E-Commerce: A Note of Caution
July 15, 2021
E-commerce is full of travails and travesty.Indian regulators must apply correctives before we are mired in agony of inaction. — KK Srivastava
The pandemic has provided a lot of tailwinds to e-commerce business but at the expense of 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 Blue Ocean with a view to become such monoliths. Though still away from being ripe for 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 online retail market will hit a figure of $350 billion. By 2030India will be third largest online retail market, after the US and China. In 2020 twenty million new shoppers were added to e-commerce platform, while this year this figure may be 40 million. The user base is likely to be 190 million by 2021 end. The sales for 2020 are $38 billion, and may touch $55 billion by 2021 end, a phenomenal growth of 45%. Interestingly and understandably this growth will be catalysed by 88% of new online shoppers coming from tier 2, 3 & 4 cities. New e-commerce models are emerging and fuelling this growth such as social, video, and influencer led. Most importantly while earlier 70% of online shoppers used to be driven by predatory pricing (aka heavy discounting) followed by these portals, presently more than 50% of these shoppers are motivated by convenience factor. The average time of delivery has been cut by two third. Hyperlocal and express deliveries are being offered now.
Online Retail Juggernaut
Year GMV ($bn)
The 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 favouring specific vendors on their platforms, in violation of fair play. In 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 ‘marketplace’ model, whereby they cannot have ‘preferred’ vendors, certainly not those in which they may have equity stakes too. They are not allowed to practise inventory-based model. But they have been doing all this, and more. Thus there is definitely a need to rein them in by passing 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 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 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 Indian 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 we 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 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 consumers purchases, promoting favoured vendors. May be to this we will have to add in medium term the unethical practices like labour 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 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 these 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.
The author is a noted economist and management thinker.