Flipkart and Amazon have got no respite from the new e-commerce rules. They have been compelled to pull the plug on thousands of products and rehaul their business model in India
Despite hectic lobbying by foreign e-commerce players, India’s new e-commerce rules formally came into effect on February 1, 2019. The Department of Industrial Policy & Promotion (DIPP) has refused their request to grant extension for a few months.
The decision had a ripple effect on the stocks of Amazon and Walmart (as it owns 77% stake in Flipkart), which together lost over US$ 50 billion in market capitalization. While Amazon has invested US$ 5 billion in India, Walmart spent US$ 16 billion last year in the world’s largest e-commerce deal to buy a controlling stake in Flipkart.
Amazon faced the bulk of the damage, losing US$ 45.22 billion on NASDAQ, while Walmart lost US$ 5.7 billion. Part of the loss for Amazon was also attributed to planned increases in spending. Its global sales including India have also decelerated, growing by 15% in the quarter ending December 2018. The growth in the same quarter the previous year was 29%.
Flipkart has admitted that it was “disappointed” about the government’s rush to implement the updated e-commerce policy and not permitting an extension for business restructuring. Amazon is planning to continue engagement with the government on the issue.
Amazon and Flipkart have a 75-80% of online retail business in India. A major portion of their sales come from a few sellers. With the new rules, e-tailers are not allowed to hold a stake in seller entities on their marketplace.
The policy said that e-tailers cannot hold a stake in seller entities that sell on their marketplace, which compelled Amazon India to delist lakhs of products. It had two seller entities handling most of its business before these rules came into effect – Cloudtail (a joint venture with Narayana Murthy’s investment firm Catamaran) and Appario Retail (a joint venture with Ashok Patni family office). It’s a major setback for Walmart as well, which has scaled back from Britain and Brazil and is banking heavily on India and China.
E-commerce firms are also not permitted to offer deep discounts now. They have to ensure that they do not source over 25% of a seller’s gross sales through their wholesale units or it will be deemed as ownership of the selling entity.
Technopak Chairman Arvind Singhal says that Amazon and Flipkart could take 6-8 months to restore their listings and establish workarounds. Both retailers will have to sign new contracts with thousands of merchants and brands, and delete terms like exclusive. They may also attempt to develop private labels for India, as this has not been disallowed yet.