The e-retail business in India

The e-retail business in India

Online retail store Flipkart's Big billion day sale on October 6, in which the e-retailer claimed to have sold products over Rs 600 crore drew brickbats from thousands of customers.

A mega flash sale, where the company offered as much as 90% discount ran into several technological problems because of the unprecedented response it received, leading to an outcry on social media. The co-founders of the company SachinBansal and Binny Bansal apologised because of their failure to anticipate the glitches when the sales commenced which left thousands of customers frustrated and furious.

While the founders of Flipkart had tendered an apology to all its customers, various bodies have demanded regulation of e-commerce, which is just beginning to gain some toe-hold in the Indian retail space. The Minister for Commerce and Industry, Nirmala Sitaraman, has said that the government will look into the whole fiasco and regulated the e-commerce industry.

The flash sale fiasco has raised several issues, which will have far-reaching social implications. Big white goods makers like LG and Samsung have reportedly raised the issue of distorting act of offering predatory pricing. Some of them have even threatened to take legal route to stop online retailers from offering such deep discounts. Predatory pricing is when a retailer sells below the cost of production of the product to gain a large market share and eliminate competition.

Size and spread of e-retail

The e-commerce industry is pegged at around R 18,000 crore at present and is expected to touch Rs 50,000 crore by 2016. Online retail accounts for about 10% of the total organised retail sales volume in the country. The debate on online and brick-and-mortar retail has gained currency because of high levels of discounting by some of the online retail players. Any business selling at below cost is unsustainable and the predatory pricing must be stopped.

While the fiasco with Flipkart can be seen as an one off incident, the retail business is changing across the world as it was first large-format stores and malls and now it is digital platforms which brings in more efficiency at a lesser cost. Online markets have enabled small sellers, retailers, artisans and weavers to directly market their goods and services to customers at their doorstep. People sitting in smaller towns can get products which were till sometimes before only available in metros. The major strength of online retail is to provide variety and convenience to customers. Most products sold online are cheap than in physical stores as online retailers definitely enjoy a cost advantage over their offline peers because of lower overheads like lesser number of staff, lower real estate costs and no frontend store. 

Government action to curb malpractices

For the government, the Flipkart aftermath should trigger a long-overdue discussion on the policy stance on e-commerce and organised retail. While e-commerce may sell products at a much lower price than a front end store, it is equally alarming that the portals are not following the e-commerce laws of the country.

In fact, e-commerce frauds in India have significantly increased and there is an urgent need to regulate and punish such e-commerce offences and crimes. Sites like Myntra, Flipkart and many more e-commerce websites are under regulatory scanner of Enforcement Directorate (ED) of India for violating Indian laws and policies. E-commerce websites and technology companies are also under the scanner of income tax department in the country.

A case over anti-competitive practices, companies not honouring warranties of products sold online and regulatory troubles mean India's fast-growing online retailers have a problem. But various reports suggest that e-retailers often pay for most of the discounts they offer out of their own pockets and a case of predatory pricing arises from this fact. The money is funded by various private equity companies. As a result many white goods makers have stopped selling directly their products from this platform. For instance, Samsung and LG have stopped selling directly on Flipkart, because of the pricing issue, and are considering whether they should offer warranties on whatever stock is sold on such websites.

E-commerce companies are flush with funds as the fast volume growth has led foreign investors to pour in billions of dollars in these companies.

At present, foreign direct investment is allowed only in e-commerce companies that follow the marketplace model where they connect buyers and sellers and not in case where the companies stock their own inventory. While this has forced companies to adopt marketplace model, there have been many instances where the fine line has been crossed and tax and investment authorities have raised objection. For instance, Flipkart was recently judged to have violated foreign exchange regulations when the Enforcement Directorate found its earlier inventory-led model was in violation of the laws and the company may be fined Rs 1,000 crore. Similarly, Amazon India too is facing trouble with tax authorities in Karnataka as it is being alleged that the company switched from marketplace model to inventory-led model. The government will have to quickly put in place adequate rules and regulations for online retail so that customers are not fooled. In fact, e-retail has lot of potential because of young demography and that must be encouraged with proper regulations and customer protection. 

Indian online retail visitors 

Website Minutes per visitor

Myntra.com       6

Flipkart.com     16.2

Jabong.com       6.3

Amazon.com     7.6

Snapdeal.com   7.8

(Data as on August 2014) Source: Morgan Stanley

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