Will The New FDI Guidelines For Ecommerce Change The Indian Retail Industry?

The Indian Government announced a policy allowing 100% FDI in online marketplace platforms. But the policy added that ecommerce entities operating in a marketplace model will not directly or indirectly influence the sale price of goods & services and will maintain a level playing field. In effect, this means that etailers will now not be able to provide discounts as a business strategy to acquire or retail customers.

While many in the startup eco-system were critical of the government interfering on how ecommerce companies run their business, many, especially brick & mortar retailers and those who were critical of the deep-discounting strategy, welcomed this move as something that will ensure a level playing field.

While I fully agree with those who want the government to stay out of deciding how companies should run their business and what marketing strategies they should deploy, I find no merit in the argument that this policy will create a level playing field.

Why do brick & mortar retailers feel that the field was not level?

What prevented them from raising capital – from banks, VCs, PEs or from public markets that some of them have experience in tapping – to follow similar strategies that ecommerce companies deployed. And if they did not want to raise capital because they did not agree that discounting was a sensible business strategy, they should simply follow the strategies that they feel are most suitable for a retail business. Just because I disagree with your strategy does not give me the right to declare it as unfair.

A handful of PEs and VCs were / are willing to bet big bucks on their conviction that discount will be a more capital-efficient way of acquiring customers faster, and their belief that once a customer is acquired, there will be a way of retaining the customer to benefit from the expected ‘lifetime value’ of that customer. Whether this strategy is prudent of not, only time will tell. It is their money and they are willing to bet it on their conviction and belief. Just because you do not agree with discounting as a prudent business strategy does not give any one, brick & mortar retailers or the government, the right to protest against the strategy or block it.

Those critical of the deep-discounting model also argue that discounting reduces a brand to a commodity. I disagree. A strong brand is something that consumers trust and feel strongly about for the value proposition that it delivers to them. Yes, they may switch to buying it from someone who offers it cheaper. But if they are switching to a cheaper option, to me it just means that the brand connect for the user was not strong enough for the price-value equation to hold. Anyway, no one is forcing any brand to participate in deep-discounting models online or offline. And if ecommerce players were offering discounts on their own, the brand owner should in fact be happier with a healthier price-value equation.

That said, irrespective of whether ecommerce players will find some loopholes to continue to offer discounts, they will need to strengthen the core foundations of their businesses. Customer experience, supply-chain, warehousing, logistics, after-sales services, brand equity, being good places to work at, being responsible corporate citizen, CSR, etc. are some of the building blocks of any strong business. Many of those who started as startups in the recent past have started to develop organizational competencies in some of these areas. But building organizational competencies, including culture and processes and brand equity, is hard work and takes a long time.

Ecommerce players too are in the retail business. Some of the rules of the retail businesses will apply to them; and they may redefine some of the rules. But unlike the government’s definition that ‘ecommerce marketplaces’ are ‘information technology platforms’, I would argue that ecommerce companies need to think of themselves as retail companies, with online as their ‘currently’ (and perhaps for a long time) preferred mode of engaging with consumers.

Now, whether consumers who started buying online will switch back to offline if the discounts stop remains to be seen. Ecommerce and brick & mortar retail businesses provide a significantly different and differentiated experience for the customer. I like going to shops as much as I enjoy the convenience of buying online. And I may continue doing both. Much like sometimes I order food via an online app, and sometimes I go to a restaurant to eat.

Just because the app offers me cheaper options I am not going to stop going to restaurants, and just because the apps stop discounting I am not going to stop ordering from them. Both customer engagement mediums will have to create their customer-delight points differently, and the pressure from each other will drive innovation beyond just discounting. Hopefully. Or should I discount my optimism?

Either way, the government should refrain from suggesting to the industry what business strategies are acceptable and what are not. As long as it is legal, it should be permissible.