Transparency versus survival of the weakest

Has e-commerce brought price transparency or proved death knell for traditional retail stores? wonders Tehelka Bureau

A “Market Study on E-commerce in India” done by the Competition Commission of India and released on January 9, 2020 has found that e-commerce has increased price transparency and competition. However, the bitter truth is that the growth of e-commerce has been sounding like death knell for brick and mortar or physical stores.

What is the truth? We try to find out. As on January 7, 2020, e-commerce giant Amazon held a market capitalization of $796.78 billion, the first time, it has attained the market-cap title. Amazon has left behind the traditional retail store giant — Wal-Mart, which by the way was valued at around a market cap of $330 billion as on January 8, 2020.

While e-commerce has hit retail stores, it is interesting to know that like many other businesses, E-commerce has also affected Direct Selling. Direct Selling in its simplest terms means marketing, distribution and sale of goods or providing of services as a part of network of Direct Sellers. The growth of the people associated with different direct selling companies is dependent upon the product, quality as well as personal touch in sale of products which they have demonstrated before a prospective consumer and retain her or him.

Rini Sanyal, Chairperson, Indian Direct Selling Association observed “The Direct Selling industry has been facing the problem of unauthorized sales of its products on E-Commerce platforms. More importantly, as the brand owner (Direct Selling Entity) remains responsible as per law, they have had to adopt various strategies to keep unauthorized E-Commerce sales under check. The product-experience a consumer receives at the hands of a Direct Seller is totally absent while one buys from a portal. Also, this curtails the income opportunities of scores of Direct Sellers (5 million+ in India), who put in their hard work and time to create a customer base. The availability of Direct Selling products on e-commerce platforms can be disastrous for Direct Sellers, who are micro-entrepreneurs.”

She said that the Delhi High Court, in its 8th July 2019 judgment, held the Direct Selling Guidelines issued by Ministry of Consumer Affairs are binding on E-commerce portals, prohibiting them to allow such sales on their platform without the consent of Direct Selling entities. While the said order brought about an interim relief for Direct Selling, many 

E-commerce players continue selling these products. Clearly, the final ruling by the courts will decide this matter.

Bhartiya Udyog Vyapar Mandal is of the view that “E-commerce companies like Amazon are incurring a loss of close to 3000 crores per annum but are pumping in more funds to destroy traditional stores in India”.

Secretary General of the Bhartiya Udyog Vyapar Mandal, Vijay Prakash Jain said that “big e-commerce companies had deep pockets and using their platforms to make consumers addicted to online system of purchasing. Now the online companies were selling even food products thus eliminating local merchandise”.

It is even more startling that Coresight Research has predicted that the physical stores that are closing down their number could hit 12,000 by end of this year. The investment bank UBS says that another 75,000 store could be lost by 2026. Top brands like Forever 21, Walgreens, Dressbarn, GameStop, Gap, and other chains have already announced over 8,500 store closings.

According to India Brand Equity Foundation, e-commerce has transformed the way business is done in India. The Indian e-commerce market is expected to grow to US$ 200 billion by 2026 from US$ 38.5 billion as of 2017. Increasing Internet and smartphone penetration have triggered much growth of the industry.

No doubt the ongoing digital transformation in the country is expected to increase India’s total Internet user base to 829 million by 2021 from 604.21 million as of December 2018. India’s internet economy is expected to double from US$125 billion as of April 2017 to US$ 250 billion by 2020, majorly backed by ecommerce. India’s E-commerce revenue is expected to jump from US$ 39 billion in 2017 to US$ 120 billion in 2020, growing at an annual rate of 51 per cent, the highest in the world.

But we cannot ignore that retailers have announced more than 4,300 store closures so far this year, according to an analysis by Business Insider. Big stores like GAP, JC Penney and Victoria’s secret announced more than 300 store closures over the course of 24 hours this week. Payless has said it plans to close all of its 2,500 stores in what could be the largest liquidation in history.

Propelled by rising smartphone penetration, the launch of 4G networks and increasing consumer wealth, the Indian e-commerce market is expected to grow to US$ 200 billion by 2026 from US$ 38.5 billion in 2017 Online retail sales in India are expected to grow by 31 per cent to touch US$ 32.70 billion in 2018, led by Flipkart, Amazon India and Paytm Mall.

Indeed, the focus of the Government of India has been on various initiatives namely, Digital India, Make in India, Start-up India, Skill India and Innovation Fund. The timely and effective implementation of such programs will likely support the e-commerce growth in the country. There are some major initiatives taken by the government to promote the e-commerce sector in India. To increase the participation of foreign players in the e-commerce field, the Indian Government has hiked the limit of foreign direct investment (FDI) in the E-commerce marketplace model for up to 100 per cent (in B2B models). The heavy investment of Government of India in rolling out the fiber network for 5G will help boost ecommerce in India. In the Union Budget of 2018-19, government allocated 8,000 crore (US$ 1.24 billion) to BharatNet Project, to provide broadband services to 150,000 gram panchayats.

While this entire happening in India, the harm that e-commerce has done to retail stores, could be a lesson for India to learn.Payless chain filed for bankruptcy in 2019 and said it planned to close all of its 2,500 stores in what could be the largest retail liquidation in history. Gymboree Group filed for Chapter 11 bankruptcy protection in January and said it planned to close more than 800 stores under its Gymboree and Crazy 8 banners. Gymboree closed nearly 400 stores in the process. Shopko too filed for bankruptcy last year and has said that it would close 251 stores. Even popular and trendy Target finds itself with money-losing stores that it needs to shake loose.

President of Federation of Sadar Bazar Traders Association (Regd), Rakesh Kumar Yadav observed that “our business has taken a hit and the turnover had halved while the government was perhaps sleeping. The online companies were selling even fake products to lure customers at cheap prices. When will government wake up and come to the rescue of poor retailers in India? He questioned

Unmindful of the ground realities the world over, in India, under the Digital India movement, government launched various initiatives like Udaan, Umang, Start-up India Portal etc. Under the project ‘Internet Saathi’, the government has influenced over 16 million women in India and reached 166,000 villages.

Udaan, a B2B online trade platform that connect small and medium size manufacturers and wholesalers with online retailers and also provide them logistics, payments and technology support, has sellers in over 80 cities of India and delivers to over 500 cities. The government has introduced Bharat Interface for Money (BHIM), a simple mobile-based platform for digital payments. The Indian e-commerce industry has been on an upward growth trajectory and is expected to surpass the US to become the second largest e-commerce market in the world by 2034. Technology enabled innovations like digital payments, hyper-local logistics, analytics driven customer engagement and digital advertisements will likely support the growth in the sector.

Now the just released CCI study says that the search and compare functionalities of online platforms have provided to the consumers a wide array of alternatives to choose from while for businesses, e-commerce has helped expand market participation by aiding innovative business models. The CCI study confirmed that online commerce is gaining importance across the sectors studied. The share of online distribution and its relative importance vis-à-vis traditional channels varies significantly across products. This divergence constrains construction of a unified competition narrative and points to the need for product-specific assessment of market and competition dynamics.

The report released on January 9 presents the key trends identified and also discusses the issues that may, directly or indirectly, have a bearing on competition, or may hinder realization of the full pro-competitive potential of e-commerce. These include the issues of lack of platform neutrality, unfair platform-to-business contract terms, exclusive contracts between online marketplace platforms and sellers and service providers, platform price parity restrictions and deep discounts.

The CCI is of the view that many of these issues would lend themselves to a case-by-case examination by the CCI under the relevant provisions of the Competition Act, 2002. The report outlines these issues and presents the observations of the CCI on the same without assessing whether a conduct is anti-competitive or is justified in a particular context.

On the basis of the market study findings, the enforcement and advocacy priorities for the CCI in the e-commerce sector in India are, inter alia, include, ensuring competition on the merits to harness efficiencies for consumers, increasing transparency to create incentive for competition and to reduce information asymmetry and fostering sustainable business relationships between all stakeholders.

The insights gained from the study will inform antitrust enforcement in these markets. Nonetheless, bargaining power imbalance and information asymmetry between e-commerce marketplace platforms and their business users are at the core of many issues that have come up in the market study. Thus, without a formal determination of violation of competition law, improving transparency over certain areas of the platforms’ functioning can reduce information asymmetry and can have a positive influence on competition outcomes.

In view of the foregoing, the report enumerates certain areas for self-regulation by the e-commerce marketplace platforms. These have been advocated with a view to reduce information asymmetry and promote competition on the merits.

The CCI under its advocacy mandate has urged the e-commerce platforms to put in place certain transparency measures. The CCI wants to set out in the platforms’ terms and conditions a general description of the main search ranking parameters, drafted in plain and intelligible language and keeps that description up to date.

It wants the the main parameters to include the possibility to influence ranking against any direct or indirect remuneration paid by business users, set out a description of those possibilities and of the effects of such remuneration on ranking. It, however, has a word of caution and says that introduction of the above-mentioned features, however, should not entail, disclosure of algorithms or any such information that may enable or facilitate manipulation of search results by third parties.

Even the CCI Study finds something amiss in e-commerce and suggests to set out a clear and transparent policy on data that is collected on the platform, the use of such data by the platform and also the potential and actual sharing of such data with third parties or related entities. It suggests that adequate transparency over user review and rating mechanisms is necessary for ensuring information symmetry, which is a prerequisite for fair competition.

Adequate transparency must be maintained in publishing and sharing user reviews and ratings with the business users. Reviews for only verified purchases to be published and mechanisms to be devised to prevent fraudulent reviews and ratings. Is says that the business users should be notified revision in contract terms. The study says business users concerned may be notified of any proposed changes in terms and conditions. The proposed changes should not to be implemented before the expiry of a notice period, which is reasonable and proportionate to the nature and extent of the envisaged changes and to their consequences for the business user concerned. About the discount policy, it suggests to bring out clear and transparent policies on discounts, including inter alia the basis of discount rates funded by platforms for different products and suppliers and the implications of participation and non-participation in discount schemes.

The Market Study on E-commerce in India was initiated by the CCI in April 2019 with a view to better understand the functioning of e-commerce in India and its implications for markets and competition. The objective was also to identify impediments to competition, if any, emerging from e-commerce and to ascertain the Commission’s enforcement and advocacy priorities in light of the same.

The study, a combination of secondary research, questionnaire survey, focused group discussions, one-on-one meetings, a multi-stakeholder workshop and written submissions of stakeholders, covered the three broad categories of e-commerce in consumer goods (mobiles, lifestyle, electrical and electronic 

appliances and grocery), accommodation services and food services. 16 online platforms, 164 business entities including sellers (manufacturers and retailers) and service providers (hotels and restaurants)] and 7 payment system providers from across India participated in the study. In addition, 11 industry associations, representing different stakeholder groups, also participated.

With the digital age, there is definite a paradigm shift leaning more towards e-commerce. The brick and mortar retailers must comply and adjust themselves to new strategies like the business mix-having retail presence and going online or merging with established online businesses to survive.

The CCI Study may help gather useful insights and information on the key features of e-commerce in India, the different business models of e-commerce players, and the various aspects of commercial arrangements between market participants involved in e-commerce. The study may also provide an opportunity to learn from business enterprises on how they are responding to the advent of digital trade and has helped gauge the key parameters of competition in digital commerce.

It is time; the government studies the impact of e-commerce on retail sector too. Shuttering stores or declaring bankruptcy in recent months amidst sagging sales is a pointer to the fact rise of e-commerce outlets have made it harder for traditional retailers to attract customers to their stores.