No-Price-Influence Condition Lacks Clarity; May Significantly Impact the Ecommerce Sector

Published on 11 Apr, 2016

Ecommerce Sector Analysis

The way the ecommerce sector had been shaping up lately, it is clearly the question of how long can one pull on. If the absence of the clear definition of influencing prices continues and discounting is restricted, then ecommerce platforms may see sharp decline in their transactions. These conditions may accelerate the pace toward major consolidations.

The new FDI policy for ecommerce prompts more questions than answers. While it legitimizes the way online marketplaces are operationally structured, its ambiguity begets confusion. For example, how are vertical ecommerce players—many of whom operate on inventory-led model and have foreign private equity investments—supposed to now behave, as FDI isn’t allowed for inventory-based models? Will this apply retrospectively and require such players to make changes to their structures or will this apply to fresh funding going forward? The policy is quite ambiguous in such areas and open to interpretations.

However, what may have a far reaching impact, on the ecommerce sector itself, is one specific condition out of the ten put forth by the Department of Industrial Policy & Promotions. It states that ecommerce marketplace players will not directly or indirectly influence the sale price of goods or services and shall maintain a level playing field.

Ambiguity of this condition, as to what exactly constitutes influencing price, can be widely translated as end of ‘promotional funding’ or event/theme-based mega discount sales. While it may enforce level-playing field with the offline market, this restriction will lead a regressive domino effect on the entire sector.

For the ecommerce sector in India, the fundamental differentiator—and the prime driver—is discounted pricing. Market-shares were being governed by discounted pricing, giving rise to such discount-wars and fiercely fought promotional battles. Allied convenience of cash-on-delivery and return-policies further sweetened the deal for online buyers.

If one takes discounts out of the equation, it impacts two-folds.

First of all, despite the FDI policy, most of the ecommerce entities have and will continue to rely heavily on private equity funding. The prevalent trend of investors is to valuate ecommerce companies on their Gross Merchandizing Value (GMV), a highly debatable approach in the first place. It gave birth to the whole gamut of heavy discounts and huge spends on advertising and promotions, to enable larger volumes of transactions. For example, the top four e-commerce marketplace players have spent a whopping $700 Mn on advertising and promotions during FY2015. Ironically, this funding has considerably dried up in last few months. Almost all of the ecommerce entities have been losing money, and have been finding it harder to get funded further. In fact, while one of the ecommerce giants saw its valuation being reduced by a third recently, the only profitable ecommerce entity in India has been IRCTC—the online ticket booking and allied services platform run by the subsidiary of the Indian Railways.

Now if the absence of the clear definition of influencing prices continues and discounting is restricted, then ecommerce platforms may see sharp decline in their transactions, directly impacting their GMV. And in turn, their valuations.

Interestingly, the way the ecommerce sector had been shaping up lately, it is clearly the question of how long can one pull on. PE money will not be easy anymore to come by for startups and early-stage companies that are struggling to gain traction or momentum. The sunrise sector has been inching toward the market consolidation. Conditions of no-discounts and lesser funding may accelerate the pace toward major consolidations.

While the DIPP policy that allows 100% FDI in marketplaces is welcome, one wonders if the specific no-price-influence condition in its ambiguous state is moot, as we anyway follow the free market economy. It will be interesting to observe how the ecommerce companies and their legal advisors craft innovative ways to interpret this condition in their bid to remain competitive on pricing and promotions.

However, if left ambiguous, this condition may accelerate the drivers for market-wide consolidations, and we may witness major changes within the next couple of years.


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