Expected to reach $200 billion by 2026, Indian e-commerce market is likely to have a total user base of 829 million by 2021. This growth will be primarily driven by the sales of electronics which is projected to reach over $71 billion by 2022.
The e-commerce market currently has only two big players: Flipkart and Amazon. Even though Paytm has entered this space with its Paytm Mall, it has not yet reached the level of adoption of Flipkart or Amazon mainly due to the limitations imposed on it by the Draft National e-Commerce Policy: The policy states that the current ‘marketplaces’ in India are not technically marketplaces.
To be a marketplace, an e-commerce platform has to provide a technological platform for the buying and selling of goods and can act as a “facilitator” between a vendor and consumer. According to the policy, an e-commerce platform that operates on a marketplace model needs to have an IT infrastructure, such as computers and internet besides providing logistic support, such as warehousing and payment collection, to the vendors it hosts. There are other limitations that the policy poses for the marketplaces.
Restriction on purchase of goods from a single vendor
The policy states that no marketplace can buy over of its goods from a single vendor. The policy went live on February 1, 2019. At that Cloudtail and Appario sold over 300,000 products, ranging from sunglasses to home cleaning products from Amazon India. These had to be removed after the formulation of the policy. Even though most of these products were finally restocked, they are now sold by other vendors.
No permission for partners to sell their products
The policy also states that an entity that has a major equity partnership with a particular marketplace cannot sell its products on the platform run by that marketplace. To mitigate this issue, Amazon had to reduce its stakein both Cloudtail and Appario from 49 per cent to 24 per cent, while suspending its Amazon Pantry service.
Freedom to sellers
The policy also prevents a marketplace from restricting any seller to sell any product exclusively on its platform only. Despite electronics dominating the sales in e-commerce retail, it is sale of smartphones which generates the most revenue in this segment. For instance, Flipkart had forged an exclusive partnership with Xiaomi according to which most of Xiaomi’s new models for India were only sold via Flipkart. These exclusive partnerships allowed e-commerce players to offer deep discounts for smartphones, thus driving adoption but cutting into their margins.
Adopting a no-discounts policy
A marketplace cannot directly or indirectly give discounts on products. The policy prevents a marketplace from granting direct and indirect discounts. E-commerce firms’ margins in the smartphone and electronics categories have been in the low single-digits, whereas other categories such as fashion, FMCG and home furnishing products attract margins of 25-35 per cent on an average. In 2018, the cash burn on smartphones hung at 15% for these players; however, it was expected to dropto 12 per cent by March 2019 mainly due to this policy. By 2023, it is expected to come down to 5 per cent. The limits on discounting will also facilitate a change in focus of the type of products sold, making the revenue share of other segments rise significantly.