How Amazon and Walmart’s Flipkart Continue to Skirt India’s E-Commerce Laws
Small businesses are left with no reprieve in sight unless JioMart changes things
In 1968, my grandfather set up a small hardware and electronics store, laying the foundation for a family business that grew and flourished over the next 50 years. But things have changed in the last couple of years. From thriving in competition, we’ve gone to just about surviving.
The problems faced by my family business are not much different from what small businesses and mom-and-pop stores around the world face: predatory pricing by deep-pocketed, e-commerce companies. Predatory pricing is a strategy in which dominant firms deliberately reduce prices to loss-making levels in the short term to force other players out of the market. It is considered anti-competitive because in the long run customers will have no option but to buy from the dominant players.
What enables companies to set predatory prices?
Amazon and Walmart-owned Flipkart have come a long way in India, capturing nearly 60 percent of the e-commerce market and slowly creeping in on the entire retail market.
In most countries where Amazon operates it not only facilitates a platform for third-party sellers to sell to consumers (marketplace-based model) but also maintains its own inventory and sells directly to consumers as well (inventory-based model). The biggest advantage of the inventory-based model is that e-commerce giants can leverage their bulk buying capacity to get steep discounts from manufacturers and this, in turn, makes it easier for them to sell at low prices.
In addition to bulk buying discounts, both Amazon and Flipkart can offer huge discounts, even if it means they incur losses, because of heavy foreign investments. Both companies currently do not make profits on their India operations. While Amazon relies on its profitable US arm, Flipkart relies on its US-based parent company, Walmart.
Small businesses in India, who currently constitute more than 75 percent of the Indian retail market, neither have the clout to purchase in bulk nor the ability to attract foreign investment. Owing to this disadvantage, the Indian government passed regulations to prevent e-commerce companies from engaging in unfair competition and predatory pricing. But these regulations are repeatedly violated.
When there is a law, there is a loophole
The Indian government’s Foreign Direct Investment (FDI) policy outlines that e-commerce companies with FDI can only operate as marketplaces for third-party sellers and cannot operate an inventory-based model where they sell directly to customers. The policy is meant to prevent e-commerce companies from reaping the benefits of bulk buying. But Amazon and Flipkart found a way around this regulation because these rules only applied to Business to Consumer (B2C) e-commerce and not Business to Business (B2B) e-commerce. So both firms set up a wholesale unit which sold to third-party sellers, who in turn, sold on the online platform.
On Amazon, the major third-party seller, Cloudtail, was a 51:49 joint-venture between Catamaran Ventures and Amazon. Flipkart, likewise, sold products through WS Retail, which was owned by Flipkart’s founders until 2011. This, technically, did not violate the FDI rules because Amazon and Flipkart did not maintain any inventory, rather Cloudtail and WSRetail did. But it violated the law in spirit because these sellers bought their stock from the Amazon and Flipkart’s wholesale units.
The government closed this loophole in 2016 by clarifying that an e-commerce marketplace cannot derive more than 25 percent of its overall sales from a single vendor.
To get around this, Amazon created another company just like Cloudtail called Appario Retail. This was a 51:48 partnership between Patni group and Amazon. Flipkart, on the other hand, reduced its dependence on WS Retail and expanded to include a handful of preferred sellers who made the bulk of the sales on the platform. This structure allowed Amazon and Flipkart to make sure no single vendor sells more than 25 percent, but put together, these preferred sellers still made up the bulk of the sales on the platform, and they continued buying from Amazon’s and Flipkart’s wholesale units.
When there is a loophole, there comes a law
Two years later, in 2018, the Indian government tightened the noose once again by revising the 25 percent cap. It changed from no seller on the platform can sell more than 25 percent of overall sales to no seller should purchase more than 25 percent of its goods from the marketplace or its group companies. This was supposed to reduce the dependence of sellers like Cloudtail and WSRetail on the wholesale units of Amazon and Flipkart, respectively.
To tackle this, Cloudtail asked other smaller sellers to sell through it rather than directly on Amazon. Many sellers agreed to this because they can sell faster through Cloudtail owing to the preferential treatment Cloudtail receives from Amazon. This helped Cloudtail reduce its dependence on Amazon’s wholesale unit, but many of the sellers who got into this agreement now accuse Cloudtail of charging very high margins and also of using sales data to their advantage by starting private labels.
Private labels are Amazon-owned brands that sell products in direct competition with third-party sellers. AmazonBasics is one example. Private lables are problematic because Amazon can give these products preferential treatment in terms of pricing and search ranking, and can use its exclusive access to shopping data to further optimize sales of these products. The debate on whether private labels should be allowed is still open, but in India, the government has currently not passed any laws against this.
Another way Amazon gets around the new 25 percent limitation is by diversifying its seller channels. Cloudtail and Appario Retail are not the only sellers that Amazon has control over. Sellers like RocketKommerce, Sigma Online, and STPL Exclusive all have a special relationship with Amazon as well. So while one seller can only buy 25 percent of its stock from Amazon’s wholesale unit, many such sellers keep business running as usual.
Flipkart’s way around this restriction was to create intermediaries that buy from its wholesale unit and sell to preferred sellers like OmniTech Retail and TrueCom Retail, who in turn sell to customers on the platform.
Simply put, the e-commerce policy continues to be violated because the wholesale units of Amazon and Flipkart still sell to a select group of third-party sellers, who in turn, sell at predatory prices on the online platforms.
The Indian government’s latest revision also stipulated that no group company of a marketplace can be a vendor on the said marketplace. A group company is defined as a company in which the marketplace directly or indirectly has 26 percent or more stake and appoints more than 50 percent of its board members.
This was supposed to deal a huge blow because it meant that Cloudtail and Appario Retail cannot be sellers on Amazon as the latter held a significant stake in them. After a brief period of taking down listings from these sellers, Amazon delicately sidestepped this issued by reducing its share in Cloudtail and Appario to 24 percent each and they were no longer classified as group companies.
As for Flipkart, there is no evidence that it has any stake in its preferred sellers. Flipkart’s ownership structure is complex to discern because its holding company is located in Singapore and the company has 14 subsidiaries that are interconnected in a convoluted manner.
The current state of affairs
Amazon and Flipkart currently give preferential treatment to a select group of sellers like Cloudtail and Omnitech in the form of lower fees, better shipping rates, sales data sharing, and prominent placement in search results.
In December 2019, the Confederation of All India Traders (CAIT) staged a protest across the country claiming that over 80 percent of the sales on Amazon and Flipkart came from only 10 to 15 preferred sellers on the platform. This starkly stands against Amazon’s claim that it supports more than 650,000 sellers. A more recent report by Reuters reveals that 35 Amazon retailers account for around two-thirds of the sales on the platform.
The All India Online Vendors Association (AIOVA), a group of over 3500 online merchants, recently wrote to the Competition Commission of India (CCI) alleging that Cloudtail pays Amazon a fee of 6.3 percent for electronic products while other independent sellers pay about 28 percent. This goes directly against the FDI policy because the policy dictates that the marketplace should treat all sellers in a fair manner. The recent Reuters report also reveals that Amazon helped Cloudtail establish relationships with companies like Apple, Microsoft, and OnePlus, which allowed these companies to only sell through Cloudtail.
While Amazon claims that all sellers are treated fairly and equally, the Reuters report reveals that Cloudtail has been frequently referred to as Special Merchant (SM) and Appario Retail as Special Merchant (SM2) in internal company documents. The documents also suggest that these special merchants get subsidized fees, directly in contrast to Amazon’s claim of impartiality.
Moreover, these preferred sellers continue to buy from their respective marketplace’s wholesale unit at discounted prices. Owing to this endless list of advantages, these sellers are able to sell at predatory prices. “The price points at which these sellers sell the products on the marketplace platforms are in many instances lower than the cost price for the brick-and-mortar retailers. These retailers maintain that, therefore, they either have to match the online discounts at a significant loss or the online market would be foreclosed for them,” reveals a recent report by the Competition Commission of India (CCI).
Simply put, Amazon and Flipkart enable few companies, including themselves, to thrive and flourish at the cost of the vast majority of the Indian retail sector, but portray themselves as a channel for all small businesses to do business online. At the end of the day, both the e-commerce giants continue doing what the Indian government sought to curb in the first place: sell products at predatory pricing.
The Indian government’s lackadaisical attitude towards enforcing its own e-commerce policy is the other side of this story. This is partly because no customer is complaining. Customers benefit from low prices and they don’t particularly care how or why e-commerce companies offer deep discounts. The other reason the government is not strictly enforcing its policy is because of the huge investments these companies have made into the Indian economy. Amazon has committed over $6 billion to grow its Indian business and is committing to export $10 billion worth of goods by 2025. This has allowed these companies to get away with creative corporate structures without much repercussion.
The Confederation of All India Traders (CAIT) and All India Online Vendors Association (AIOVA), which consist of the stakeholders who are affected by these malpractices, have repeatedly written to the government highlighting the issues that small business face, but the lack of a proper investigation by the government has left these parties with no reprieve in sight. But, there might light at the end of the tunnel.
JioMart: A new era of e-commerce?
Jio Platforms, India’s largest telecom operator with over 400 million subscribers, owned by Reliance, India’s largest company, hopes to revolutionize the e-commerce just as it did the telecom space in 2016.
Mukesh Ambani, chairman of Reliance, announced last year that the company is introducing a new model of e-commerce, through a platform called JioMart.
JioMart, rather than maintaining its own inventory, is looking to link the 30 million neighborhood stores that currently exist in India to nearby customers. It is also partnering with Facebook-owned Whatsapp to make the shopping and payment experience seamless for customers. This will mean customers still get the convenience of online shopping, but their orders will be fulfilled by stores near them, benefitting small businesses as well. This is being touted as the “phygital” model because of the combination of physical and digital commerce. JioMart has already begun operations in select cities and is focusing on grocery delivery to start with.
But there’s a caveat. Reliance also has its own chain of brick-and-mortar retail stores across the nation selling grocery, food, apparel, footwear, electronics, and home improvement products. Reliance Retail is the largest retailer in India in terms of revenue and if JioMart goes on to become just another sales channel for this business, it will not make any positive difference to small businesses across the country. Rather than empowering small businesses, JioMart will only add to the competition they are facing.
Jio has the money, political power, and customer base to revolutionize the e-commerce space, but will it execute the plan as intended or will it become one like the others. We’ll have to wait and see.