Feb, 2019     

Impact of changes in Government FDI Regulation on India’s E-tailing Sector


E-com FDI Policy Changes – A squeeze on market leaders and attempt to level playing field for small retailers

Published on: Feb 2019

 

Over the past 5 years, Indian e-tailing market has grown at a 40% CAGR from USD 4BN in 2014 to USD 24bn in 2018. While the rapid growth benefitted the leading e-tailers and more importantly consumers, it came at an expense of affecting traditional retailers whose sales were directly impacted. Even thousands of sellers who came in large numbers to list on marketplaces hoping to ride the e-commerce growth wave were left disappointed as sales were largely driven by mobiles and electronics – the two categories dominated by marketplace linked and preferred sellers.

This resulted in uniting a strong lobby against e-tailers who strongly complained that the marketplaces weren't truly operating as marketplaces and engaged in anti-competitive, predatory pricing practices. As a result, government enacted several policy changes that directly aim to limit marketplace's ability to offer discounts and thus level the playing field for small retailers.

Deep Dive – Policy Changes


The policy changes aim to decrease marketplaces ability to offer discounts and in effect level the playing field for small retailers

The above policy changes as implemented on 1st February 2019, forces foreign funded e-commerce platforms to restructure their operations and supply chains. With the internet retail in India sized at USD 24 BN in CY18, the changes are likely to have far reaching consequences to not just internet retail but also to overall retail, business and consumer sentiment, employment, GDP, and beyond.

The new policy changes have a significant exposure on the overall-entailing GMV – 70% of which is captured by the two market leaders – Flipkart and Amazon. The key products categories that are affected by the changes are – exclusive listings, private labels, and listing by sellers who are linked to marketplaces. RedSeer estimates that the overall GMV threatened is ~USD 15BN, a staggering 45% of the overall expected GMV in 2019.

~40-50% of the e-tailing GMV is exposed to the policy changes

As observed in the two weeks following policy implementation, marketplaces have been quick to circumvent the policy changes and the overall impact is likely to be much smaller than earlier anticipated. RedSeer, through its deep market understanding of the Indian e-commerce is set to unveil a detailed report on the implications of the new e-commerce retail regulation and policy stand.

Redseer 50 page report on the FDI impact covers the above and many other analysis as detailed in the TOC below. For further details, please reachout to us at query@redseer.com


REPORT CONTEXT – POLICY EVOLUTION

Published on: Feb 2019

Policy then

  • Indian law permits
    • 100% foreign ownership of 'single-brand' retailers, e.g. Ikea, but limits foreign ownership to 51% in 'multi-brand' retail
    • 100% foreign ownership of multi-brand wholesalers i.e. selling to businesses, but not to retailers i.e. selling to individuals
  • In 2016, Indian government clarified the rules relating to foreign ownership in e-commerce retail.
    • It allowed foreign-backed companies to operate internet-based marketplaces i.e. connect independent sellers with customers
    • It, however, did not allow these foreign backed companies to keep inventory or sell products directly to consumers
    • Capped total sales originating from a group company or one vendor at 25%
  • Foreign backed internet retailers, most prominently Amazon India (owned by Amazon Inc.) and Flipkart (owned by Walmart Inc.) had already anticipated government action and restructured their operations to thinly comply with broad guidelines:
    • Amazon set up a JV (with 49% ownership) that owns Cloudtail – the largest seller on Amazon India
    • Flipkart set up a wholesale distributor and retailer, WS Retail that pushed sales on marketplace through multiple sellers

Policy now (effective 1st February 2019)

  • The new rules do not allow foreign funded online retailers to
    • source more than 25% of its inventory from a wholesaler linked to the marketplace, or
    • have any of the wholesaler's equity owned by the marketplace
    • restricts marketplace to keep inventory or sell directly to consumers
  • Implementation of sudden changes and rules restricting foreign but not domestic players is likely to have multiple short term and long terms effects on the Indian e-tailing scenario

WHY IS THIS IMPORTANT ?

  • India has ~600 mn internet users, 20% of which are active online shoppers
  • Indian online retail is a $24 BN industry (2018) and is set to cross $100 BN by 2023
  • Recently policy changes effective 1st February saw following market reactions from major e-tailing players:
    • Amazon Inc. lowered its sales guidance for the first quarter due to the new rules, sending its shares down by more than 4% on Friday, 1 Feb.
    • Walmart shares also came under selling pressure on Friday, 1 Feb down 2.1%
  • Other internet industry players are likely to be impacted as well with the policy changes causing them to rethink their supply chain and operational strategies to comply with rules

OBJECTIVE OF THE UPCOMING REDSEER REPORT

  • The above policy changes as implemented on 1st February 2019, forced foreign funded e-commerce platforms to restructure their operations and supply chains. With the internet retail in India sized at USD 24 BN in CY18, the changes are likely to have far reaching consequences to not just internet retail but also to overall retail, business and consumer sentiment, employment, GDP, and beyond.
  • RedSeer, through its deep market understanding of the Indian e-commerce is set to unveil a detailed report on the implications of the new e-commerce retail regulation and policy stand. The key aspects that report will cover are:


Table of Contents[1]

  1. Context Understanding
    1. Background
    2. Origin and Evolution of the Issue
    3. Regulation and Policy Stand
      1. Overall Retail
      2. Internet Retail
      3. Participation by e-tailers.
  2. Policy Impact (as experienced after 1st February 2019)
      1. Trade and financial exposure
        1. Wholesale affiliate sales vs marketplace sales of e-tailers
        2. Cut by platform and category
        3. Mitigation strategies
      2. Sales Impact (estimates for Feb Week 1)
        1. SKUs affected by category and platform
        2. Delta in discounts to customers
        3. Short term impact on online traffic, usage, and orders
        4. Short term impact on GMV, incl by category and platform
        5. Annual impact on the GMV, incl by category and platform
      3. Supply Chain Impact
        1. Impact on sourcing from brands and sellers
        2. Impact on delivery timelines and operations
  3. Sentiment Analysis 
        1. Customer view
          1. Awareness of policy changes
          2. View on discounts and perceived changes in the same
          3. Change in buying sentiment – willingness to buy, buying consideration set, where are shifting to buying instead if not online
          4. Challenges faced amongst platform users/buyers post the new rules (if any)
        2. Seller View
          1. Perceived implications of the new changes
          2. Short term impact seen on business
          3. Sentiment in working with platform- has the midterm outlook improved
          4. Challenges and opportunities in long term\
        3. Industry Practioners view
          1. How are the incumbents managing the policy changes?
          2. How will the industry evolve? – supply chain, market shares, and profitability
          3. How will it impact small retailers? How real is threat faced by incumbents from for big Indian retailers e.g. Reliance?
          4. What are the key challenges and opportunities?

METHODOLOGY

The study has been conducted using RedSeer's trademark integrated research approach, which involves the following:

  1. Consumer surveys: 150+ surveys of regular shoppers on internet marketplaces, both the large horizontals and top 4-5 smaller ones
  2. Seller interviews: 30+ seller interviews to understand their perspective on the policy changes
  3. Industry veterans and experts: 10-20 interviews from industry participants[2] to understand their outlook and approach for navigating the policy changes

RedSeer will synthesise inputs from the above research studies and leverage its deep internet industry understanding, and proprietary knowledge to provide a holistic view on the impact of changes in regulation and policy stand towards internet retail in India.


REPORT AUTHORS

For the detailed report please contact us at query@redseer.com


[1]illustration
[2] Industry participants includes marketplaces, participating brands, sellers, and industry experts from e-tailing and other affected internet verticals e.g. e-grocery, others