First Understanding the Models of E-Commerce – Marketplace Model
E-commerce Company provides an IT platform on a digital or electronic network to act as facilitator between buyers & sellers without warehousing the products.
It aggregates various retailers/brands and provide a sales channel (offers shipment, call centre, delivery and payment services) to them but cannot exercise ownership of the inventory.
It allows for a superior customer service experience, as many smaller brands have greater outreach now, with their fulfillment processes taken care of by online marketplaces. E.g. E-Bay/Shopclues etc
100% FDI is allowed in marketplace model of e-commerce.
Inventory Model
Products are owned by the online shoppingcompany. The whole process end-to-end, starting with product purchase, warehousing and ending with product dispatch, is taken care of by the company.
Allows speedier delivery,betterquality control and improved customer experience and trust. But, it restricts cash flow and is difficult to scale
FDI in multi-brand retail is prohibited, including e-commerce retail (B2C); E.g. Jabong, YepMe etc.
Recently, government introduced changes in e-commerce norms which are said to be clarificatory in nature and are not new restrictions.
Changes introduced by the new rules
From February 1, 2019, e-commerce companies running marketplace platforms:-
Such as Amazon and Flipkart – cannot sell products through companies, and of companies, in which they hold equity stake.
It put a cap of 25% on the inventory that a marketplace entity or its group companies can sell from a particular vendor. Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% its purchases are from the marketplace entity or its group companies.
No seller can be forced to sell its products exclusively on any marketplace platform, and that all vendors on the e-commerce platform should be provided services in a “fair and non-discriminatory manner”.
Services include fulfilment, logistics, warehousing, advertisement, cashbacks, payments, and financing among others.
The marketplaces will not be allowed to offer deep discounts through their in house companies listed as sellers (check price cartelization).
E-commerce marketplace entity will be required to furnish a certificate along with a report of statutory auditor to Reserve Bank of India, confirming compliance of the guidelines, by September 30 every year for the preceding financial year.
E-commerce entities will have to maintain a level playing field and ensure that they do not directly or indirectly influence the sale price of goods and services.
The above mentioned rules explain certain principles laid down in a 2017 circular on the operations of online marketplaces, wherein 100% foreign direct investment through automatic route is allowed. Some other discussion points in the circular were as follows:
Scope of Marketplace Model: E-Marketplace would include warehousing, logistics, order fulfillment, call
centre, payment collection etc.
The move was aimed at bringing new entrants/smaller players in the e-commerce business.
It would also increase the need for office spaces, warehouses & logistics, providing a boost to the real estate business.
It would also check tax evasion through illegal warehousing.
Predatory Pricing
Predatory pricing (dominant player reducing prices to such an extent to edge out other players) is an anti-competition practice under Competition Act 2002. The government would appoint a regulator to check discounts offered by e-commerce players, so that they don’t sell below market prices & compliance with FDI norms.
Impact on E-commerce companies (UPSC IAS)
Most of e-commerce firms source goods from sellers who are related 3rd party entities. E.g. WS Retail contributes to 35-40% of Flipkart’s overall sales. Cloudtail India, the biggest retailer operating on Amazon, has its 49% equity held up by Amazon or its subsidiaries. Amazon also holds up 48% equity in another major retailer, Appario Retail. This will impact backend operations of e-commerce firms, as group entities would now have to be removed from the e-commerce value chain.
Also, players like Amazon and Flipkart, who have their private labels, will not be able to sell them on their platforms if they hold equity in the company manufacturing them.
Currently, most of the e-commerce are burning cash to attract consumer base and hence, are in deep losses. In the long run, this will help large companies build a viable business rather than just depend on discounts.
Retailers
The absence of large retailers will bring relief to small retailers selling on these platforms. Traditional brick-and-mortar stores, who now find it difficult to compete with the large e-commerce retailers with deep pockets, will become more competitive.
Marketplaces are meant for independent sellers, many of whom are MSMEs (Micro, Small & Medium Enterprises). These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce.
But, it may also become difficult for small start-ups to raise funds from big e-retailer companies. Also, mandatory listing of inventory on different platforms may increase sales cost for MSMEs.
Consumers: Consumers may no longer enjoy the deep discounts offered by retailers that have a close association with marketplace entities.
Employment: The threat of job losses in the supply chain network has emerged as a major concern, as the number of e-commerce orders will go down, warehouse expansion plans may take a hit and the utilization of delivery executives will reduce, leading to significant job losses.
Growth of the sector: By 2022, the size of digital economy in India will be approximately $ 1 trillion and by 2030, it could constitute almost 50% of the entire economy. Licensing and price controls may depress a fast growing sector
International Trade Outlook: As 71 members led by countries like China, Japan and the US began exploring possible WTO framework on free cross-border e-commerce at Buenos Aires ministerial (2017), the new guidelines preempt any possible obligations on e-commerce imposed by WTO. It would enable Govt. to take a stand in international trade negotiations and discussions, which is fully cognizant of the need to preserve flexibility and create a level-playing field for domestic players.
A Way Forward (UPSC IAS)
E-Marketplaces should change their business model and begin to look at franchise channels, rather than equity investments channels, to do business in India.
The Government should come out with an E-Commerce policy which establishes a commonly accepted definition of e-commerce, provides a level playing field for domestic & foreign businesses. Draft E-Commerce Policy has already been submitted by the commerce ministry.
A single legislation should be enacted to address all aspects of e-commerce so that the legal fragmentation seen across the various laws is reduced, viz. the Information Technology Act, 2000, Consumer Protection Act 1986 etc.
Setting up an accreditation system for vetting e-commerce platforms which adhere to good business practices is the need of the hour.
