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E-COMMERCE: BAIT AND SWITCH

E-COMMERCE: BAIT AND SWITCH

Jul 06, 2021

The pandemic has provided a lot of tailwinds to e-commerce business but at the expense of the traditional business. In management parlance, Blue Ocean is a strategy that refers to a market for anything without any perceptible competition. Under it an uncontested market share is created and captured, making the competition irrelevant eventually. Big tech e-commerce companies have been investing, exploring, and fishing in the Blue Ocean with a view to becoming such monoliths. Though still away from being ripe for the picking, these deep pocket behemoths have time and resources on their side to pick the ripening fruit. The market is too tempting. According to one estimate, the market is predicted to reach $200 billion by 2027, from $64 billion in 2020. There are close to 286 million households in India. Out of those around 65%- nearly 186 million- have an average annual gross household income between Rs. 1,50,000 to Rs. 10,00,000. This large chunk of the market pie is a promising bait for value e-commerce. Thanks to Reliance, data has become highly affordable for most Indians, thereby pulling the aspiring consumers into exploring e-commerce portals. 

According to our estimate, India’s digital economy will be worth $800 billion by 2030. In the same year sales by kiranas will touch nearly $1.5 trillion. And the GMV (gross merchandise value) of the online retail market will hit a figure of $350 billion.  By 2030 India will be the third-largest online retail market, after the US and China. In 2020 twenty million new shoppers were added to the e-commerce platform, while this year this figure maybe 40 million. The user base is likely to be 190 million by 2021 end. The sales for 2020 are $38 billion and may touch $55 billion by 2021 end, with a phenomenal growth of 45%. Interestingly and understandably this growth will be catalyzed by 88% of new online shoppers coming from tier 2, 3 & 4 cities. New e-commerce models are emerging and fuelling this growth such as social, video, and influencer-led. Most importantly while earlier 70% of online shoppers used to be driven by predatory pricing (aka heavy discounting) followed by these portals, presently more than 50% of these shoppers are motivated by convenience factor. The average time of delivery has been cut by two-thirds. Hyperlocal and express deliveries are being offered now.

Online Retail Juggernaut
YearGMV ($bn)
202038
202155
2025140
2030350

Online retailing itself is expected to generate around 1.48 million employment opportunities by 2021. And for each of these jobs, downstream industries provide 3-4 additional jobs. The sector indeed offers a lot of promise. But the big question is: Will the segment be eventually dominated by big bulls who – if not prudently regulated – will perform in an oligopolistic market? What will happen to our Kirana business? And will the predatory prices- aimed at eliminating competition – eventually be replaced by prices containing elements of supernormal profits? We have already seen that Amazon and Flipkart (read Walmart) were charged with favoring specific vendors on their platforms, in violation of fair play. In a digital economy comprising of Artificial Intelligence, Machine Learning, and other technologies algorithms to eliminate competition can be easily developed. They were also making exclusive deals for merchandise and/or were selling certain products/models exclusively on their platforms. Remember players with foreign equity have been permitted to operate on the ‘marketplace’ model, whereby they cannot have ‘preferred’ vendors, certainly not those in which they may have equity stakes too. They are not allowed to practice inventory-based models. But they have been doing all this, and more. Thus there is definitely a need to rein them in bypassing and implementing laws and regulations which will protect the interests of Indian vendors and Indian consumers. Also, the same goal can be achieved by creating competition by facilitating the entry of other players. Otherwise, market concentration will lead to centralization and cartelization of supplies, harming both the smaller players and unprotected customers. Moreover, what merits attention is the fact that no seller can offer a price below cost in long run; deep discounts can continue only if vendors are squeezed. If caution is not exercised, the time may not be far when the consumers face limited choices at ‘market’ prices (set by the monopoly players) while vendors too face monopsonistic buyers.

Nobody in his senses should oppose e-commerce since they bring in multiple benefits. In 2021 half a million gig workers are expected to be employed in online retail. Logistics firms in India clocked over 3 billion shipments in 2020, of which nearly 800 were driven by third-party logistics firms. Online retailing has made products accessible to even small towns. India can use these platforms to compete globally. Many MSMEs have been able to access the pan-India and global markets, thanks to these marketplaces. In short, the evolving e-commerce ecosystem has contributed significantly to the economy of India, including consumers and producers. Yet, they cannot be allowed to adopt predatory practices. Surely, the new proposed e-commerce rules must strike a prudent balance. The two players, Amazon and Flipkart have alleged that, if converted into law, these rules will increase compliance requirements of e-commerce companies in addition to curtailing the scope for business growth since broad discounts would be if allowed, may possibly restrict the growth of private labels, and will probably not enjoy the ‘intermediary’ status since they will be subject to fall-back liability mechanism if consumers incur losses due to action of the seller.

Yet who can deny the fact that e-commerce behemoths have enjoyed instant exponential growth since their arrival? But this expansion used the crutches like predatory pricing, nongenuine product reviews, cooked up algorithms influencing consumer's purchases, promoting favored vendors. Maybe to this, we will have to add in the medium term the unethical practices like labor exploitation, dominating other sectors like BFSI (a fear recently expressed by RBI), and many more. Do you know that Jeff Bezos earns Rs 1.10 crore each minute of the day and has an accumulated wealth of nearly $180 billion? India’s traditional retail sector provides the second largest jobs after agriculture. Is the Govt. too late perhaps? It may be noted that most of the proposed amendments are already in place in one form or the other. What is needed is to finetune an e-commerce policy that becomes a cornerstone for online business. But the govt. should draw a fine balance by making it non-preferential and above board. While this regulation should not be diluted under pressure, at the same time if they need plenty of rewriting to meet the objectivity benchmark so be it. 

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