100% FDI in Retail Flashcards
The new guidelines permit 100 percent FDI in the “marketplace” model, but not in the “inventory” model.
Marketplace Model - (B2C ) Here E-commerce websites Act as a platform where the buyers and sellers can meet and agree upon a price. E-commerce entity acts as a facilitator between buyer and seller.
Inventory Model - Inventory model of ecommerce means an ecommerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly. ( For example: Amazon buy products from wholesalers in a bulk and then provide huge discounts to the consumers ,this cannot be matched by brick and mortar stores who then have to fold and suffer heavy losses.)
- By saying marketplaces cannot influence prices, the government may end up stopping the flow of discounts.
- Putting the onus for delivery of goods and customer satisfaction on the seller may result in added complications when it comes to grievance redressal
Valuations of Indian e-commerce companies have been off the rocker for a while now. The discount game too has been taking a toll as intense competition led e-tailers to slash prices, burning investor money in the process.
*In an attempt to restore some sanity, and provide much-awaited clarity to the sector, the government released guidelines for Foreign Direct Investment (FDI) in the sector, applicable with immediate effect.
- Warranty/guarantee of the goods and services in a marketplace model will be the responsibility of the seller.
- The guidelines also aim to ensure transparency. In a marketplace model goods/services made available for sale electronically should bear the name, address and other contact details of the seller while ensuring that the post sales, delivery and customer satisfaction would be the responsibility of the seller.
The guidelines will ensure a level playing field between e-commerce companies and brick and mortar retailers, but at the same time it take away the fun from online shopping. Nonetheless, the move, especially on transparent pricing will give a lifeline to these companies who were competing against each other for the race to the bottom by announcing ridiculous discounts.
**This however, will impact valuation of companies as sales will be hit without these flash sales that attracted a large section of buyers.
Any other restriction?
Yes. Any single vendor or a group company of the market place e-commerce player cannot account for over 25 percent of the total sales.
Why the 25 percent cap on sales by a single vendor?
It was alleged that many market place firms were flouting the market place rule by selling a big chunk of goods through companies owned or controlled by them. When it came to their group firms, the e-commerce players could provide facilities not available to regular sellers. This meant indirectly owning the goods and services while claiming to be a market place model.
What are brick and mortar retail companies saying?
They have welcomed the rules saying it will provide a level playing field as e-commerce firms were so far hurting their business by luring consumers online with unsustainable discount offers.
How will the rules impact valuations of e-commerce players?
In the short term, the valuations could shrink. That is because the firms will no longer be able to show huge growth in revenues. Already, last month Morgan Stanley marked down the value of its investment in Flipkart by 27 percent.
But profitability will recover as heavy discounts end, and that should improve investor perception about these companies, and subsequently valuations.
