The Union government’s clarification on foreign direct investment (FDI) in e-commerce marketplaces will improve profitability and cash flows of brick & mortar (traditional street-side business) retailers. The move will cushion the impact of marginally higher capex intensity and support their credit profiles, according to a statement by Crisil Ratings.
“Revenue growth for B&M retailers, especially in the apparel and consumer durables segment, should improve as pricing gradually gravitates towards parity with online marketplaces. This, coupled with expectedly greater pricing power and store productivity, will provide a fillip to profitability,” said Anuj Sethi, Director, Crisil Ratings.
Aggressive discounting by e-marketplaces had hurt the profitability of B&M retailers. Facing what seemed like an existential crisis over the past couple of years, these retailers gamely fought back by reorienting store profiles, increasing private labels, and sharpening focus on Tier II & III cities thereby improving overall operating efficiency.
A better operating environment will also mean B&M retailers will continue to focus on store additions over the next 2-3 years.
The pace of store additions is expected to be faster than the 10 per cent of existing space presaged earlier. Further, better cash flows will support the credit profiles of B&M retailers. The new sourcing norms will impact e-marketplaces heavily dependent on group companies and restrict deep-discounting that had become synonymous with the sector.
Meanwhile, Crisil expects the e-marketplace sector to undergo a gradual transformation in the near term to a more sustainable business model. It will focus more on optimising processes (supply chain, warehousing and overall fulfilment) from a deep discounting for customer acquisition strategy.
The Central government, while defining the marketplace model of e-commerce, has permitted 100 per cent FDI under the automatic route. In addition, it has also stipulated some restrictive conditions for the marketplace model.
It has put a cap that marketplace will not source more than 25 per cent of its sales from a single vendor or group companies. Also, e-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods and services and shall maintain a level playing field.
