Packages move along a conveyor belt at the Inc. fulfillment center in Hyderabad, India. (Photographer: Dhiraj Singh/Bloomberg)

Amazon Pantry: FDI In E-Commerce Rules Derail Amazon’s Grocery Push Inc. was forced to temporarily suspend its key grocery service and remove several products after its largest sellers stopped listing their items on the Jeff Bezos-owned online marketplace.

Pantry, the world’s largest online retailer’s grocery service managed by company affiliates, disappeared after the government’s latest foreign direct investment policy, effective Feb. 1, prohibited e-commerce entities from owning stake in sellers on their platforms and limited sales of any vendor or their group companies on a marketplace of online retailers, among other rules.

“The Pantry services are currently unavailable in India,” the company led by the world’s richest man said on Twitter after a few customers complained about the grocery platform not working.

Cloudtail—Amazon’s largest vendor where it holds a minority stake—was a seller for Pantry.

“While all the categories will be impacted, e-commerce firms will find it more difficult to do food and grocery,” K Vaitheeswaran, founder of Fabmart, India’s first online retailer, told BloombergQuint over the phone.

Agreed Ankur Bisen, senior vice president (retail and consumer products) at Technopak. “E-commerce companies can’t do stock and sell and can also not have a stake in the seller entities. Stock and sell gives you better margin and control over the supply chain and that was the incentive for the e-commerce companies.”

Amazon has been building its grocery vertical over the last three years and has juggled models to establish a foothold with Amazon Kirana, later rebranded as Amazon Now and currently known as Prime Now. Pantry, however, had the largest selection and was present in more cities than Prime Now. Walmart-owned Flipkart, which launched its grocery vertical last year, is only present in four cities.

Prime Now, a hyperlocal service platform that enables offline businesses and ensures product delivery within two hours, is still functional. This platform delivers goods via Big Bazaar and More stores. But one of the Amazon-fulfilled sellers on Prime Now—Now Store—is no longer available.

The U.S.-based company said it sees “very good long-term prospects” in the Indian market but is evaluating the recent changes in FDI rules for online marketplaces to ensure that there are no “unintended consequences” for customers and sellers on its platform, newswire PTI reported quoting Chief Financial Officer Brian Olsavsky. “There’s much uncertainty as to what the impact of the government rule change is going to have on the e-commerce sector there (India). We remain committed to complying with all laws and regulations, we will, but we’re evaluating the situation,” Olsavsky said in an investor call. “Our main concern is trying to minimise the impact to our customers and sellers in India.”

Amazon last year bought a 49 percent stake in the parent of a services company that acquired Aditya Birla Group-operated More—India’s fourth-largest supermarket chain—at an enterprise value of around $580 million, the biggest investment in the country’s brick-and-mortar retail in four years. The same year it even allocated $500 million for food and grocery.

To put that in perspective, the retail market is expected to be worth $1.1 trillion by 2020 from $672 billion currently, according to a report by Assocham and The online grocery market, Forrester Research estimates, currently accounts for less than 1 percent of the overall food retail.

Bisen said Amazon needs to evaluate what they want to do in this vertical. “The fact that they have been investing should be interpreted as they were keen on making the category big,” he said, adding that now Amazon can play the role of market access and do proper vendor onboarding and selection, among others. “They can choose what categories they want to do in food grocery, whether they want to do fresh vegetables or not, hyperlocal, and may choose not to do certain categories.”

Vaitheeswaran, however, expects it will take about six to nine months for the e-commerce companies to recoup from the recent changes.

Also read: E-Commerce FDI Policy: Bored Game