Insights into Editorial: FDI in e-commerce: Who are we protecting?

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Insights into Editorial: FDI in e-commerce: Who are we protecting?

22 April 2016

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Every time there is talk of fully opening up the retail sector in India to foreign companies, concerns are raised about how this will hurt the family-owned, mom-and-pop stores and the brick-and-mortar retailers. The argument most often heard is that they will be unable to compete against the investments of the big foreign companies.

  • These concerns have once again come to the fore by government’s latest move to allow 100% FDI in marketplace e-commerce companies.

How the latest move protects offline retailers?

To protect the offline retailers, in its latest policy the government has barred marketplaces from offering discounts on their own. These can only be offered by the vendors selling on the platforms. This is also aimed at ending “predatory pricing” by online companies, and provide a level playing field.

Why offline retailers wanted such measures?

The competition between online and offline retailers has intensified over the past couple of years. New online entrants have tried to make a mark and capture a large market share in a relatively short time span, by offering discounts—sometimes really huge ones—especially during the festival periods. Hence, offline retailers have been crying foul.

Issues associated with this decision:

  1. Consumers:

The biggest winners of the discount-driven business model adopted by online marketplaces over the past couple of years have been Indian consumers. The latest move would have a direct impact on the end consumer. Also, in a free and open market, policymakers should not be telling businesses what they can, or cannot, charge for a product—especially if it is not an essential lifesaving commodity.

  1. Businesses:

Offering discounts is a business decision and these decisions are not usually taken under any force. Often, there is a strategic rationale behind such offers and there is no reason to assume that it will go on forever. In fact, we have already been seeing the emergence of a level-playing field based on self-assessments of the e-commerce industry on the feasibility of such discounting.

  1. Measurability:

Also, it is not clear how online sellers are influencing prices. Besides, if one way is closed, online marketplaces and suppliers will find an alternative way to be able to offer sweet deals to consumers. Hence, it is highly unlikely that barring them from offering discounts will help solve the issue.

Why, at present, online sales would have little impact on offline retailers?

At present, only 34% of the Indian population has access to Internet. Among these, only about 39 million people make online purchases. That is a very small number.

How would the government’s move change the market dynamics?

  • According to A.T. Kearney’s research, two-thirds of e-commerce buyers in India are bargain hunters. And now with no discounts offered these buyers go away as well. The market dynamics will change drastically. The latest move may, unintentionally, end up raising the barriers to entry of capital into the sector.
  • Also, a large part of the capital that has flowed into the online marketplace sector has come from outside India. Venture capitalists and private equity firms have been pumping money into India despite the sector facing many hurdles and not making any money, at least not yet. The hope is that the market will bloom in the coming years, and the companies will eventually see a healthy return on their investments. The recent move, however, has affected their hopes.

What’s the way ahead?

The stage is set for offline retailers to adopt technology-enabled retailing methods. It is because the advent of technology is changing the way consumers shop. If these stores do not adapt quickly, they will be left behind. While a majority of them are willing to use technology, many of them are unable to do so due to a variety of reasons—high initial capital cost, lack of technical know-how, unorganized warehousing and inventory management, lack of manpower, etc.  

For such entities online marketplaces provide the best opportunity to jump on to the technology bandwagon and profit from it. It is because of the following reasons:

  • Firstly, the entry barriers—capital and human resources—are lower than they would be if these businesses were to set up an online presence individually.
  • Secondly, they will be able to extend their reach and customer base.
  • Thirdly, they will become more competitive both from a products and price perspective.
  • Finally, it will help improve their inventory management—slowly, but surely.

Conclusion:

The government should make sure that policies governing the retail sector are designed to facilitate the future and not regulate the past. Therefore, the time is also ripe for the government to develop a policy with a road map for the future rather than regularizing the past.