FDI norms on e-commerce market place will benefit brick and mortar retailers: CRISIL

The new norms on foreign direct investment in e-commerce market places that restricts sales by a single vendor to 25 per cent in the market place and curb discounts will improve profitability and cash flows of brick and mortar (B&M) retailers, rating agency CRISIL ratings said on Thursday.

The biggest offline retailers in India include Future Group, which runs the offline Big Bazaar outlets, Reliance Industries and Aditya Birla Group, which runs the More stores.

"Revenue growth for B&M retailers, especially in the apparel and consumer durables segment, should improve as pricing gradually gravitates towards parity with online marketplaces. This, coupled with expectedly greater pricing power and store productivity, will provide a fillip to profitability," Anuj Sethi, director of CRISIL Ratings said in a statement.

DIPP, while defining 10 per cent foreign direct investment in market place model of e-commerce had set conditions: the market place will not source more than 25% of its sales from a single vendor or group companies, e-commerce marketplaces will not directly or indirectly influence the sale price of goods and services and shall maintain a level playing field. In addition, the rules stipulated customer satisfaction responsibility on vendors and not market places.

India's e-commerce firms registered gross merchandise value sales of $ 13.5 billion in 2015, with 93 per cent of it by three top firms -Amazon, Flipkart and Snapdeal, Morgan Stanley Research said in a report in March.

The aggressive discounting by these e-commerce firms to get more users to try their platform had hurt the profitability of B&M retailers. Facing what seemed like an existential crisis over the past couple of years, traditional retailers gamely fought back by reorienting store profiles, increasing private labels, and sharpening focus on Tier-II & -III cities thereby improving overall operating efficiency.

A better operating environment will also mean B&M retailers will continue to focus on store additions over the next 2-3 years, CRISIL said.

"The e-marketplace sector will undergo transformation in the near term to a more sustainable business model and will focus more on optimising processes (supply chain, warehousing and overall fulfilment) from a deep discounting for customer acquisition strategy," Amit Bhave, Director, CRISIL Ratings, said.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel