• Why the rules against heavy discounts will actually help the ecommerce bandwagon

    Indian ecommerce market is now the fastest growing globally and is projected to reach over $100 billion by 2020. Several factors favour continued growth of ecommerce in India, including limited product availability in tier II and III cities and high cost of physical retail space in tier I cities.

    That said, the market faces a major uncertainty today, having grown so far on the back of massive amounts of venture capital, which is now slowly drying up. Ecommerce firms initially justified the aggressive spending as the cost of educating consumers and changing their deep-seated habits. But investors are getting increasingly impatient.

    Flipkart, the industry’s torchbearer, recently saw its valuation drop by nearly 30%, and many smaller firms are struggling to survive. Rather than infusing more funds into these companies and sponsoring massive discounting, investors are asking for a plan that eventually leads to profitability.

    Stop Counting on Discounts That is unfeasible as long as aggressive discounting remains the norm. The question though is which company will reduce discounting and risk a loss of market share in the quest for profitability. As of now, no firm is willing to take the risk despite the pressing need. But they may just be getting help from the most unlikely quarter the government.

    Earlier this week, the government released guidelines on the ecommerce sector, specifically on FDI in online marketplaces in India. Among other things, the new guidelines mandate that marketplaces cannot influence the selling price of goods.

    This is interesting and, if enforced strictly, will have tremendous impact on Indian ecommerce. In the long-term, it will actually help the ecommerce companies.

    It may seem surprising that the loss of price control will help them. But, as of now, they are all locked in a battle for market share and they are all bleeding money because the focus of that battle is so much on discounts. The rule can help put price out of the equation and cause ecommerce firms to focus on other aspects such as service quality and product innovation. That focus may help increase margins, which will be good for these companies and their investors.

    Obviously, another implication is that it will also nullify the price advantage of ecommerce over physical retail. But the period of educating Indian consumers about ecommerce through massive discounts is over. With artificial discounts off the table, it will have to be other factors such as convenience that draw people to buy online.

    Also, ecommerce companies can focus on genuine cost advantages they have (like lower real-estate costs) as opposed to fake price advantages created through investor money. In the short-term, there is no doubt that ecommerce companies will lose some customers to physical retail. But the inability to discount heavily will actually be good for the industry in the long-term.

    It is surprising that it will happen due to a government mandate rather than their own initiative.

    True Marketplaces Another interesting mandate in the recent guidelines is that no single vendor can account for more than 25% of sales on a marketplace. This rule is to help ensure that companies that claim to be marketplaces are true marketplaces.

    The rule helps Snapdeal the most. The company has been set up as a true marketplace from the very beginning. Flipkart and Amazon will both be affected.

    For Flipkart, WS Retail (a former Flipkart subsidiary) accounts for over 25% of its purchases. Flipkart will have to rely less on WS Retail, which should suit its own decision to become more like Alibaba in China (a marketplace) rather than Amazon in the US (inventory-led B2C model).

    For Amazon again, it will have to ensure that Cloudtail, which is partly owned by Amazon, will have to be less than 25% of sales. I suspect the adjustment will be hardest for Amazon. 

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