This article is written by Jagdish S. Kaisare, pursuing a Diploma in Entrepreneurship Administration and Business Laws, from Lawsikho. He is a fourth-year law student at Alliance School of Law, Alliance University.
Amazon has grown from a mere startup to full-fledged multi-billion dollar online-retailer company. Their innovative business model is fascinating and worth studying. Jeff Bezos began his entrepreneurial journey by launching an online bookstore in 1994 by the brand name “Amazon”. With time, it expanded to an “everything store”. Amazon’s unique selling point is its offering – widest range of high-quality goods and services at low prices! It’s business model is a tech-retail that delivers high-value proposition via its mixture of offerings. Its companies comprise of its online market platform that offers everything from a-z, online video content streaming platform, e-reading platform, podcast platform, cloud infrastructure, and brick and mortar stores. Amazon’s success is defined by its customer experience, vast range, low price, convenience, prompt delivery, and technology infrastructure.
Amazon’s revenue is the dynamic and great amount of its revenue is derived from fees and commissions from its sellers, affiliate program, advertising, kindle and amazon prime subscriptions. Amazon’s business model is not labour intensive, and, is thus, highly scalable. It’s business model facilitated its vision of being a multi-national giant. With the thriving technological advancements, Amazon only seems to grow rapidly.
Amazon’s entry into India
Despite being an acquisitive company by the approach, in 2013, Amazon decided to organically enter the nascent e-commerce Indian market, with the launch of their website. They relied on the data they acquired from junglee.com, a price aggregator venture launched in 2012. Amazon began their innings by offering only books and movies. Within few weeks, they ventured into electronics and as of 2019, they offer everything from A-Z. Amazon’s business model involved “third party” retailers who would offer their products on the Amazon marketplace platform. Upon an order, these retailers would transport their goods to Amazon’s warehouses where the goods were packaged and dispatched. They, however, faced endless challenges like understanding the intricacies of operating in the Indian markets and economy, handling logistics, understanding buyer psychology and the approach of Indians towards online transactions. Furthermore, India’s FDI policy prohibited multi-brand retailers from online selling. Thus, Amazon was prohibited from stocking and selling on its own.
Amazon’s Business Structure in India prior to the FDI Norms.
Amazon India focused on 8 modules to expand, set-up and dominate the Indian Market. Amazon’s understanding of the market saw an opportunity to target the middle, upper-middle and upper class of the society. They mainly focused on the “busy” Indian and offered a massive platform, amazon.in, that offered the consumer a wide range of goods, and its door-step delivery. In remote areas, they set up facilitation centres, and in urban areas, by its door-step delivery and massive discounts, Amazon offered great value to the consumers. To gain competitive advantage, Amazon acquired many Information Technology and e-commerce startups at low costs and used the data collected to offer customized deals to the consumers. Amazon’s strategy to enter the Indian market involved offering a wide range of goods and services at low prices.
How was the Amazon India Business Model different to that of the United States?
In the United States of America, Amazon’s business model is that of an inventory based, wherein, the inventory of goods and services is owned by Amazon and is sold to the customers directly. However, the Indian laws are different, and thus, posed a challenge to Amazon.
India’s FDI policy does not permit foreign direct investment in inventory based model of e-commerce business. Therefore, to abide by the Indian laws, Amazon had to shift from an inventory based model to marketplace model. The FDI rules allow 100% foreign direct investment via the automatic route in a marketplace model of e-commerce. The exceptions to this law are that a manufacturer is permitted to sell its products in India via e-commerce retail. Also, a single brand retail business operating through brick and mortar stores is permitted to sell via e-commerce.
Amazon being a multi-brand platform, and a foreign entity, had to face a challenge. Therefore, to comply with the laws, Amazon had to act as a mere facilitator between buyers and sellers, and adapt to a marketplace model of e-commerce.
Amazon India also faced many other challenges. Among others, the lack of “plastic money” use in India, governments stringent FDI norms, logistics, and delivery. Amazon overcame these challenges innovatively. They launched “cash on delivery”, tied up with local suppliers, courier services, set up fulfillment centres, etc. Their innovation delivered an effective solution, thus, enabling an ecosystem of business. In my opinion, Amazon’s efforts are absolutely commendable!
How did Amazon innovate to work around the laws?
Amazon entered into a joint venture with Catamaran Ventures, to launch an entity named “Cloudtail India Pvt. Ltd”. Cloudtail is categorized as an “independent seller” and is the most dominant sellers on Amazon.in. With this, Amazon successfully mixed their business model with marketplace and inventory. This enabled Amazon to expand its sales while maintaining customer indulgence. Cloudtail has expanded exponentially and acted as a growth driver for Amazon India. Consequently, Amazon stopped abiding by the “guaranteed returns” that it promised to the other third-party sellers. Likewise, Amazon has also entered into joint ventures with Patni Group, to launch an entity named “Appario Retail”.
Cloudtail contributed the majority of Amazon India’s sales, until, in 2016, the FDI ruled caped the single seller contribution to 25% of the marketplace’s overall business. Thereafter, Cloudtail requested other sellers to list their offerings via its platform, so that they could ensure product availability, faster deliveries, and enhanced customer experience.
FDI Policy 2019
The new rule inserted in the policy prohibits an entity related to the e-commerce marketplace entity, directly or indirectly, by way of equity participation, from selling on that e-commerce marketplace platform. It also prohibits the e-commerce marketplace from sources more than 25% from a particular seller. To strictly interpret this rule with regard to Amazon, Cloudtail would be prohibited from selling on Amazon, because of Amazon’s equity participation in Cloudtail.
Another rule inserted provides that, services like fulfilment, logistics, warehousing, etc., have to be provided to all vendors in a fair and non-discriminatory manner. Further, for related party entities, at arm’s length. The rules also bar exclusivity.
These rules created havoc for the e-commerce platform and endangered its brands like “Amazon Basics”, “Amazon Echo” etc. In my opinion, the sole purpose of these amendments was to ensure that the marketplaces are impartial and prices are uninfluenced. The policy aims to create a level playing field, protect the highly unorganized brick and mortal retail sector and generate benefits to the buyers, sellers and the entire e-commerce ecosystem. It also aims to rectify the pricing policies and treat brick and mortar retailers at par. To overcome the hurdles of these regulations, Amazon might have to divest/offload its shares to a completely unrelated entity.
What did Amazon do?
As a result of evaluating and complying with the new FDI Rules, Amazon initially took down the listing of numerous of products, like the amazon basics products, amazon echo speakers, products listed by Cloudtail, Shopper Stop, Appario retail, from its website. They also temporarily pulled the plug on its grocery retailing, and pantry services.
As per the RBI notification, for an entity to be a group company, it has to directly or indirectly, exercise 26% or more voting rights.
Thus, Cloudtail restructured its ownership. In order to comply with the norms, Amazon had to divest some of its equity from Cloudtail. Accordingly, Catamaran Ventures increased its stakes in Cloudtail to 76% from 51% and Amazon’s stakes decreased from 49% to 24%. Thus, Cloudtail ceased to be an Amazon Group Company, and therefore, became eligible to list its products and offering on Amazon.in. As per reports, cloudtail has plans to list on other online market places as well. It would only be logical for Amazon to divest its equity holding in other related entities like Appario, etc.
Further, as per reports, Amazon has reduced its commission charges to attract more independent sellers to list on their platform. They also intend to introduce rating based commission system. With this, they aim to create a team of sellers in line of Cloudtail and Appario retail, in order to comply with the 25% cap.
Despite these developments in the FDI norms, Amazon have been innovative in their approach, and have returned to the battlefield with Cloudtail as its vendor, Pantry services, Amazon Pay Unified Payments Interface (UPI).
As far as the new regulations are concerned, it should be a welcoming move. In my opinion, the rules ought to be more specific with regard to what the e-commerce marketplace entity can do and cannot do. We have previously observed big corporations comply with the mandate of the law despite exploiting the ambiguity in the law. Therefore, the rule out to expressly lay down the do’s and don’t, without leaving any scope for ambiguity.
What has to be taken into consideration is that India, as a market, is very unique. It is dominated by highly unorganized retailers, small traders, brick and mortar traders, mom and pop stores. As a result of the actions of the big giants, this trader community was allegedly, greatly aggrieved. Further, the other third-party retailers listing on Amazon were allegedly enraged with the preferential treatment that Cloudtail, Appario, and other Amazon related entities received.
With these new norms, we can hope for a more level playing field, robust and genuine e-commerce sector. Amazon would have to rework their strategies and perhaps face competitions from physical retailers like Big Bazaar, Croma. Amazon would also be challenged by its e-counterparts like Tata Cliq, Reliance Industries Limited’s soon-to-be-launched e-commerce platform. Companies like Snapdeal and Paytm have gained from these regulations.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.