Regulation throws a wrench in Indian Ecommerce

The battle to control India’s ecommerce market has become more complex. New foreign investment rules now allow 100% foreign direct investment in online retail businesses. However, the rules also ban discounts on listed items and require companies to follow a marketplace rather than inventory-based model. Most of the large ecommerce providers in India already operate as marketplaces. However, these companies cannot have more than 25% of their sales coming from any one vendor.

Although exact numbers are unavailable, analysts suspect that Flipkart subsidiary, WS Retail most likely breaches the 25% threshold. Additionally, Cloudtail India, a joint venture between Amazon and Catamaran Ventures, represents roughly 40% of Amazon’s Indian sales. Both Amazon and Flipkart have used subsidized discounts to fuel growth, but one could argue that a ban on discounting will prove more difficult for the local player.

With a war chest of venture capital and the proliferation of Indian smartphone use, FlipKart has boasted consistent annual GMV growth of over 200%. Unfortunately, a substantial driver of that growth has been steep discounts on smartphones. With discounting now banned, the company will need to shake up its strategy to remain competitive with Amazon, which despite working within the same regulatory conditions, can still win market share with its world-class logistics, customer service, and technology.

While in the short-term, these regulations are a big blow to retailers, it brings clarity to what has been a bitter dispute over the legality of foreign-owned online shopping sites. It also serves as a reminder to investors to proceed with caution in international markets, as stark and sudden changes in regulatory conditions can have an enormous impact on the business environment.

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