eyesight, emphasising that the government’s role should be to establish laws and practices that promote fairness.

According to him, it is no secret that e-commerce has grown through discounts. “For large e-commerce firms, market acquisition happens by acquiring a share of the consumer’s mind and through pricing. When a large sum is spent on advertisements, it is for acquiring the mind share of the consumer,” he says. “Pricing matters in a big way too. Whether you call it predatory pricing or market acquisition pricing depends on which side of the fence you are.”

(This article was originally published in the India Today edition dated September 9, 2024)

The Season of Opportunism

Devangshu Dutta

October 29, 2014

(The Hindu Businessline – cat.a.lyst got marketing experts from diverse industries to analyse consumer behaviour during the last one month and pick out valuable nuggets on how this could impact marketing and brands in the years to come. This piece was a contribution to this Deepavali special supplement.)

Two trends that stand out in my mind, having examined over two-and-a-half decades in the Indian consumer market, are the stretching or flattening out of the demand curve, or the emergence of multiple demand peaks during the year, and discount-led buying.

Secular demand

Once, sales of some products in 3-6 weeks of the year could exceed the demand for the rest of the year. However, as the number of higher income consumers has grown since the 1990s, consumers have started buying more round the year. While wardrobes may have been refreshed once a year around a significant festival earlier, now the consumer buys new clothing any time he or she feels the specific need for an upcoming social or professional occasion. Eating out or ordering in has a far greater share of meals than ever before. Gadgets are being launched and lapped up throughout the year. Alongside, expanding retail businesses are creating demand at off-peak times, whether it is by inventing new shopping occasions such as Republic Day and Independence Day sales, or by creating promotions linked to entertainment events such as movie launches.

While demand is being created more “secularly” through the year, over the last few years intensified competition has also led to discounting emerging as a primary competitive strategy. The Indian consumer is understood by marketers to be a “value seeker”, and the lazy ones translate this into a strategy to deliver the “lowest price”. This has been stretched to the extent that, for some brands, merchandise sold under discount one way or the other can account for as much as 70-80 per cent of their annual sales.

Hyper-opportunity

This Diwali has brought the fusion of these two trends. Traditional retailers on one side, venture-steroid funded e-tailers on the other, brands looking at maximising the sales opportunity in an otherwise slow market, and in the centre stands created the new consumer who is driven by hyper-opportunism rather than by need or by festive spirit. A consumer who is learning that there is always a better deal available, whether you need to negotiate or simply wait awhile.

This Diwali, this hyper-opportunistic customer did not just walk into the neighbourhood durables store to haggle and buy the flat-screen TV, but compared costs with the online marketplaces that were splashing zillions worth of advertising everywhere. And then bought the TV from the “lowest bidder”. Or didn’t – and is still waiting for a better offer. The hyper-opportunistic customer was not shy in negotiating discounts with the retailer when buying fashion – so what if the store had “fixed” prices displayed!

This Diwali’s hyper-opportunism may well have scarred the Indian consumer market now for the near future. A discount-driven race to the bottom in which there is no winner, eventually not even the consumer. It is driven only by one factor – who has the most money to sacrifice on discounts. It is destroys choice – true choice – that should be based on product and service attributes that offer a variety of customers an even larger variety of benefits. It remains to be seen whether there will be marketers who can take the less trodden, less opportunistic path. I hope there will be marketers who will dare to look beyond discounts, and help to create a truly vibrant marketplace that is not defined by opportunistic deals alone.

Chargebacks – the Ugly Side of Retailer-Vendor Partnership

Devangshu Dutta

May 21, 2010

A lively discussion / debate took place on Retailwire.com about whether retailers were using chargebacks as justifiable penalties for poor performance by vendors or an unjustified means of generating income for the retailers.

The fact is that fees, discounts and chargebacks are becoming more common, and in private conversations – when no retail customer is within earshot – vendors will verify this. Retailers say that such chargebacks are only compensation for vendors not complying with processes that have been clearly laid down and agreed to, since non-compliance creates extra costs for the retailer, or loses the retailer margin.

But is vendor performance really becoming worse with each passing season? Or is it that difficult trading conditions or insufficient skills are making buyers take this easy road to margin?

It’s an open secret that merchandise quality and delays – the two most common causes for chargebacks – are easily overlooked when the market is hot and the product is in demand.

Chargebacks are a dangerous tool in the hands of a lazy, short-term thinking buyer who is incentivised on gross/realised margins from season to season; to him/her they are a quicker way to get to that bonus check for the season. Pragmatic vendors, for the most part, don’t want to antagonise the buyer because that risks not just business with the current retail customer, but any retailer that the buyer moves to in the future.

It’s ironic that vendors are mainly cited as “partners” when it comes to sharing the retailer’s pain. I don’t recall any retailer calling such vendor-partners up to a stage for distributing checks to share extra margin in particularly profitable years. Comments are welcome from anyone who can remember that happening; we’ll all have something inspiring to quote in industry meets, then. (And I’m really hoping some comments quoting such incidents will appear soon!)

The Retailwire discussion on this topic (with comments justifying both sides) is here – “Clothing Vendors Take a Chargeback Hit” – and the original article in Crain’s New York Business is here – “Retailer fee frenzy hits designers“.

Fashioning Seasons

Tarang Gautam Saxena

May 8, 2009

In a recent workshop on fashion styling, we were discussing how the retail seasons have evolved. In the developed economies, from the traditional two seasons – spring-summer and autumn-winter – the number of seasons grew as fashion brands discovered or invented (take your pick!) sub-seasons to create and satisfy distinct demand in specific time periods. For many companies, the number of “seasons” has grown to 10-12 now including transitions and “promo season” series.

India, you would think, essentially has two seasons, the summer and the festive season. However, in the last decade or so, as exposure to the global culture has increased, other “seasons” such as the “Valentine’s Day” have emerged and proved important for retailers.

In fact, events such as the “Sabse Sasta Din” (“the cheapest day”) on the 26th January (India’s Republic Day) created by Kishore Biyani’s Big Bazaar in 2006 should also qualify as seasons, given the huge sales upsurge during the event. In fact, the impact has been such that many other retailers and brands have also taken this concept rather seriously this year. In fact, after a rather dull consumer response in the festive season in 2008, many of our clients reported rocking sales in the last week of January 2009 on the back of heavy promotional campaigns.

More recently while voter awareness campaigns such as “Pappu can’t vote” have been effective marketing initiatives to get many of us out of our comfort zones and exercise our voting rights, many retailers and brands have also seized this opportunity of citizens’ awakening by offering up to 20% discounts to those who have voted. The economic slowdown is certainly getting people to think differently and more creatively. So, “Jago re” (awaken) brands, retailers and countrymen – go ahead and fashion your own season!

A Discount By Any Other Name

Devangshu Dutta

October 16, 2007

A discount outlet store sells merchandise that is off-season (such as summer merchandise in winter or vice versa) or out-of-fashion (hence possibly two-three seasons old) or comprising of manufacturing over-runs.

However, in India discounts are prolific even in the high street market. In clothing as an example, a large chunk (estimates vary from 40% to 70%) of ready-to-wear stock is sold under discount. Some of it is sold in factory outlets, but a significantly larger proportion is sold throughout the year in regular high street stores under offers that run throughout the year.

There are also discount streets within the city (such as Fashion Street in Mumbai or Sarojini Nagar in Delhi) operating the year round. This reduces the benefit that a discount outlet specifically provides to the consumer.

Second, discount stores typically are based “off-locations” away from regular customer traffic. In markets such as the US and the UK, an “outlet village” may be located 50-100 km from the nearest suburban or urban centre but quite close in terms of drive time. In India currently, due to poor road conditions, the stores have to be in higher cost locations.

Most critically, a sustainable and sizeable discount outlet also needs a base of many brands that have built up high profile and that operate consistent price premium at full-price levels. The brands must have enough scale so a discounting outlet cannot damage its brand image. This enables not just standalone discount outlets, but entire “outlet villages” to be set up. These clusters can generate a much bigger and sustainable customer footfall, much like a shopping mall. That ecosystem of brands has been weak in the past in India but has recently accelerated, and we are likely to see critical mass emerging in future, which may allow the discount business to grow.

In the coming years, expect more action, with clustering of stores and brands, specialist discount malls, and possibly even innovative and India-specific models to come up. How about air-conditioned haats with proprietary bus connectivity to town centres?

Let the good, discounted, times roll.