The Indian retail real estate sector is slowly waking up to the fact that the recent amendment from Department of Industrial Policy and Promotion (DIPP) on 100 per cent foreign direct investment (FDI) in e-commerce seems is a welcome move for them.
That, as well as the new rules which could potentially end the discount wars – new rules that may disappoint consumers, but will almost certainly increase footfalls in malls.
For the uninitiated, the Indian Government has allowed 100 per cent FDI in online retail of goods and services under the so-called “marketplace model” through the automatic route, seeking to legitimize existing businesses of e-commerce companies operating in India.
Head – Retail Services, CBRE South Asia Pvt. Ltd., Vivek Kaul says, “The new FDI regulation legitimizes already existing marketplaces. Players operating on an inventory-based model will be impacted the most. Grocery players might have to restructure operations. The regulation might also make an impact on the expansion plans of e-commerce players as they might want to revisit their operation dynamics and expansionary strategy.”
With the enactment of this regulation, Indian retailers are anticipating footfalls to increase at brick-and-mortar stores, mostly since they offer touch, feel and many other experiential elements – like physically connecting with consumers – that are missing in online shopping.
Senior Vice-President, DLF Place, Saket, Benu Sehgal, says, “The FDI regulation is a much-awaited move. This will help establish parity in conducting both online and offline businesses. In the past we have seen how massive discounting on e-commerce has led to an online sales boost. Post this amendment, the actual strengths of both the mediums will come into play.”
Executive Director, Select Infrastructure Pvt. Ltd., Yogeshwar Sharma, says, “The move will help ensure price parity between online and brick-and-mortar players. Retailers dwelling in malls should also look at it positively.”
Benefits for Malls
100 per cent FDI in e-commerce is a significant retail development that can potentially end the online vs offline discount wars. The new regulations prohibit marketplaces from offering discounts and capping total sales originating from a group company or one vendor at 25 per cent and this will generate more footfalls to malls.
CEO, Ishanya and Housl!Fe, Mahesh M says, “I think this is one of the most encouraging actions that has been taken to balance the retail economy in terms of long term stability. This will also put a check on the so-called ‘promotion-driven funding’ that e-commerce companies have been taking significant advantage of. The offline and online prices will hopefully be competitive going forward. However, let’s be clear again that e-commerce players are not restricted to selling below market prices. The Government has only restricted e-commerce players from any promotional funding tactics and hence it will be only the vendor who will have to absorb any discounts offered online. If a vendor wishes, he can offer additional discounts on a product, but then he will have to bear that loss himself. This brings in far better control and hopefully more transparency and competitive market dynamics.”
However, the new move can effect the valuation of e-commerce companies.
Illustrating this, Kaul says, “The recent regulations aim to control the deep discounts as the Competition Commission of India strives to provide a level playing field for online as well as offline retail. This might hurt valuations of leading e-commerce players as a lot of money has been spent by these companies in customer acquisition by playing the discount card. However, ensuring compliance of the discounts being offered might prove to be a challenge.”
Benu Sehgal adds, “It seems that there are no loopholes, but certain cashback policies and other indirect discounts are not essentially being covered under this law. We are yet to see that how well the Government is able to ensure compliance.”
Effect on Retail Categories
As per Benu Sehgal there would be no major category of retail that will be affected with the recent development. The move will help establish synergy between online and offline retail. There are already instances of online players looking at setting up physical stores, and offline players getting all set to establish their presence online.
Most leading players in the apparel and footwear retail space are already present online, either independently or through leading online platforms.
Kaul says, “By bringing in clarity with respect to the laws and regulations that govern the emerging e-commerce sector, the Government has provided a clearer framework for players that operate/plan to operate in the e-commerce space. With discounts that have been driving the e-commerce boom — especially in the apparel and electronics segments —coming under scrutiny, physical stores can look at increased footfall in the near future.”
Mahesh concluded, “This policy will affect all categories. But from our perspective on consumer durable like furniture, these categories require substantial back end facilities such as warehousing and better logistics solutions. Those players who are currently in the inventory based model may migrate to market place models to off er themselves on the FDI inflow front. This eventually may lead to a balanced approach from both online and offline retailers with respect to consumers though the funding patterns may be different. Such a situation will create an even better level playing field for offline retail destinations like Ishanya. Not to, of course, forget that online models in whatever format will continue to grow at a much higher growth rate given their inherent advantages.”
Clearly, synergy of online and offline is the future, and clarity in FDI policies will help establish a better synergy between the two.