The online retail sales as a percentage of total retail sales in India are still very small and will be hovering around 7-8% and as such, they are still not a monopoly but it is growing at a high rate. The trade practices that E-Retailers follow of selling goods at a price much lower than the cost is against the provisions of CCI, writes Rajat K Baisya.

Only in recent years, 70% of the Flipkart started by two ex-Amazon employees was acquired by the world’s biggest retailer Walmart at an astronomical price of 20 billion USD proving all analysts and their predictions wrong. It was the biggest ever acquisition that happened in India in terms of value. Sachin Bansal, one of the promoters, was not in favour of this outright sale and he decided to sell his own equity also and part ways with the other partner Binny Bansal who remained as Executive Chairman. Sachin now plans to get into the financial service business. Walmart in their anxiety to stall Amazon to get hold of Flipkart to emerge as the invincible single largest player in e-retailing to dominate online retail business in India ended up paying a huge price.

These days, acquisitions are happening on transactions of the huge sum which often defies all logic. Data acquisition seems to be more important for investors and not profit. The data has now become more valuable than even petroleum oil. WhatsApp, a company with no revenue and was having 138 million USD in losses was acquired by Facebook paying 19 billion USD in 2014 just to get access to data. WhatsApp now has over 2 billion database and that will give Facebook the opportunity to start a new business and they already announced to start payment services in India.

India was at 137 in global ranking for data usage till Jio appeared in the scene and made data free forcing Airtel and Vodafone also to fall in line and within six months, India ranked world no 1 in terms of data usage. Everyone now uses WhatsApp.

With the entry of Walmart and Amazon in the Indian online retail space, the retailing industry has undergone remarkable changes. In India, we have about 13 million retailers and they have felt the threat and formed an association to create pressure on the government and system to stall the march ahead by these two giants to take away the business of the small retailers.

The younger generation does not like to go shopping in traditional mode and instead they buy everything online. The reasons are: it is easier to order, cheaper in price in comparison to high streetprice, it is delivered to your home, it can be returned if you don’t like with no strings attached, it comes with some loyalty offers like bonus points entitling you to get further benefits in future which even can be gifted to anyone you want, you can decide from a whole range of wide choices including foreign foods and new brands. Everything happens without any hassle and people enjoy the whole experience of ordering and receiving goods using mobile apps, like never before.

The Swadeshi association approached the government as they felt threatened. Any product that you buy from retail stores in the neighbourhood can be bought online from Amazon and Flipkart at a cheaper price. In addition, you also get well-known foreign brands. I can see these days youngsters are consuming foreign brands. Manufacturers in their own interest have also have to keep their stock for online deliveries to consumers’ from Amazon and Flipkart.

Traders are traditionally supporters of BJP and thus the government is keen to come out in support of Swadeshi online retailers’ demand. Commerce Minister Piyush Goel has been talking about this in all forums and even threatening them that they will have to follow the rules of the game. Multi-brand retailing is still not allowed in India for foreign companies which had prompted Walmart to get into the Cash & Carry model of wholesale. They also tried their hands in a joint venture with Bharti Airtel to set up retail outlets but that did not work and JV has been called off. The Cash& Carry business with fifty-eight large-format wholesale stores of Walmart is not making money and reporting huge losses. They now decided to close those down.

On receiving the complaints from the traders association the matter was referred to the Competition Commission of India (CCI) who initiated an audit of both Walmart and Flipkart. Fearing the repercussion both went to Bangalore high court and got a temporary injunction against an audit. But the battle will continue.

What is really happening with these two retailers? Amazon’s boss Jeff Bezo was recently in India to announce a new dose of funding up to 2 billion USD in the next two years and also creating 1 million new jobs which he did organising programs in Mumbai attracting media attention. But Commerce Minister Piyush Goel did not lose time and immediately said that ‘Amazon is not doing any favour to India and they are only funding their losses and 1 million new jobs will also throw many times more numbers of people out of job from traditional retail and distribution sector’.

This might be true. But can it be stopped? Every business has the right to fight for their survival. What is these two deep-pocket global e-retailers are doing? They are heavily discounting the merchandise to acquire customers. Customers’ acquisition cost is very high for them. The result is clear and for Amazon having a turnover of Rs 5000 crores they incurred a loss of Rs 6000 crores. And that loss has to be funded. This can be clearly seen as selling stock at prices lower than cost just to acquire customers.

For earning revenue of Re 1 Amazon is spending Rs 1.20. In international trade selling anything lower than cost is considered as dumping and there is anti-dumping law preventing any country to sell products at lower than cost as it can destroy the local trade. The Competition Law in India was introduced in place of earlier MRTP (Monopoly and Restricted Trade Practices) to protect the local trade and prevent monopoly. Similar law prevails in all countries.

The attempt of Amazon and Flipkart can be clearly seen as eliminating the traditional trade and converting all customers to online retail. They are incurring huge costs to acquire the customers with the hope that once they have a huge loyal database they will be able to sell some merchandise like fashion goods and garments etc. at a much higher price with a good margin to make money. Currently, investors are only pumping money to get customers and reach a huge scale of operations. They can then sell processed foods at a price lower than the cost and pose a serious threat to the existence of traditional dealer-distribution network engaging a large number of workforce.

E-Retailers Amazon and Flipkart

But the other side is also true, in the sense that if global online retailers like Amazon and Flipkart cannot eliminate the traditional retailing trade they cannot grow and as such, there is a conflict of interest between two models. Competition Commission of India (CCI) has a role to play to help the smaller local players to survive.

The online retail sales as a percentage of total retail sales in India are still very small and will be hovering around 7-8% and as such, they are still not a monopoly but it is growing at a high rate. The trade practices that they follow of selling goods at a price much lower than the cost is against the provisions of CCI. And as such, there has to be a meeting ground. CCI initiated audits to reveal the truth but Amazon and Flipkart are fighting to avoid that audit process. The process may still be pursued by the government. It also has political and socio-political connotations. Walmart and Amazon have pumped in a huge sum in India and they still have not yet reaped any profit from their operations.

All these investments is going as entry cost for creating eventually a profitable model. Capital funding cannot go on forever and they will do everything possible to get going and growing for achieving a positive bottom line which itself is a far cry from the current situation when losses are, in fact, more than the sales. President Trump’s recent visit possibly was also to tell Modi that ‘don’t disturb our business houses’.

The future of the food retail trade in India will be having only two models – one, the organised retailing which is gaining ground now and growing with a lot of local business houses including Birlas, Ambanis, Goenkas, Damani, Godrej, and Biyani are having their chains of organised retail stores. But some of those are serious acquisition candidates. Damani’s D’Mart model in western India is successful. They sell everything 10% lower than MRP. But others are yet to break even.

Ultimately, the total retail trade – both online and physical stores will be in the hands of global players. Time only will tell us when, but this is inevitable as most of these local players are losing money including Big Bazzar and waiting for someone to come and pay their price. Some of those will get acquired and few are already in discussions with prospective shooters. Very small retail stores including mom and pop stores will run in smaller towns and villages. But they also have to be supported by efficient supply chain and logistics operators.