FDI In E-Commerce: Is It Curtains For Amazon’s Largest Sellers And Its Private Labels?

Two of Amazon.com Inc.’s largest sellers in India are likely to cease operations from Feb. 1, according to a person privy to the development.

The person said that the sellers Cloudtail and Appario will stop listing their products on the Jeff Bezos-owned online marketplace. That’s because the government’s latest policy on foreign investment in e-commerce, which comes into effect on Feb. 1, barred online marketplaces from owning stake in sellers on their platform and striking exclusive deals, among other rules.

Meanwhile, Amazon India brought a number of changes to its platform overnight to comply with the new rules. While its seller entities Cloudtail and Appario, where it holds minority stake disappeared from the platform, several products of its own private labels such as Solimo, Amazon Basic, Myx, Symbol and RJCo were also unavailable when BloombergQuint checked Amazon.in

E-commerce firms, including Amazon and Walmart Inc.-owned Flipkart, sought a deadline extension over the past month. But the Department of Industrial Policy and Promotion in an update to its website on Thursday declined any extension, saying the decision was taken after “due consideration”. The person cited earlier said that Flipkart and Amazon are exploring options and clarifications.

“There is much uncertainty on the impact of government rule changes on e-commerce,” Brian Olsavsky, chief financial officer at Amazon.com, said during the company’s earnings call on Thursday. “We built the business around price selection and convenience and the changes don’t help in those dimensions for both sellers or customers.”

The policy is seen as a huge setback for Amazon, which has finished investing $5 billion in India and Walmart, which last year took over Flipkart for $16 billion in its largest acquisition. “These (changes) will limit the capability of discounting by Amazon and Flipkart significantly and can also slow down their growth in the country,” said Satish Meena, an analyst at Forrester Research.

An industry partner who spoke to BloombergQuint on the condition of anonymity concurred.

Amazon in a statement said they remain committed to complying with all laws and regulations and will look to engage with the government to seek clarifications, as well as “minimize the impact on our customers and sellers”.

While Flipkart, too, is disappointed that the government decided to implement the changes at a haste, it said the company will remain committed to doing everything to be “compliant with the new rules”.

The Confederation of All India Traders said that the government’s move is a strong step to clean the “greatly vitiated e-commerce market of the country”.

What Are The Guidelines And What Can Online Retailers Do Now?

Stake In Vendors

The most important clause is that a vendor will be deemed to be controlled by an online marketplace entity if over 25 percent of purchases of such a vendor are from the marketplace entity or its group companies.

The rules now prohibit vendors from buying more than 25 percent from group companies of online platforms, Paresh Parikh, national leader, tax-consumer and retail practice and partner at EY India, said.

Online retailers argue that it’s cumbersome for them to have visibility of a vendor’s overall inventory, even though if a vendor procures from their wholesale units.

Meena of Forrester Research said that adhering to this clause essentially affects alpha sellers who procure from the wholesale and sell the entire inventory on the marketplace. “These are the sellers who drive sales and provide e-commerce the ability to give discounting.”

The firms will have to ensure that all the vendors who sell on Flipkart or Amazon cannot buy more than 25 percent from their wholesale subsidiaries.

Control Over Inventory

A clause specifies that entities having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, won’t be permitted to sell its products on the platform run by such marketplace entity.

Flipkart said it doesn’t violate this rule as it holds no stake in any of its vendor entities such as WS Retail or Omnitech Retail.

The Case Of The Private Label

While the government has clarified that there’s no “restriction on the nature of products (private labels) sold on the marketplace”, but the first two guidelines taken in conjunction imply that Amazon or Flipkart cannot sell its own products and private labels.

Amazon has about 8-9 private label brands, such as Symbol, Mix, Solimo, Amazon Basics, to name a few. Flipkart’s in-house brands include SmartBuy, MarQ and Perfect Homes.

However, e-commerce firms don’t hold inventory as they do contract manufacturing and then vendors buy such labels either from their etailers’ wholesale arms of e-commerce companies or directly from another distributor and sell it on the marketplaces. The vendors in most cases are either entities like Cloudtail or Appario or alpha sellers. That will no longer be possible according to the new guidelines.

Also, the 25 percent restriction wouldn’t enable a vendor to purchase more than 25 percent from the wholesale arms of e-commerce entities.

How Exclusive Deals Will Be Affected

The new policies also prevent Flipkart and Amazon from making agreements with third-party merchants to exclusively sell their products on their platform. The two companies enter such deals mostly with smartphone makers like Xiaomi and One Plus. Starting Feb. 1, this needs to be stopped.