New restrictions on India’s burgeoning e-commerce industry could potentially hurt Amazon’s business in the country.
India is an important growth market for the American e-commerce giant: Amazon has already paid about $ 5 billion in this market and reportedly plans for an additional $ 2 billion investment in the Amazon in India. It has also made inroads into the country’s offline space, buying equity stakes in local retail chains such as More and Shoppers Stop.
India’s e-commerce market will surpass $ 100 billion by 2022, with online retail and travel holding more than 90% share, according to global consulting firm PwC.
Amazon shares fell on Friday with the entry into force of India’s new e-commerce regulations, in part because the company expressed concerns about “a lot of uncertainty” in the country.
An Amazon India spokesperson said in a statement to CNBC on Tuesday: “While we remain committed to complying with all laws and regulations, we will continue to seek to engage with the government to seek clarification that will help us. to decide our future course of action as well as to minimize the impact on our customers and our salespeople. “
Now, Amazon is working to reconfigure its business model, key partnerships and ownership structure in order to come into compliance in India. Here’s what you need to know about the recent changes in the e-commerce marketplace in the world’s fastest growing large economy:
Last December, the Indian government issued circular which effectively prohibited Amazon and its local competitor, Flipkart, from selling products of companies in which they have a stake.
The document says e-commerce companies can no longer enter into exclusive sales deals with sellers or offer significant discounts to consumers based on those deals. Foreign direct investment would only be allowed in e-commerce businesses that provide markets for buyers and sellers, under the new rules.
Typically, e-commerce companies can make wholesale purchases through their wholesale subsidiaries or other affiliates and then sell the products to preferred sellers with whom they have agreements, according to Reuters. In turn, these sellers can sell the products to consumers at low prices.
The new changes took effect from February 1, following complaints from local Indian retailers and merchants about anti-competitive practices like Amazon and Flipkart, which is owned by Walmart.
Analysts told CNBC that the new ecommerce rules will have a short-term impact on Amazon as they will force companies like Amazon to seek alternative business models in the absence of relying on the companies they are in. hold a stake.
“This will have a significant impact on product availability on these platforms in the short term, as these sellers account for at least 45-50 (percent) of sales on these platforms,” CNBC told CNBC via email. Satish Meena, Senior Forecast Analyst at Forrester. He added that Forrester is forecasting a minimum 5-6% reduction in online sales for 2019 due to the policies.
In addition to this, the the government refused requests Amazon and Flipkart to delay implementation of the new rules to give businesses more time to comply.
An Amazon India employee walks towards a security barrier at the company’s new distribution center on the outskirts of Bangalore.
Manjunath Kiran | AFP | Getty Images
While parliamentary elections are due to be called in May, one analyst called the situation a political “posture”.
“Applying the same (rules) is a totally different problem and depends on how these companies interact with decision-makers, display their intention and… the willingness of decision-makers to seek common ground,” Ankur Bisen, vice- senior chairman at Indian management consulting firm Technopak, told CNBC via email. He explained that the situation is expected to stabilize later in the year once the government clarifies the changes.
As Amazon tries to comply with the new rules, more than 400,000 items available on its Indian site could temporarily disappear, the The New York Times reported last week. This would represent nearly a third of Amazon’s estimated $ 6 billion annual sales in India, according to the newspaper.
On Wall Street, analysts are mostly stuck in the Internet juggernaut, tweaking estimates and lowering price targets slightly.
The overall impact of the new rules on Amazon is “hardly… overwhelming,” Michael Pachter, managing director of equity research at Wedbush Securities, told CNBC by email.
He cited estimates that the new restrictions would affect about a third of products sold by Amazon in the country, so that the company would lose only about $ 250 million in sales. Meanwhile, Amazon is expected to generate $ 280 billion in revenue this year, which is about 0.1% of its sales, Pachter said.
While investors have a legitimate short-term concern, Amazon’s game in India is “a very long game,” according to RJ Hottovy, consumer capital strategist at Morningstar.
“We don’t expect Amazon to post positive profits in the region for nearly a decade, which won’t change based on the new regulations,” he told CNBC. “In the longer term, I expect India to ease some of these restrictions if companies like Amazon and Walmart fund infrastructure projects in the region.”
Technopak’s Bisen added that the rules would benefit local entities that do not belong to foreign companies, as they are expected to become more active in the e-commerce space. On the other hand, consumers who have long enjoyed a wide variety of low-cost products would lose out, analysts said.
Given the amount of money involved in the sector, the government may be relaxing some regulations, added Meena of Forrester.