Clash of the titans: How e-commerce battle is shaping up in India

The next gold rush in India could be the e-commerce. Its proof is evident in the major domestic and overseas players – Flipkart, Amazon, Paytm Mall, Google, Reliance Industries Ltd (RIL), BigBasket, Grofers and a host of smaller players– upping their bets on the sector.

Almost every research or survey on the local online retail market reveals the immense untapped potential of the sector.

For instance, Google's team for the Next Billion Users disclosed last year that three Indians were coming online every one second.

Another report by the National Association of Software and Services Companies and PwC India has projected e-commerce market to cross the $100-billion mark by 2022, from $38.5 billion in 2017.

A secondary research by the Indian Brand Equity Foundation (IBEF) shows that India's e-tail market could reach $200 billion by 2026 and the internet user base could likely rise to 829 million by 2021 from 560.1 million in September 2018. It expects the internet economy to double to $250 billion by 2020 from $125 billion in April 2017.

These stories about the domestic e-commerce sector have attracted major retail players. Last year, the US's Walmart brought in foreign direct investment (FDI) of $16 billion through the home-grown e-tail firm Flipkart. To counter that, Amazon has also announced an investment of $5.5 billion in India. For a while, the two American retail behemoths were pitted against each other in a battle for the e-commerce market in India.

But not for long. Billionaire Mukesh Ambani has sounded the war bugle by announcing his entry into the e-commerce space. Ambani's RIL is gearing up to enter into online retailing via Reliance Retail and Reliance Jio.

Going by his past records, one can expect bloodshed and a fierce battle for market share between Amazon, Flipkart, and RIL.

One could also see the e-commerce game changing after last month's government clarifications on FDI rules in the e-commerce sector. The notification makes it clear that foreign e-commerce entities operating as marketplace cannot influence the sale prices, directly or indirectly. It says only vendors/sellers can determine the discount.

In an attempt to plug the gap in the current FDI norms, the circular also articulates that marketplaces cannot hawk inventory of vendors in which they have a direct or indirect stake, through the group companies, on their portal.

It's the tweak in the exclusivity rule that could hurt the foreign players most. The government note specifies that marketplaces, with FDI, have to ensure no vendor/merchant sells more than 25% of its inventory on one platform.

These changes in the FDI rules, which becomes effective today, will compel foreign marketplace operators to tinker with their existing business model and may adversely affect their volumes and profitability.

Kishore Biyani, founder and CEO of Future Group, which operates Pantaloon and Big Bazaar retail outlets, told DNA Money these rules always existed and sees the government's latest press note as only "a clarification".

"It was a clarification (press note on December 26, 2018). We always thought these were the rules," he said.

According to him, if the rules are applied in "letter and spirit", it will change the way "one (online retailers) does business in India".

But it's not just the articulation of the FDI law on e-commerce that is threatening to turn the sector on its head. There are other disruptive forces that are coming into play at the same time.

After the latest clarifications, the e-commerce battle ground looks to be in favour of domestic players. This is because there is little clarity on regulations for domestic players. This may give RIL's proposed e-commerce venture an edge over overseas players currently dominating the market.

Also, with Reliance Retail and Reliance Jio having covered quite a bit of the field till now, it will become easier for Ambani to close in on incumbent rivals from the start itself. His offline retail business currently operates 4,000 stores and close to 50 warehouses while RJIL owns 4,000 Jio outlets across the country. These infrastructure could be synergised with his business online. He also has the financial muscle to match the might of the overseas competitors.

Ambani is reportedly looking to emulate the O2O (online-to-offline) marketplace business model pioneered by Chinese ecommerce major Alibaba. This model will involve aggregating merchants on RIL's e-commerce platform, where consumers would search for products and services online but make the purchase offline. Under this model, merchants will tap online opportunity. It would also help RJIL skirt the discounting issue raised by small traders and retailers.

According to a media report, it will entail zero cash burn as RIL's consumer-oriented companies – RJIL and Reliance Retail – sign on local merchants.

RIL, whose RJIL's mobile subscriber base has crossed 250 million users till the September quarter of the current fiscal, may push online commerce through mobile. M-commerce in India is lagging e-commerce with online retail through mobile at $16.81 billion in 2017. This was half of e-commerce's $38.5 billion market size in 2017.

In the midst of all this, a storm is being whipped up by the micro small and medium enterprise (MSME) sector, which largely consists of mom-and-pop grocers and small retailers. Its representative body Confederation of All India Traders (CAIT) is intensely lobbying against the major foreign e-commerce players, who they believe have been hurting the interests of small retailers and traders. After pushing the government to ensure that the FDI rules were being implemented not just in letter but also in spirit, they are now keeping up the pressure for timely adherence to FDI clarifications by the e-commerce companies.

CAIT is also demanding for the domestic e-commerce players to be brought under the "ambit of policy".

Weighed down by pressures from small traders and businesses agitating against the rise of foreign e-commerce operators in the country, India has steered clear from the World Trade Organisation (WTO) round of negotiations to frame a set of rules to protect the interests of e-commerce investors around the world. In this regard, US has taken the lead to safeguard the economic interest of US e-commerce giants Amazon and Walmart.

The US online retailers have also pressed the alarm button saying changes in the FDI rule will cause "significant customer disruption" if the deadline was not extended.

Some rumblings by the American industry associations, led by the US India Chambers of Commerce (USAIC) – a wing of the US Chambers of Commerce – were also heard on the negative impact on India's FDI and customers in the long term.

Though, Anil Talreja, partner, Deloitte Haskins & Sells, does not feel the recent developments in the e-commerce sector will have any negative impact on it.

"The messaging I get from a lot of players in the market is that they seem to be overcoming it. They must have re-looked at the model shareholding. The problem is every e-commerce company has a different structure, shareholding pattern, transaction and model. It is not that there is a size that fits all. They will find a way to do business in a different way. Perhaps, they will re-look at what should be the pricing, supply chain, sourcing and terms and conditions of contract with sellers," he said.

Talreja expects the strong fundamentals of the domestic e-commerce sector to drive it to the next phase of growth. E-commerce is still a very small part of overall retail sales in the country.

According to the online statistics, market research and business intelligence portal Statista, e-tail sales in India is expected to account for 4.4% of the total retail sales this year. It constituted just 1.7% of the total retail turnover in 2015.

The sector's growth has mainly been propelled by penetration of internet and smartphones, the launch of the fourth generation (4G) network and rising disposable income. Policy support in the form of 100% FDI in B2B e-commerce and FDI through automatic route in a marketplace model of e-commerce has also facilitated growth.

Over the last few years, online retail sales have been growing at around 30%, led by Flipkart, Amazon and Paytm Mall.

Buoyed by growth potential, the sector has seen a deluge of investments led by US' Walmart, which acquired Flipkart in a largest ever deal of $16 billion. It has also attracted investments from 21 private equity and venture capital of around $ 2.1 billion in 2017. In 2018, close to 40 deals worth $ 1,129 million were closed in the first half of the year.

But it may be 2019, which could be the watershed year for the Indian e-commerce. One could see RIL's entry change its course –just like it did in telecom sector – by forcing players to change their business model. The sector could also shift lanes and move into the fast growth lane, albeit unprofitably in the short run.

Growth potential

• e-tail sales in India is expected to account for 4.4% of the total retail sales this year. It constituted just 1.7% of the total retail turnover in 2015
   
• M-commerce in India is lagging e-commerce with online retail through mobile at $16.81 billion in 2017
   
• Ambani is reportedly looking to emulate the O2O (online-to-offline) marketplace business model pioneered by Chinese ecommerce major Alibaba

FIGHT FOR CLICKS

• $200 bn – e-tail market could reach by 2026
   
• $100 bn – e-comm market expected to cross by 2022
   
• $38.5 bn – e-commerce market size in 2017
   
• $5.5 bn – likely India investment by Amazon
   
• 829 mn – internet user base likely to reach by 2021

Source: Indian Brand Equity Foundation, PwC