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Analysis of new FDI Norms: Amazon & Flipkart now can’t sell their own Brand’s products on their platform

We are living in an age where E-commerce is at its boom, with increased internet penetration and ease of shopping now you can buy almost, everything on e-commerce retail platform likewise daily grocery items to luxury Items, that best suits your living standards. Everything is now available on the -commerce portal that too at very competitive prices & with big discounts.

Now day’s people can be seen outside the physical stores & shopping malls, but they generally not purchase merchandise from there, they prefer to purchase items electronically, due to the big discount offered by the E-commerce retailers.

In the field of online shopping, There is two big market player in India, Amazon &  Flipkart, they provide good deep discounts on their own developed brands, which increase the attractiveness of their products & resultant the product of other small traders listed on their portal gets ignored automatically.

In response to these deep discounts that are offered by the Amazon & Flipkart on their products, small traders file a plea to CCI, they contend that big discounts offered by the likes of Amazon and Flipkart are driving them out of business.

Finally, government has taken a move to tighten the FDI norms on the basis of several complaints made by the seller listed on these e-commerce portal to the CCI (Competition Commission of India) that these market players like Amazon & Flipkart are involved in predatory pricing & Deep discounts, which destroying the business of small traders.

On Dec’26 of 2018, the commerce and industry ministry’s decision to introduce the new FDI norms for e-commerce marketplace follows complaints by small traders. According to the New FDI norms, the government restricts the e-commerce retailers from influencing the sale prices, directly or indirectly.

In line with this changed norms, its prohibits e-commerce entities providing marketplace (Like Amazon & Flipkart etc.) to influence the sale price of the product, directly or indirectly. It allows only the sellers to determine the discount. The circular issued extends its scope by saying marketplaces cannot sell the inventory it has a stake in, directly or indirectly, through any of its group companies on its own platform.

These new FDI norms were introduced to provide a safeguard to the offline retailers or small retailers who can’t afford such big discounts. It brought the Following changes:

1. It prohibits the E-commerce retailers to sell the products of companies in which directly & indirectly stake held by e-commerce operator.

2. Its restricts exclusive launching of product on their websites & Apps.

3. New norms also put a bar on procuring inventory from the single seller, the maximum cap is 25% of total inventory can be procured only from a single seller.

These changes will be effective from February 1, 2019

As per Mr. Vivek Chand Burman, "The underlying theme of the draft is limiting marketplace entities with foreign investments or who want to receive FDI to offer only services such as technology, logistics, warehousing and refraining them from entering into core retail, that is, buying and selling of goods.

Which means the Indian retail chains companies like Reliance retails, Chroma & Tata CliQ etc. are the outside the scope of these changes.

Impacts on E-commerce retailers like Amazon & Flipkart

The impact of these changes will have a significant impact on multi-brand, multi-product retailers like Flipkart and Amazon as they are accounting almost 70 percent of online retail stores industry revenue & more than 50 percent of them are through the products of their group companies.

As per CRISIL* reports, Due to such changed norms, the e-commerce market players like Amazon & Flipkart may lose around 40 percent of their revenue, in an amount it is about Rs. 35,000 Crore to Rs. 40,000 Crore by the Year 2020.

“The impact on e-retailers would be largely in the electronics and apparel segments, which account for a bulk of their revenues,” said Anuj Sethi, senior director at CRISIL

Why new rules Impacts this much:

1. Over the year to make faster delivery & better inventory management, these platforms have invested in their joint ventures, subsidiary & associates. Which enables them to have a huge buying capacity & they are enabled to offer big discounts on their Products.
 For Example- Amazon Cloudtails

2. Furthermore, some market player has started investing in their own brands like Amazon Kindle, amazon basics, likewise Myntra’s Roadster, HRx etc.

3. These private labels provide them better control over supply chain & same time it provides greater margin to sales in comparison to a sale of third-party vendor product.

Due to changes in norms the e-commerce market place can’t having equity participation or any kind of ownership/control over the seller whether directly or indirectly. Which means now the Amazon will not be able to sell their Amazon basic’s products on their platform.

This all will result in major revenue cut to theme & Impact this much to the marketplaces like Amazon, Flipkart, Myntra etc

Tighten FDI policy going to be boon for Brick & Mortar Stores

Nowadays Customers prefer to scroll on their laptop or mobile screen rather than stepping out of their home and same time are also enjoying the big discounts as well, this hampered the brick and mortar (Physical shopkeeper's business) a lot.
But with the tighten FDI Norms, e-commerce operator will not be able to give such deep discount to the customers, that will turn the customer towards bricks & mortar stores.

According to CRISIL, They estimate that Brick & mortar retailers will wrap up at least one-fourth of business lost by E-retailers increasing their revenues by up to Rs12,000 crore, implying a higher growth of 19%, compared with CRISIL’s earlier expectation of 17% by 2020.

Earlier the growth rate of Brick & mortar retail stores was only 13% for the fiscal year 2014 to 2018 in comparisons of 40 percent growth rate of e-retail stores.

However the e-commerce industry can’t suffer a lot due to this, as remaining lost business of e-retailers will be grabbed by Indian E-retail companies, as resultant their long term growth potential will increase with the increasing internet penetration & convenience of online shopping

The move to tighten the FDI norms for e-retailers can be seen as a strategic decision from the government to promote business and create livelihoods by keeping competition alive and protecting small retailers.

*CRISIL (formerly Credit Rating Information Services of India Limited) is a global analytical company providing ratings, research, and risk and policy advisory services

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