Retailers warn of legal action against online firms over discounts

Traditional brick-and-mortar retailers (including some with digital arms) upped the ante in their fight against e-commerce marketplaces and warned of legal action to ensure the implementation of new rules that prohibit online marketplaces from offering deep discounts while allowing 100% foreign direct investment (FDI) in them.

The new rules, announced late last month, also cap total sales originating from a group company or one vendor on e-commerce marketplaces at 25%—a cap at least two large marketplaces breach.

The Retailers Association of India (RAI), an organized retail lobby group, submitted a note to the department of industrial policy and promotion (DIPP) seeking clarifications on the enforcement of the FDI policy for marketplaces unveiled on 29 March.

“RAI is also ready to go to court if necessary and will decide on its next course of action in the next two to three weeks if they don’t see the policy getting implemented,” said B.S. Nagesh, vice-chairman of Shoppers Stop Ltd and chairman of RAI.

The threat follows online marketplaces continuing to offer discounts, adopting a business-as-usual approach in the days following the new policy announcement and the rules barring pricing intervention.

“So far, it has been two weeks since the clarifications have been issued and the behaviour has not changed,” Pranab Barua, who oversees the apparel and retail business at Aditya Birla Group, said at a press conference on Thursday. “The question that arises is: what happens next? We are all very clear that we want a level playing field. But unless this is implemented there is going to be an issue.”

The press conference was attended by representatives of some of India’s largest retail firms, including Kishore Biyani, group chief executive officer (CEO), Future Group; Rahul Mehta, president, Clothing Manufacturers Association of India; Alok Gupta, managing director and CEO, The MobileStore Ltd; and Govind Shrikhande, managing director, Shoppers Stop.

“If you look at all the (e-commerce) firms, I don’t think anyone is adhering to the norms that have been laid. I think this is a very serious concern. It is a contravention of the law of the country and it is not at all a level playing field. It is high time that this is implemented. Otherwise only announcement of policy doesn’t make sense,” Biyani said.

So far, India has allowed 100% foreign investment in business-to-business e-commerce but none in retail e-commerce.

Indian e-commerce firms such as Flipkart and Snapdeal have been following the marketplace model and attracting large foreign investments.

Marketplaces essentially act as a platform connecting sellers and buyers, and the new government rules make that clear.

Over the past five years, brick-and-mortar retailers have been asking the government to allow FDI in physical multi-brand retail. A law enforced by the previous government allows it as long as the concerned state governments do not have a problem with it. However, the current National Democratic Alliance government has, without changing the law, indicated its opposition to FDI in multi-brand retail.

Meanwhile, venture capital firms, hedge funds and private equity investors have pumped billions into marketplaces that have burned this money on discounts, promotions, marketing and expanding their networks.

Fashion retailers such as Myntra and Jabong are moving to a marketplace model, but currently depend on one seller for most sales. While Myntra gets over 90% of its sales from Vector E-commerce, Jabong’s sales largely depend on Xerion Retail.

Offline retailers say e-commerce marketplaces are continuing to flout the norms and offer discounts. Moreover, e-tailers are increasingly resorting to cashback offers on wallets and vouchers as a way around upfront discounts.

“The role of wallets and cashbacks is also something that needs to be seen,” said Gupta of The MobileStore, stressing that pricing discipline needs to be implemented.

Amazon India said that it operates within the guidelines. “We have and we will continue to operate within the parameters of the laws and policies of India as we do in each country we operate in,” said an Amazon India spokesperson.

The end of discounting, if it happens, will benefit brick-and-mortar retailers as it would lead to an improvement in their profitability and cash flows, said a 31 March report from credit rating firm Crisil Ltd.