Sector Update | 30 Ecommerce
March 2016
Ecommerce
100% FDI in Marketplace model – what changes?
FDI in marketplace model was allowed; but implications are in finer details
DIPP issued guidelines on Ecommerce, allowing 100% FDI in marketplace models and
not inventory.
It also mentioned that marketplaces should not influence prices in any manner –
potentially bringing under question the discounting via big sale days.
No marketplace can have 25%+ dependency for sales on a single vendor – this could
mean advantage Snapdeal, considering Flipkart’s reliance on WS Retail, and Amazon’s
on Cloudtail.
Over the long term, in-place guidelines are positive for attracting investments. Curbing
discounts will drive rationalization of operations; and identifying marketplaces as
technology intermediaries should lend clarity around taxation uncertainties.
DIPP issues guidelines for FDI in Ecommerce
The Government of India’s Department of Industrial Policy & Promotion (DIPP)
issued new notifications related with Foreign Direct Investment (FDI) in
ecommerce. The circular officially recognized the ‘marketplace model’ under
B2C ecommerce, and allowed 100% FDI in the sector.
At the outset, 100% FDI in marketplace model was the assumed understanding
thus far as well – with inventory model still excluded.
However, the notification
comes with a few clauses touching upon the operational aspects of the
marketplace. These could have larger implications in the modus operandi of
the industry participants around discounting, single seller dependency and
fulfillment responsibilities.
What are the key highlights of the guidelines?
Marketplace v/s inventory model:
100% FDI under automatic route permitted
in marketplace model of e-commerce. FDI is not allowed in inventory based e-
commerce model.
Setting prices of products:
E-commerce entities providing marketplace will not
directly or indirectly influence the sale price of goods or services and shall
maintain a level playing field.
Single vendor dependency:
A single vendor may only participate in 25% of the
overall sales on the marketplace.
Fulfillment services:
E-commerce marketplace may provide support services to
sellers in respect of warehousing, logistics, order fulfillment, call center,
payment collection and other services. But marketplaces will have to clearly
provide name, address and other contact details of the seller.
Product warranty:
Post the sale delivery of goods to the customers and
customer satisfaction will be a responsibility of the seller.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 3982 5585
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
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30 March 2016

Ecommerce
Do the guidelines spell the end of aggressive discounting?
Cannot influence pricing directly or indirectly:
Restrictions on marketplace
entities to directly or indirectly influence price of goods suggest loss of control
on aggressive discounting. Also, prevailing mechanisms by which the
marketplaces lure the sellers to offer their products at lower prices may come
under the scanner.
Mechanisms still exist - via customer loyalty incentives…:
We believe there is
room to still offer discounts via customer loyalty routes – coupon codes /
vouchers under a plethora of pretexts. 2 notable examples of such mechanism
in allied industries are: [1] Online travel agents offering coupon codes and
wallet-based cashbacks; as they cannot have differential pricing for airline
tickets, and [2] Even in organized offline retail, discount vouchers are now a
norm to drive repeat visits.
…but cannot match the impact of big sale days:
For E-tailers, heavily marketed
big discount days may be passé - events like Flipkart’s Big Billion Day sale and
marketplaces’ festive sales. The industry heavily relied on these events to garner
significant volumes, and absence of the same is bound to have an impact. For
example, Flipkart had claimed to have sold ~500,000 mobile handsets in 10
hours on its Big Billion Day sale.
Exhibit 1: 16x increase in advertising/promotional expenses for Amazon Seller Services
FY14
FY15
14,060
4,360
550
7,020
2,270
15,000
10,000
5,000
-
1,180
2,020
900
Source: Tofler, MOSL
Exhibit 2: 6x increase in advertising/publicity/promotion expenses for Snapdeal
FY14
15,000
10,000
5,000
-
1,180
2,020
900
550
14,060
4,360
7,020
2,270
FY15
Source: Tofler, MOSL
30 March 2016
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Ecommerce
With limit on volumes from single vendor, is it advantage Snapdeal?
WS Retail (largest seller on Flipkart) and Cloudtail India (largest seller on
Amazon), may be easily contributing to more than 25% of their marketplace’s
total sales.
Cloudtail (a JV between Amazon and Narayan Murthy’s Catamaran Ventures),
generates at least 40% of the company’s sales in some months, as per a media
article (Click
here)
Flipkart has been trying to reduce its dependency on WS Retail since over a
year, but still has a large share of volumes from the seller.
The problem at Flipkart and Amazon is an outcome of inventory-model
preference for both, who, at least to start with, were compelled to operate as
marketplaces due to regulations. WS Retail and Cloudtail were the midway
between compliance and product quality control.
Snapdeal on the other hand has been a marketplace by choice. Consequently,
while Snapdeal has over 200k sellers on its platform, Flipkart and Amazon have
managed less than 100k. This potentially puts Snapdeal at an advantage v/s its
peers, who may have to hunt for more sellers to meet the stipulated guidelines.
What are the long term benefits of the guidelines?
Clarification at last:
To start with, industry had been seeking clarification around
the definitions and purview of E-tailers, and that has finally come through. This
is positive from the point of view of attracting long term investments in the
sector, notwithstanding the fact that the guidelines may not conform to the
wish-list, including FDI in inventory-led E-commerce
Inject rationality:
As curtains draw on the aggressive discounting regime,
marketplaces’ focus is bound to shift from customer acquisition through deep
pockets to differentiation through services and business models.
Tax-relax?
The Government identifies the segment Rsas an electronic
intermediary, operating a technology platform to facilitate sales and
transactions between third party sellers and buyers. This may come as reprieve
against the tax demands from multiple marketplaces by multiple state
authorities under multiple pretexts! While GST is around the corner, whether or
not that sees light of day soon enough, these guidelines will aid some clarity and
potentially facilitate much-needed tax reprieve for the intermediaries that are
marketplaces.
30 March 2016
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