Amazon Scouting For An Off-Line Partner In India

While fears of a retail invasion by the two

giants, Walmart and Amazon, continue to haunt

domestic retailers in India, the probable merger

of Japan's SoftBank and China's Alibaba, giving

rise to a third player, has given a ray of hope to

small retailers in the online space at least...

It is undisputed that India is a growing consumer

economy. To quote statistics, the organized retail

penetration is still at a nascent stage at 7–8%, but it

is growing at a frenetic pace of 20–25% annual CAGR

(compounded annual growth rate) as per the reports

of Indian Brand and Equity Foundation. The Indian retail

market continues to attract foreign direct investment (FDI)

at an annual growth rate of 35%.

The growth of modern trade retail stores in India has seen an

uptick in the last 15 years. Simultaneously, mushrooming

retailers in the e-commerce space have taken consumerism

to the nook and corner of India.

Increased affordability of smartphones, change in working

habits owing to a demographic transition, and faster

and cheaper mobile data have resulted in deeper Internet

penetration in rural, urban, as well as adjoining areas

within a radius of 300 kilometers of each Tier-I, Tier-II, and

Tier-III cities (rurban) of India. Internet access propelled an

exponential growth in multi-brand e-commerce, making it

more accessible and inclusive. In addition, the Government

of India's initiatives such as Digital India, Make in India,

Start-up India, and Innovation Fund are all acting as

catalysts for the growth of e-commerce in India.

In the present Union Budget, USD 1.24 billion has been

allocated to the BharatNet project, which promises to take

broadband services to 150,000 gram panchayats. The

increased digital inclusion of rural India will certainly

trigger a progressive expansion of e-tailing in India.

Unprecedented investments and lateral acquisitions have

introduced stiff competition in the e-commerce space,

particularly in marketplace models.

The genesis for the rapid growth of marketplace e-commerce

models is a Policy Amendment 2017 by the Government

of India & the Reserve Bank of India. The FDI regulatory

position for the e-commerce trading sector with a view to

bring online and offline businesses to enjoy a level-playing

field made 100% FDI through an automatic route possible.

The model is based on the fact that in trading as a business

activity without ownership in the goods to be provided,

the e-commerce operator is only offering a marketplace or

a platform for multiple sellers to list their goods and sell

directly to end consumers. In other words, e-commerce

entities can only become eligible for FDI if they transact

exclusively with sellers registered on their portal and cannot

permit more than 25% sales from a single vendor on their

portal. Even today, the Indian Government Policy, however,

does not allow FDI in inventory-based e-commerce entities

which are selling their own goods through their portals and

are in control of the entire end-to-end process of trade.

In the backdrop of this cyber revolution, Indian retail has

been stirred by Walmart of US contracting to buy 77% equity

stake in e-commerce giant Flipkart, which was started

almost a decade ago by two Indian IIT graduates Sachin

Bansal & Binny Bansal.

Walmart already has a stronghold on wholesale trade in

India through its cash-and-carry stores, and now, Walmart

has made investments in Singapore to own a majority in

Flipkart's holding company in Singapore, thus converting

Flipkart India into another subsidiary. While consumers

and shareholders rejoice in this deal, it has rattled the

nerves of the other channels of trade. Trade association

bodies have complained that the efficacy of the existing

regulatory regime of Indian trade and commerce in India

has been compromised by this deal.

In India, Flipkart's e-commerce trading activity today

as a 'marketplace model' boasts of 100 million users

and 100,000 sellers. This deal, therefore, gives Walmart

immediate online access to the Indian retail market

hitherto foreclosed by the FDI Regulations. This enables

Walmart to not only set up an integrated retail chain

capturing the larger proportion of offline wholesale/cashand-

carry trade sales through its brick and mortar stores

but also augment further sales revenues from online

consumers.

The Flipkart acquisition development is being closely

watched by its biggest competitor Amazon Seller Services,

which is another e-commerce marketplace model company

with large operations in India. Amazon recently entered

the grocery retail business and received statutory approvals

for $500 million FDI in the food sector through Amazon

Pantry and Amazon Now stores. There is a buzz that

Flipkart's pole position is likely to spearhead a strategic

alliance between Amazon and Kishore Biyani's Future

Group, commencing with fashion brands and then spilling

over to other categories. Amazon, if market rumors turn

true, would find such a partnership beneficial in creating

an omni-channel presence in India. Future Group too is

likely to vouch for such an alliance as a weapon to counter

its immediate competitor Reliance in offline modern trade,

as Reliance has already entered the online marketplace

bandwagon.

The Indian online retail market contributes to only 1.5% of

the total retail industry. However, the imminent competitive

scenario of consolidation between the two e-commerce

marketplace-dominant players has already spread threat

perceptions of an impending existential crisis amongst

domestic retailers and traders albeit the fact that small

suppliers and home-based or small-scale entrepreneurs may

still benefit out of the e-commerce players' consolidation

efforts in Indian markets. Though the FDI Policy Amendment

has in-built mechanisms to insulate a market against

unfair competitive tendencies of dominant players, it is yet

to be seen how things will shape up for the domestic trade

fraternity in the long run. Given such a fear-laden climate

in domestic retail in India, the Confederation of All India

Traders (CAIT) approached the Competition Commission

of India (CCI) expressing their apprehensions about the

Walmart–Flipkart deal.

Increased competitive rivalry and a liberalized business

environment fostering innovative ideas and greater retail

integration empower e-commerce marketplace platforms

to challenge the classic retail on multiple parameters.

First, they can capture the affluent consumer base in

Tier II and Tier III cities who so far had limited access to

the aspirational brands through classic retail. Second,

marketplace e-commerce models need not be bothered by

sectoral boundaries and can expand their range of products and services in the same customer base. For instance, taxi

app Uber has launched an on-demand food delivery app

service, Uber Eats, for its customers. Similarly, Amazon

not only has expanded to the grocery segment but also

now provides the facility of video streaming against a

subscription fee through Amazon Prime. To make purchases

more convenient, e-commerce portals are also introducing

e-wallet services like Amazon's Pay Balance.

CAIT fears the denial of fair market access to small retailers

and traders in the offline platform through unfair means

of competition such as predatory pricing and abuse of

dominant position. Even online sellers apprehend

discrimination as they fear that only Walmart's products

including imported goods may be promoted on Flipkart as

offerings to Indian consumers. It is still a fresh memory for

many followers of the retail trade story in online markets

about a regulatory challenge that had earlier compelled

Flipkart to sell off its stakes in WS Retail (Singapore-based

retail wing of Flipkart contributing to 75% of stocks listed

on Flipkart) in 2012.

While fears of a retail invasion by the two giants, Walmart

and Amazon, continue to haunt domestic retailers in

India, the probable merger of Japan's SoftBank and China's

Alibaba has given a ray of hope to small retailers in the

online space at least. SoftBank after its delineation from

Flipkart has more capital to invest and may route more

funds into Paytm merchant services or Big Basket or

Grofers. SoftBank's investment in Grofers and Alibaba's

investment in Big Basket have given both an entry into

the online grocery market. It is speculated that this merger

might provide some competitive insulation to small players

by challenging the dominance of Walmart and Amazon.

However, it could just as well result in the rise of a third

dominant player, thereby completely foreclosing the entry

of any new player and compelling the exit/death of existing

smaller players.

The war between the two key players does become a

force to reckon with and e-tail grows progressively, even

encroaching into offline modern trade. However, despite

these speculations and apprehensions, there is still road to

cover before the e-commerce marketplace model, and the

market dominance capture war between Walmart's Flipkart

and Amazon can actually engulf the dominant traditional

general trade of kirana (mom & pop stores) completely.

There are already synergies of such kirana stores being

referred to as 'proximal delivery centers' of regular grocery

through traditional stores being digitally integrated with

various e-payment models.

In this age of transformation of Indian retail trade channels

and the interplay between digi-age marketplaces and

traditional stores, there will be lots of lessons to learn for

retail markets and trade channels to evolve.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.