Regulatory challenges in India bring Amazon, Walmart into unlikely alliance

The rivalry between Amazon India and US retail giant Walmart, which bought over Indian e-tail firm Flipkart in 2018, to corner a bigger share of the over $100 billion Indian e-commerce market will intensify in 2019. However, even as they fight it out, regulatory challenges on foreign e-commerce players in India is also bringing the two into an unlikely alliance.

 

The next big battle between Walmart and Amazon India will be fought in two key areas: Building an offline presence to complement online sales and an aggressive thrust in the grocery and foods business. It’s another matter that grocery and foods business is facing a major challenge due to unclear regulations.

 

Amazon has already made the right moves in both areas. In 2017 it picked up a 5 per cent stake in lifestyle chain Shoppers Stop and followed it up last year with a 49 per cent stake in Aditya Birla Group’s More, which has over 575 grocery stores and 20 hypermarkets across the country. The online giant is also in the race to acquire a minority stake in RP-SG’s food and grocery retail chain Spencer’s Retail. And if it manages to stitch up a deal to garner a minority stake in Kishore Biyani’s Future Retail, which runs Big Bazaar as well as its fashion brand, Amazon looks set to be streets ahead of its rival in India. It may also bring its global food brand, Whole Foods, to this country.

 

Amazon is also looking to ramp up its online grocery offerings. The company, which has two grocery segments, Amazon Pantry and Prime Now, is toying with the idea of bringing in healthy, organic and niche products to its burgeoning millennial user base at affordable prices. Also, in the food only segment, Amazon Retail India Pvt Ltd (ARIPL), fully owned by the American major, would like to scale up significantly from the current low-key stage. 

 

Clearly, Walmart-controlled Flipkart has some catching up to do. However, Flipkart hopes to leverage the expertise of Walmart in building supply chains and, after running pilots, is all set to expand its grocery services in the next five months, if policy hurdles don’t come in the way. While it would not be selling perishables such as fresh produce and meats, there are plans to put in place a cold supply chain by the end of 2019.

 

“In grocery, we have seen spectacular adoption, and after Bengaluru, we are now focused on ramping it up in Hyderabad, Chennai and Pune. The success has been possible because of our problem-solving approach, by which we recognised and set up an independent supply chain for grocery,” says a spokesperson for the company, which has also been in talks with online grocery platforms such as Grofers and Bigbasket for an alliance. 

 

While Flipkart has not yet revealed any details about its offline strategy, it is bound to leverage parent company Walmart's 21 cash-and-carry stores across India which sell a variety of products from FMCG goods to furniture. Walmart plans to set up 50 more stores in the next four to five years. However, analysts say that the US major’s chances of buying large Indian offline retail chains may be limited as Amazon has already bought into them.

 

Amazon and Walmart’s aggressive move into the grocery and food business is a no-brainer. According to research agency Technopak, Indian consumers spend over $700 billion per annum on merchandise, out of which $300 billion is spent on basic foods alone. E-commerce constitutes only 2-2.5 per cent of the total merchandise and out of this about 40 per cent of the gross merchandise value comes from the sale of mobile devices.   

 

However, for both Amazon and Walmart-controlled Flipkart, a huge challenge this year could be handling regulatory issues, especially so because with elections round the corner, the government may be in the mood to please domestic e-commerce players. In December last year, the Department of Industrial Policy and Promotion (DIPP) issued an additional set of guidelines for foreign direct investment (FDI) in the e-commerce sector. Under these, it barred online marketplaces with FDI from selling their private labels on their own platforms and also on those they may have stakes in.

 

Amazon and Walmart’s Flipkart together have several private labels covering 200 different categories. And collectively, they have spent $1.5 billion in India to expand their private labels. Shutting these down would mean huge losses as they have already made significant investments in infrastructure, staff, marketing and so on.

 

Those in the know say that after the DIPP shocker, the two companies together met top government officials both in the DIPP and Niti Aayog and made representations on the adverse implications of the move. A week later, DIPP watered down its policy and stated that there would be no restrictions on private labels sold by e-marketplaces. Even so, there’s much else in the guidelines that’s awaiting clarity.

 

 Indian e-commerce players, on their part, are clamouring to have the restrictions reinstated. Kunal Bahl, co-founder of beleaguered e-tail firm Snapdeal, Sanjay Sethi, co-founder of Shopclues, trader bodies such as Confederation of All India Traders (CAIT), and Swadeshi Jagaran Manch (SJM) have all come out in support of curbs on foreign e-commerce platforms.  Says CAIT national secretary general Praveen Khandelwal, “The new clarification note by DIPP allowing private labels is nothing but simple, stupid confusion or the government losing guts and back-tracking.”

 

Amazon and Walmart are allying on another front — the government’s e-commerce policy whose first draft seems to be tilted in favour of Indian players and traders.  “The ones who formulated the first draft of the policy included representatives from companies such as Ola, MakeMyTrip, Paytm, among others. Amazon and Walmart fear that pressure from these companies would lead to an unfavourable policy, one that specifically targets us,” said a source at one of these companies.