Unclear norms offer e-tailers loophole to cut prices

Despite the Centre’s guidelines that restricted e-commerce companies with foreign direct investment from offering discounts, online retailers continue to woo buyers with offers and price cuts of up to 85 per cent.

While high-margin categories such as clothes and accessories have higher discounts, low-margin categories such as mobile phones and electronics are being sold with discounts of up to 40 per cent in the form of direct cash discounts or cash-backs. They are doing so because the FDI guidelines did not specify the level of discount that has been disallowed. It only stated that online retailers will not influence pricing.

Arvind Singhal, Founder of retail consultancy firm Technopak, said, “How does the government decide as what is the right level of discounts a company can offer? A high-margin category can have high discounts and still make money.”

E-commerce companies did not wish to comment on their discounting strategy.

India Ratings and Research (Ind-Ra), in a note, said the e-commerce policy is unlikely to change the discounting model of online retailers in the near-term. It added that while the policy was a step towards regulating the burgeoning e-commerce sector, gaps in the policy framework continue to exist.

Ind-Ra believes further clarity is essential for the successful regulation of the sector, implementation of the policy and achieving the desired objective to bring about a level-playing field between offline and online retailers.

The e-tailers can continue to exploit the loopholes or adopt innovative strategies to extend deep discounts, till a stringent framework to prohibit and bring a level-playing field with offline retailers is put in place.

Kumar Rajagopalan, MD, Retailers Association of India (RAI), said the retailers’ body is aware of the discounts being directly or indirectly given out.

“We are planning to go to either the Finance Ministry or DIPP (Department of Industrial Policy and Promotion) against the e-commerce players, after May 4. Till then, we will wait and watch. We are collecting all information in this regard .”

Both RAI and Footwear Association of India had last year filed cases in the Delhi High Court against the e-commerce companies for flouting FDI rules.

The court had directed the Enforcement Directorate to look into the matter following which the latter will be coming out with the finding on May 4.

Paritosh Sharma, e-commerce expert and Head of Business Channel at payment gateway PayU, said online retailers have stopped advertising or sending out promotional offers only on basis of discounts.

Sharma could be right. For example, Bengaluru-based Flipkart, whose valuation was marked down drastically by global hedge funds, including Morgan Stanley and T Rowe Price, failing on reasons of poor sales performance and profitability, has started to lure customers through means other than discounts. Its recent advertisement says ‘Flipkart matlab bilkul pakka’, meaning Flipkart means pure guarantee.

Similarly, Delhi-based Snapdeal has launched a ‘refer and earn’ campaign on its app. Users can refer Snapdeal to friends and earn ₹100 on each new customer added.

Market experts believe that the advertising share of e-commerce companies has started waning both on TV and print.

“They have got enough customers already. They are looking at optimising costs and not going out with loud campaigns anymore,” said marketing manager with a leading marketplace.

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