CCI Releases Study On E-Commerce In India

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CCI Releases Study On E-Commerce In India

The Competition Commission of India (CCI) released a report titled ‘Market Study on E-commerce in India: Key Findings and Observations’.

The study was initiated by the CCI in April 2019 with a view to better understand the functioning of e-commerce in India and its implications for markets and competition. The objective was also to identify impediments to competition, if any, emerging from e-commerce and to ascertain the Commission’s enforcement and advocacy priorities in light of the same.

The study, a combination of secondary research, questionnaire survey, focused group discussions, one-on-one meetings, a multi-stakeholder workshop and written submissions of stakeholders, covered the three broad categories of e-commerce in consumer goods (mobiles, lifestyle, electrical & electronic appliances and grocery), accommodation services and food services.  Sixteen online platforms, 164 business entities [including sellers (manufacturers and retailers) and service providers (hotels and restaurants) and seven payment system providers from across India participated in the study. In addition, 11 industry associations, representing different stakeholder groups, also participated.

The study confirms that online commerce is gaining importance across the sectors studied. The share of online distribution and its relative importance vis-à-vis traditional channels varies significantly across products. This divergence constrains construction of a unified competition narrative and points to the need for product-specific assessment of market and competition dynamics. Online commerce, the study shows, has increased price transparency and price competition.

The search and compare functionalities of online platforms have lowered search cost for consumers and have provided them with a wide array of alternatives to choose from. For businesses, e-commerce has helped expand market participation by aiding innovative business models.

The report presents the key trends identified and also discusses the issues that may, directly or indirectly, have a bearing on competition, or may hinder realisation of the full pro-competitive potential of e-commerce. These include the issues of lack of platform neutrality, unfair platform-to-business contract terms, exclusive contracts between online marketplace platforms and sellers/ service providers, platform price parity restrictions and deep discounts. The CCI is of the view that many of these issues would lend themselves to a case-by-case examination by the CCI under the relevant provisions of the Competition Act, 2002. The report outlines these issues and presents the observations of the CCI on the same without assessing whether a conduct is anti-competitive or is justified in a particular context.

On the basis of the market study findings, the enforcement and advocacy priorities for the CCI in the e-commerce sector in India are, inter alia, the following:

  1. Ensuring competition on the merits to harness efficiencies for consumers
  2. Increasing transparency to create incentive for competition and to reduce information asymmetry

iii. Fostering sustainable business relationships between all stakeholders

The insights gained from the study will inform anti-trust enforcement in these markets. Nonetheless, bargaining power imbalance and information asymmetry between e-commerce marketplace platforms and their business users are at the core of many issues that have come up in the market study. Thus, without a formal determination of violation of competition law, improving transparency over certain areas of the platforms’ functioning can reduce information asymmetry and can have a positive influence on competition outcomes.

The report enumerates certain areas for self-regulation by the e-commerce marketplace platforms. These have been advocated with a view to reduce information asymmetry and promote competition on the merits. The CCI under its advocacy mandate urges the e-commerce platforms to put in place the following transparency measures.

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Search ranking

  1. Set out in the platforms’ terms and conditions a general description of the main search ranking parameters, drafted in plain and intelligible language and keep that description up to date.
  2. Where the main parameters include the possibility to influence ranking against any direct or indirect remuneration paid by business users, set out a description of those possibilities and of the effects of such remuneration on ranking.

iii. Introduction of the above-mentioned features, however, should not entail, disclosure of algorithms or any such information that may enable or facilitate manipulation of search results by third parties.

Collection, use and sharing of data

  1. Set out a clear and transparent policy on data that is collected on the platform, the use of such data by the platform and also the potential and actual sharing of such data with third parties or related entities.

User review & rating mechanism
Adequate transparency over user review and rating mechanisms is necessary for ensuring information symmetry, which is a prerequisite for fair competition.

Adequate transparency to be maintained in publishing and sharing user reviews and ratings with the business users. Reviews for only verified purchases to be published and mechanisms to be devised to prevent fraudulent reviews/ratings.

Revision in contract terms
Notify the business users concerned of any proposed changes in terms and conditions. The proposed changes not to be implemented before the expiry of a notice period, which is reasonable and proportionate to the nature and extent of the envisaged changes and to their consequences for the business user concerned.

Discount policy
Bring out clear and transparent policies on discounts, including inter alia the basis of discount rates funded by platforms for different products/suppliers and the implications of participation/non-participation in discount schemes.

E-commerce in India grows at 51% annually
The CCI study is pertinent as e-commerce in India is among the fastest growing sectors, and there  is need to understand the need for policy adjustments here. Revenue from India’s ecommerce sector is expected to increase from US$ 39 billion in 2017 to US$ 120 billion in 2020, growing at an annual rate of 51%, the highest in the world.

E-commerce in India has attracted investors from across the world. Although funding in the e-commerce sector started in 2009, it gathered momentum in 2014 and maximum investment of around US$ 3500 million took place in 2017 in 124 funding rounds. Since 2009, the e-commerce sector has received around US$ 13,338 million in 904 funding rounds. Due to the increase in investments in the e-commerce sector, new companies started to enter the market since 2009. Maximum number of new e-commerce companies i.e. 1650 were formed in 2015. At present around 4757 e-commerce start-ups are active in India.

E-commerce in the goods category in India has grown at a compound annual growth rate (CAGR) of 57% in last seven years, and is expected to grow by 18.6% till 2022. The online retail market in India is estimated to be worth US$ 17.8 billion in terms of gross merchandise value (GMV) as of 2017. As of July 2018, the number of transactions in e-commerce retail was 1-1.2 million per day and on e-commerce platforms was 55-60 million per month.

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The growth engine has been smartphones, with only or primarily online retailers or e-tailers witnessing their sales mix shifting heavily into smartphone and electronics, supported by direct partnerships with brands.

As per a Working Paper of UNIDO, nearly half (45%) of the manufacturing output in India comes from the Micro Small & Medium Enterprises (MSMEs) and 43% of the MSMEs participate in online sales in India.

Increasing price competition
Confirming what is expected of online trade, the study points to an increased intensity of price competition across the categories studied. Online trade has led to greater price transparency. As per the study, majority of the respondent hoteliers and retailers track competitors’ prices and adjust price levels in response.

The frequency of price change was found to be high. In case of goods, most of the respondent retailers were found to change the price several times in a day, while some reported price revisions on a weekly basis and during promotional events. Majority of the hoteliers reported to undertake price revision on a daily basis.

While the idea of dynamic pricing strategy is not new, e-commerce has transformed the way price information is disseminated.

On the one hand, consumers enjoy increased price transparency and the consequent ease of price-comparison, on the other hand it enables sellers to monitor competitors’ prices on a real-time basis and use the same as an input in setting their own prices. Use of price comparison tools has been reported by majority of the respondents. Being on price comparison tools is considered advantageous as consumers use these tools to find the best deal and it enhances visibility of the brand. However, the survey showed that price comparison tools for the respondent hotels on an average lead to conversion rate of less than 10%. In all the categories covered in the study, there was near unanimity amongst sellers/service providers on online discounts being the key factor influencing competition. Consumer preference, according to significant majority of respondents (sellers/service providers), was being sculpted around the metric of price/discounts. While lower prices benefit consumers, the increasing focus on discounts, according to them, poses a risk to competition on non-price aspects such as quality and innovation that may hurt consumer interest in the medium to long run.

Strategic response to e-commerce
Businesses across sectors and at the various levels of supply chains were found to be gearing up to avail the opportunities of e-commerce while also equipping themselves to address the attendant challenges.

The retailers surveyed were found to be exploring various means to expand their footprints in the online space. Some of the large brick and mortar retailers have launched their own websites to complement the physical sales. The smaller retailers are primarily using third party marketplace platforms to access the online consumers. Also, there has been an emergence of a class of sellers who sell exclusively online, with no brick and mortar presence.

The contract terms between manufacturers and distributors, according to majority of the sellers surveyed, now include specific clauses with respect to online sales.

Albeit having embraced the online mode as an important and growing sales channel, the manufacturers were concerned about any distortionary impact that e-commerce might cause. Large brands are selling their products through their own websites as well as using the marketplace route. Small brands were found to be relying mostly on the marketplace platforms to access online consumers. Among large brands, it also emerged that they have introduced e-commerce teams in their sales departments to monitor prices and sales via marketplaces.

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Business models of e-commerce platforms
In the goods category, there exist two types of business models, namely, the marketplace model, whereby platform operators facilitate transactions between buyers and sellers and can fulfill the orders by handling logistics, deliveries and returns and the inventory model, that allows online retailers to own inventory and directly sell to consumers through their own platform. While e-commerce companies which have foreign direct investment (FDI) are allowed to adopt a marketplace model, they are not allowed to hold inventory and sell directly to consumers.

Some e-commerce platforms in the goods category, besides providing marketplace/intermediation services to connect sellers and consumers, also provide related services such as warehousing facilities, transactional support services, promotion and advertising, centralised payment processing, shipment and delivery of goods, refund and replacement, etc.

Some have a presence in B2B (business-to-business) wholesale, wherein the B2B entities reportedly procure goods from brands/ manufacturers and sell them to sellers, who may in turn sell the goods on the marketplace platform to consumers.

The nature of fee charged varies across platforms. Some charge fixed upfront fee and commission per transaction, the rate of commission varying across product categories. Marketplaces who offer delivery service may also include shipping charges.

The other sources of revenue are advertisements and customer subscription programs.

Role of online marketplace platforms
On the question of whether the advent of online platforms has increased the rate of market participation and have led to widening of markets, there was mixed response. A section of business users of platforms, consisting primarily of manufacturers and omni-channel retailers (i.e. retailers having both online and offline presence), were of the view that the size of the pie has not increased significantly, but shift of business from the physical to the digital space is taking place at a rapid pace. On the other hand, a section of small-scale enterprises who participated in the study confirmed expansion of markets for their products due to the advent of e-commerce platforms.

The goods marketplaces reported to have taken multiple steps to improve sellers’ experience in the last two years. These include improving the quality and image of the marketplace and related services, offering sellers to have a seller shop on the marketplace, introducing seller’s helpdesk etc.

One of the marketplaces’ group company has connected ‘kirana’ stores in over 20 states for last mile delivery programme. It has also included products of women entrepreneurs and artisans via special programmes.

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