India Tightens Noose On E-retailers And We Should Too!

India Understands Importance Of Brick And Mortar

India has tightened the noose on E-retailers and America should too. According to Quartz India, the country's new foreign direct investment (FDI) rules for the e-commerce industry could result in a massive set back for existing players. This means companies such as Amazon and Flipkart may lose up to 40% of their revenues. by 2020 due to the tightening of FDI norms, according to CRISIL Ratings. Anuj Sethi, senior director at CRISIL said, “The impact on e-retailers would be largely in the electronics and apparel segments, which account for a bulk of their revenues.”

Near the end of December, the Narendra Modi government announced several restrictive changes in its FDI policy for online retailers. The new rules are aimed at safeguarding the interests of offline retailers were first floated in 2016 and include restricting e-commerce companies from entering into exclusive deals to sell at deep discounts. The new policy also bars them from procuring over 25% of the inventory from a single vendor, especially from sellers in which the companies own a stake. Launching products exclusively on their websites and apps has been a major money spinner for online retailers, but the practice has left small traders and sellers upset because they could not match the deep discounts that online companies offered.

The top two e-commerce companies in India, Amazon and Flipkart account for about 70% of the online retail industry revenue generate and about half of their sales through group companies. this means following the new restrictions on equity ownership in sellers, e-retailers will need to make changes in their supply chain and may be forced to rapidly alter business model in several ways. It is reported that Amazon and Walmart-owned Flipkart will not be compliant with the new FDI rules by the deadline and have urged the government for an extension of the deadline by at least six months.

The government’s move to tighten FDI rules for e-commerce companies comes after sellers listed on e-commerce marketplaces complained to the Competition Commission of India that Flipkart and Amazon were indulging in predatory pricing and deep discounting, destroying the business of smaller vendors. The rock-bottom prices offered by online retailers have taken a toll on brick and mortar stores. Between fiscals 2014 and 2018, e-retail in India grew at 40% a year. Still, this does not mean anyone is writing off the e-commerce industry and the long-term growth potential for Indian e-retail companies continues to remain strong due to increasing internet penetration, and the convenience of online shopping, and the growing purchasing power of households.

As stated earlier, America also needs to investigate ways to level the playing field and protect brick and mortar retailers that provide jobs and are so important to the fabric of communities. By far the worst abuser of the current e-commerce system is Amazon which has developed strong ties with the government and has even incorporated a complacent United States Postal Service in expanding their advantage over businesses by delivering Amazon packages at a discount and even on Sunday. To make matters worse state and local governments have put special packages together with incentives aimed at luring Amazon to build in their areas oblivious to the damage it will cause in coming years.

Prices are important to consumers but so are jobs, and removing the advantages e-retailers have comes down to achieving a balance between what is best for communities in the long run and giving consumers good value. While people hate new taxes something has to be done and while an online transaction fee can be seen as a tax its goal is to be "revenue neutral" taking pressure off communities need to raise local taxes on real estate and such. The revenue from such a fee would be sent to local governments in the area where the sale originated or goods are shipped, to offset lost tax revenue from retail closings. Still, rather than getting stuck on the details of something that will most likely never happen we should instead think about what kind of community and world we wish to live in and how best to preserve the nature and quality of the life we seek.

2018 Retail Store Closings (click here to enlarge)

The ugly reality that store closures are set to accelerate is a cancer on America. Large retailers as a group are collectively set to lock the doors for the last time at thousands of stores this year. Across America stand a sea of empty and under-leased buildings that once housed thriving businesses that provided Americans with jobs. The damage Amazon is inflicting upon America when combined with the true nature of our so-called recovery spells big trouble in the future. As we take a closer look at what is driving the economy forward we find auto sales, student loans, and our ballooning national deficit. Today roughly a third of those buying cars are taking out sub-prime loans stretched out far longer than ever before and sadly, many young people are facing huge student debt that will affect their disposable income for years to come. Then there is the issue of massive deficit spending, this alone acts as a giant stimulus package but comes with massive negative ramification.

Local businesses, both large and small are often viewed as the bedrock of our communities and with the closing of each one, a little bit of us goes with them. The brick and mortar stores suffer several expenses not fostered upon online companies. Whether it is the cost of maintaining landscaping, ensuring safe ingress and egress or providing a parking lot for customers these costs rapidly add up. Staffing for longer hours for the convenience of customers often results in being open when foot traffic would indicate a store should be closed and even dealing with security and shoplifters is another expensive burden.

Adding to there problems, stores such as Target and Macy’s have even had to face a slew of dishonest shoppers trying to sneak defectives products purchased online back as exchanges and trading them for a fresh unbroken product. The fact is the assault on our brick and mortar retailers coming mainly from Amazon with it engulf and devour strategy comes at a great cost and will be levied in many forms such as reduced property taxes for local communities. We can also expect a slew of empty buildings blighting our landscape and driving down property values across the nation. With many traditional brick-and-mortar retailers having very heavy debt loads and looking at nearly $1 trillion of debt coming due over the next 3 to 5 years if the economy turns south this might only be the tip of the iceberg as retailers default on loans and bonds as well.

Washington lawmakers have shown little interest in addressing the issue of how online shopping plays into the overall economy other than initially granting it some rather large advantages. The fact is store closures are set to accelerate, this comes with a hidden cost to society that the average person fails to internalize. An "Online Transaction Fee" could go a long way to level the playing field between online retailers and brick and mortar stores. A charge on all online purchases of just a few percentage points would add a bit of competitive fairness to retailing while halting the demise of many of the brick and mortar stores that line the streets of American communities. 

While like most Americans I'm not a lover of any kind of tax, but an online transaction fee may be needed to halt the damage flowing from this shift in how consumers shop. It could make the difference of whether many small businesses across America remain in operation. These businesses pay a massive amount of real estate taxes which flows directly into the support of local police and fire departments as well as maintaining our roads. Not only are these stores where we go when we need something really fast or that has to fit just right but they also employ our friends and neighbors. As a final argument as to why we should support local stores, it should be noted that "we the people" will suffer and be forced to pony up more dollars in local real estate taxes as their contributions drop and local services are cut.