Who is afraid of Flipkart?

Photo: AFP
Photo: AFP

With online retail, shopping has become more convenient and less time-consuming. With a few mouse clicks, the desired products reach home. Just pay up and your Diwali shopping is done. What’s more? The discounts are a million times better than what the corner shop, the colony market or the city malls have to offer. In this cut-throat world, brick-and-mortar stores are struggling to retain their customer base because of the growing popularity of online shopping.

Despite glitches, the craze for Flipkart’s Big Billion Day Sale underscored the fact that the urban middle-class consumer is slowly but surely warming up to online shopping.

The days following Flipkart’s sale saw agitated traders, representing the Confederation of All India Traders (CAIT), protesting against “unrealistic” prices, “unfair” competition and “unhealthy” business practices of the online markets.

The CAIT, which supported the BJP during the Lok Sabha election campaign, slammed Flipkart and convinced Minister of Industry and Commerce Nirmala Sitharaman to “look into the matter”.

The sale of products worth more than Rs 600 crore within 10 hours at Flipkart might have unsettled traders who deal with electronics or cell phones, but in reality, the magnitude of online trading remains minute in India.

This year, consulting and tax services firm PricewaterhouseCoopers and trade association body ASSOCHAM prepared a white paper titled ‘Evolution of e-commerce in India: Creating the bricks behind the clicks’. It found that, compared to China, where e-commerce sales top $150 billion, the industry in India was estimated at $12.6 billion in 2013. Further, the white paper noted that the number of parcel checkouts in e-commerce portals exceeded 100 million in 2013, less than 1 percent of the country’s total retail market.

Nevertheless, the protest by conventional traders has raised two questions: How come online retailers such as Flipkart, Snapdeal and Amazon are offering ridiculously low prices? Are they quietly opening the door to Foreign Direct Investment (FDI) in retail?

According to Biswanath Patel, the cofounder of New Delhi-based online shopping search engine Buyt.in, the scale at which online marketplaces such as Flipkart operate is huge. Since the volumes, especially in electronics, are so high, they can negotiate with sellers to reduce costs with razor-thin or zero profits for themselves.

“The Big Billion Sale was not extraordinary, it was just different from other online marketplaces in a few ways,” he says. “Flipkart was the first one to do it and they offered much bigger discounts, which other merchants were later unwilling or unable to offer, and the window of sales was limited to just one day.”

The mechanics for online markets are simple. Since the volumes are huge, the margins are low. To a small trader, that is definitely unrealistic, but is it unfair or illegal? The Department of Industrial Policy & Promotion (DIPP) has sought the views of the Competition Commission of India (CCI), which is conducting a preliminary inquiry into the allegations of predatory pricing or setting up prices so low that they eliminate competing sellers.

It should be noted that in a similar case against Snapdeal, the CCI could not proceed further as Snapdeal was not a seller. The same is the case with Flipkart and a majority of e-commerce companies.

Flipkart is an online marketplace, not the seller. In other words, Flipkart is just a platform for sellers and buyers to strike a deal, thereby shielding the online retailer from laws on FDI and pricing.

clickbaitIn an email response, a Flipkart spokesperson noted that online marketplaces provided a platform for any brand or seller to connect with millions of customers directly inside their houses.

“Sellers are the ones who decide on the pricing of their products — and only they can change these prices,” he said. “Discounts during sales are not a new phenomenon and they help sellers attract a larger customer base from time to time and grow their business.”

Similarly, CAIT also demanded the Ministry of Commerce and Industry to probe into the business model of e-commerce companies, in the context of illegality of FDI in retail. To which Sitharaman has assured the traders that the ministry will study the matter. The government will only then be able to ascertain “whether there is a need for a separate policy or some kind of clarification”.

However, Milan Sheth, partner (advisory services) for professional services company Ernst and Young India, also draws attention to the distinction between seller and platform to note that Flipkart’s business strategy is to acquire customers by converting offline customers into online ones.

In response to the question whether Flipkart’s strategy was outside the law, he responded that Diwali sales are a ploy to lure customers. “There is nothing sinister about it, it is what a local shop or a mall would do,” he says.

Online retail giant Amazon has been asking the Indian government to allow FDI in e-commerce for the benefit of consumers, which will accelerate the sector’s growth.

Until now, all e-commerce companies have claimed to follow the online marketplace model in India, which distinguishes them from sellers and keeps them under the ambit of law.

The Enforcement Directorate is already investigating if this distinction is as crystal clear as the e-commerce companies have asserted and whether they come within the ambit of FDI rules.



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