Online retail is among the few industries that have done well even during the Covid-19 pandemic. Consumers’ love for convenience and value-for-money deals explain the industry’s double-digit growth. It is adding thousands of jobs directly and indirectly in logistics and manufacturing, in an otherwise sluggish job market. The online retail industry also helps thousands of small sellers overcome the limitation of small-sized local markets by turning them into pan-India and/or global sellers. That adds to India’s exports.
Yet, not everyone is happy, especially the offline retailers.
There are five major criticisms of the online retail platforms. One, the massive discounts they offer is killing offline retail, including neighbourhood grocery stores. Two, they give preferential treatment to large sellers. Three, they indulge in cross-selling, and are aggressively pushing private labels. Four, they exploit small sellers by charging high fees and yet expect them to give hefty discounts to customers. And five, they often find a way around (e-commerce) regulations to continue engaging in all the four practices.
It’s a cost-conscious market economy
Online sellers rely on discounting and price-cutting, which hurts the offline stores retailing in apparels, grocery or mobile phones. But so do the offline retailers. In a cost-conscious market economy like ours wherein customers want more for less, discounting, price-cutting or cashback will be used to drive sales, be it retail, telecom services or digital wallets. Most online buyers love discounts — the bigger the better. That’s why online marketplaces such as Amazon and Flipkart or offline retailers such as Big Bazaar, DMart or Reliance Retail organise big day sales or flash sales. Those who shop at DMart stores (offline or online) know that no other seller including Amazon, Bigbasket, Flipkart or JioMart can match them on grocery prices.
Thus, it’s difficult to understand why India’s e-commerce rules single out foreign online marketplaces but not the domestic online and offline retailers, which rely on similar marketing tactics to increase sales. It’s not that only Amazon and Flipkart discounts hurt the prospects of mom-and-pop stores and Big Bazaar or JioMart’s don’t. Moreover, India’s retail market is worth nearly $900 billion, of which online retailers account for only about 5 per cent.
In its current avatar, online retail is mostly about lower prices and higher (sales) volumes. That may make Amazon or Flipkart rely on a few select vendors with capacities to scale up and pull in a large number of online customers with the help of attractive merchandise prices that smaller suppliers may not offer. Unlike JioMart, for instance, foreign-owned Amazon and Flipkart can’t own inventories — which is needed to control pricing through sourcing in bulk and thus negotiate lower prices — because of India’s flawed e-commerce regulation that only applies to foreign retailers.
In an intensely competitive market, not only online platforms, but many industries including banks do cross-selling such as car loans to their credit card customers. Similarly, an online retailer may try selling shoe polish to someone who has bought shoes. The customer can accept or reject such offers. It may not be ethical but it’s a common practice.
Similarly, private labels could be an attempt to fill gaps in the supply, or offer lower-priced goods to cost-conscious buyers. Sometimes, the threat of pushing private labels by online marketplaces with their unmatchable network power is used to extract lower prices from sellers of branded consumer goods, which would otherwise resist pressure to cut prices and accept lower margins. Yet, not all customers take the bait. That is why the share of private labels in gross merchandise value (GMV) of Amazon or Flipkart is not more than 5-10 per cent. Moreover, offline retailers such as Reliance retail also use private labels.
Being commercial enterprises, online marketplaces often charge 30-35 per cent of the merchandise value as ‘fees’ to recover their expenses, and yet none of them are making any real profit. Obviously, most of the gains are appropriated by online customers and not online platforms.
Policy must offer a level-playing field
Foreign-owned online market platforms often find a way around, so goes the accusation. While that’s not a good thing, the fact is India’s e-commerce regulations are too constraining and changing frequently influenced by lobbies. At the same time, they neglect consumers and discriminate against foreign players. Online customers are too demanding: they want lower pricing, prompt delivery and reverse pickup. It’s not an easy market, yet online players are in the game for future growth and profitability.
Moreover, it’s worth mentioning that our desi online and offline retailers are not as virtuous as they may claim. We never discuss how shamefully many of our neighbourhood kirana or chemist shops fleece customers especially during emergencies or how they treat their Rajus or Chhotus. Dealing mostly in cash, they often dodge taxes. Similarly, before the entry of online players, offline mobile phone sellers used to have as much as 25 per cent margin. Obviously, they won’t be happy about customers getting better online deals.
Online retail sales are mostly about attractive prices. Thus, asking e-commerce players to not influence pricing is impractical especially if that directive doesn’t apply to local players, especially the brick and mortar stores. We must have the same rules for foreign and domestic players, and for both offline and online retail. Instead of micromanaging, we need a stable policy regime to encourage investment, domestic value addition, and job creation.
One of the recently announced draft rules wants online sellers to clearly suggest Made-in-India alternatives. If it can be applied to all kinds of online and offline retailers, it will help customers make informed choices and support the government’s ‘Make in India’ initiative.
Given the recently passed farm laws, it’s also time to consider embracing FDI in multi-brand retail. That will bring down the gap between farm to fork prices, encourage agro-processing and create thousands of jobs in post-harvest supply chains. Lack of jobs remains India’s biggest macroeconomic challenge with potential to turn our demographic advantage into a demographic disaster and derail our consumption-led growth model. This calls for sensible policy making instead of trying to please one lobby or the other.
The writer is CEO and Chief Economist of Indonomics Consulting Private Limited. He tweets @RiteshEconomist. Views are personal.
(Edited by Prashant Dixit)