#Asia Is the party over for India’s e-commerce startups?

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Own brand retailing could be the next big thing for online marketplaces, who can now engage in inventory-based retailing via this route

E-commerce

Is the party over for India’s e-commerce startups? That has been the underlying theme for Indian mainstream media’s coverage of startups in recent times. The backdrop: Morgan Stanley Institutional Fund Trust marked down the valuation of its own holding in India’s e-commerce bellwether Flipkart by 27 per cent as part of its broader valuation reset of technology and Internet companies in its portfolio.

The real story is that mark-ups and mark-downs are part of a fund’s regular internal assessment based on the prevailing underlying assumptions, and are thus in no way a reflection of overall valuations, leave alone the narrative driving the ecosystem.

In fact, the changing regulatory environment is not only opening the floodgates for foreign direct investments (FDI) in India’s e-tailing sector, but is also ushering in newer business model and technology trends.

Understanding India’s retail: Madness in our methods

India has a large but highly fragmented trading sector, divided into wholesale (B2B) and retail (B2C), with retail being further divided into multi-brand retail and single brand retail. FDI policy makes separate provisions for each division, with close control over retail trading.

That’s why it’s almost impossible to draw any conclusive inferences for India based on the global trends in single brand e-tailing. The closest comparable could be the direct-to-customer (D2C) segment.

Also Read: How bad are things for Flipkart today?

Given the stringent FDI regulations on retail, the development of e-tailing has predominantly been in the form of online marketplaces. Technically, such marketplaces are not retailers, but mere new-age means to reach consumers. The most popular e-tailing portals are horizontals, selling various categories of products.

Thus, inventory-based retailing has been inconsequential so far, given the restrictions on FDI for both multi-brand and single-brand retailing.

Change is coming fast and slow, but it’s coming nonetheless

Indian policymakers have recently amended the FDI rules to allow greater foreign investment participation in single-brand retailing. Some notable changes are: 1) entities engaged in B2B wholesale cash & carry trade with FDI can now engage in single-brand retailing; 2) 100 per cent FDI is allowed in single-brand retailing subject to 30 per cent domestic procurement; FIPB (Foreign Investment Promotion Board) could relax the conditions; and 3) single-brand retailers can now engage in e-commerce.

The amendments create an interesting scenario, as inventory-based retailing is now permitted under single-brand retail with foreign investments. This can have a far reaching impact, leading to newer business models evolving over time with the extant behemoths too adapting to the changing scenario.

Ideally, direct-to-customer (D2C) – which has been a trend over the last couple of years globally – is argued to be the most logical extension of e-commerce.

The future is direct-to-consumer!

The main objective of e-commerce is eliminating intermediaries, allowing for higher margins which can then be passed on to the customers as discounts. And eliminating intermediaries should ideally include technological intermediaries as well.

Globally, D2C is most common among luxury brands, as such a model not only helps them to effectively address the issue of counterfeit products and allow them to foster better customer relationships and loyalty, they also get access to mountains of data pertaining to consumer tastes and preferences.

Infographic: Amazon ruled India in 2015; no, Flipkart didn’t come second

One of the most important lessons learnt from luxury brand D2C is how they promoted omni-channel retailing via D2C.

A leading luxury jewellery brand, for example, sells a certain range of products online, while offering catalogues for the higher priced items to online customers and actively encouraging them to visit one of their physical outlets via appointment for a more holistic shopping experience.

The other important trend globally in this regard is own brand retailing. E-commerce platforms are increasingly moving towards promoting products under their own brands on their platforms besides offering third-party products as profit margins are much higher for private label products. Some of the most popular e-tailing items in India are electronics goods, fashion and home furnishing; all of which are globally popular under D2C for luxury labels.

Understanding India without extrapolating global trends

In recent times, electronics goods especially mobile phones have witnessed several new entrants tying up exclusively with online marketplaces for an “e-tail only” business model. Companies like Xiaomi, Motorola, Mi, LeTV have achieved great success via such routes.

Like Apple, Xiaomi has already approached the government for 100 per cent FDI in single-brand retail. Once these companies get licenses in India for single-brand retail, they are likely to adopt D2C e-tailing in large scale. So, is the party over for existing online marketplaces?

Not quite. One of the biggest advantages of online marketplaces is the product and price comparison such platforms provide. The Indian market is extremely price sensitive. As price differential is such an important factor for Indian customers, there exist platforms that list out prices of the same product across online marketplaces!

Even though the recent DIPP notification may act as a dampener for price discounting across online platforms, the price war is far from over. In fact, the rise of single-brand retail might intensify price wars, implemented in different guises.

Own brand retailing could be the next big thing for online marketplaces, who can now engage in inventory-based retailing via this route. This will lead to a new business model of white label products being sourced aggressively from SMEs to be sold over these platforms. The provision allowing extant players in B2B cash & carry trade to engage in single-brand retail is a clear indication that the government is looking to promote white label product based e-tailing in India.

Perhaps, the biggest long-term effect will be a clamour for FDI relaxations in multi-brand retail to allow inventory-based retailing, which could be argued as a logical extension to the FDI easing in single-brand retail, thereby opening the floodgates for a more comprehensive policy without splicing and dicing an otherwise seamless business segment called retail.

The party for now seems far from over, rather the party seems to have just got started.

Image Credit: Shutterstock

This article was co-authored by Raj K Mitra

The post Is the party over for India’s e-commerce startups? appeared first on e27.

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