moneycontrol.com
A famous dialogue from the 2007 hit, Guru, ran like this: "When people start speaking against you, you must know you're succeeding."
If that movie was about a businessman who succeeded in changing rules of the game against all odds, a similar story is playing out in India's nascent online retail industry where a perfect storm is gathering against some of its key players.
India's ecommerce industry has grown five times in four years (from USD 2.5 billion sales in 2009 to USD 13 billion last year) and is slated to grow by another five times in the next seven, according to one expert.
Much of this growth came as Indians discovered the joys of shopping at the click of a button – while the infrastructure related to logistics and payment gateways evolved alongside – but a large part was driven by the fact that customers discovered the fact that one was likely to find most products being sold cheaper online than in physical stores.
Online retailers definitely enjoy a cost advantage over their offline peers. They have lower overheads with respect to staff costs, real estate costs are nil while inventory management in a warehouse is easier than in a frontend store.
But of late, the widening gulf between online and offline prices, while being a boon for customers, has led to questions whether a law is being broken.
For instance, the maximum retail price of an iPhone 5s is Rs 53,000 in offline stories but the same can be bought for as little as Rs 37,000 online, a 30 percent discount, according to price comparison website Junglee.com .
A mega flash sale (offering discounts of up to 90 percent) launched recently by India's largest e-retailer, Flipkart, ran into several technological problems because of the unprecedented response it received, leading to an outcry on social media.
But while those concerns can rightly be dismissed as growing-up pangs, there are other more serious troubles brewing.
Recent reports suggest that an association of offline retailers, along with Kishore Biyani, chief of Future Group, which runs the popular Big Bazaar retail chain, have accused online firms of indulging in predatory pricing and undercutting margins.
Predatory pricing is when a retailer sells below cost with the express intention of destroying the competition and the practice is not allowed under law. According to offline retailers, there is a case to be made against the pricing policies pursued by online retailers and they are considering approaching the Competition Commission of India.
The issue is tricky: online retail companies, most of which operate under the marketplace model (where they serve as a platform for buyers and sellers to connect), can claim the question of selling below cost does not arise because they do not own goods or are at the selling end of the transaction.
This logic was used by the Competition Commission of India when it dismissed a case of anti-competitive practices against Snapdeal.com.
But there have been reports that websites such as Flipkart often pay for many of the discounts they offer out of their own pockets , under which a case can likely be made of predatory pricing.
This has resulted in another problem: leading consumer goods companies such as Samsung and LG have stopped selling directly on Flipkart, because of the pricing issue, and are considering whether they should offer warranties on whatever stock is sold on such websites (which is sourced from other retailers).
The move may have stemmed from pressure from the USD 500-billion offline retail industry, which accounts for 90 percent of sales for these companies.
None of India's leading online retailers are reportedly making profits (thanks to kind of discounts they offer, as well as several high costs they also face such as on logistics) even as sales have gone through the roof. But the fast volume growth and the potential ahead has led foreign investors to pour in billions of dollars in these companies.
The issue of foreign capital is the final point of concern facing these companies.
Under current regulations, foreign direct investment is allowed only in ecommerce companies that pursue the marketplace model (connecting buyers and sellers) and not those that stock their own inventory.
While this has forced companies to adopt the former model, there have been occasions where the line has blurred leading to trouble with authorities.
For instance, Flipkart was recently judged to have violated foreign exchange regulations when the Enforcement Directorate found its earlier inventory-led model (it switched over to marketplace in 2013) was contravening laws . The company may be fined Rs 1,000 crore.
Rival Amazon India too is facing trouble with tax authorities in Karnataka who believe that it may have crossed over from the marketplace model to inventory-led model for a batch of its sales called "Amazon-fulfilled" sales (under which it sources from vendors and keeps products with itself) and so it should have paid sales tax on transactions it carried out rather than service tax that it pays for facilitating the transaction.
Early expectations that the new Narendra Modi-led government would allow foreign investment in the consumer-facing ecommerce businesses have fizzled out despite constant exhortation by the companies.
And so, it would be fair to say troubles for the industry could only be beginning.
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