New FDI policy could benefit brick-and-mortar retail

By

Isabelle Crossley

Published
Jan 2, 2019

The new policy clarifications for online foreign direct investment are worrying some e-commerce firms but brick-and-mortar retailers may stand to gain from a reduction on deep-discounting online, according to an ICRA report.

The Department of Industrial Policy and Promotion’s updated policy on FDI has divided opinions with many large e-commerce firms fearing a re-evaluation of their business practices and smaller businesses hoping that it will lead to a more level playing field. With the Confederation of All India Traders praising tighter regulations and the US India Strategic Partnership Forum condemning the policy, it appears that many stand to lose and many to gain from the DIPP’s Policy Note 3.

Many brick-and-mortar retailers in India have struggled to keep customers buying in-store when e-commerce platforms offer heavy discounts that offline retailers cannot hope to match due to greater overhead costs. However, as the new policy prohibits online businesses from influencing the price of goods on its own site and from engaging in deep discounting practises, the difference between online and offline prices stands to be reduced. This will likely give a boost to brick-and-mortar stores. However, e-commerce will still have the advantage of convenience, popularity with India’s young population and the fact that discounting cannot be eradicated entirely.

Another change in the policy appears to prohibit e-commerce marketplaces from selling brands in which they have a stake i.e. private labels. As private label fashion brands have been major growth drivers for businesses such as Myntra due to lower costs and higher profit margins, businesses may have to greatly adjust their business plans and may have to change the ownership of private labels. The policy comes into effect on February 1 but, as private labels are such a big part of e-commerce platforms’ business, a month is not long to adjust.

According to an ICRA report published by ET Retail, online businesses that may be affected by the policy include Appario (an Amazon India and Patni Group joint venture) and Cloudtail (an Amazon India and Catamaran Ventures partnership) among others. Brands are also prohibited from exclusive tie-ups with e-commerce platforms which will also affect certain fashion labels.