Is Amazon illegally favouring its private brands?
Business
Is Amazon a cheater?
“Yes” says Reuters, a globally acclaimed news agency company.
As part of an independent investigation, Reuters scrutinized internal documents of Amazon India. The documents included official emails exchanged within the organization, executive strategy papers and business plans made by the company.
The investigation revealed that Amazon indulged in illegal practices to stifle competition and unfairly favour its private brands.
The report accused Amazon of 2 malpractices:
The company illegally used proprietary and confidential information of its platform’s third-party sellers to create knock-off goods.
The company rigged its search algorithm by placing its private brands in the first 2 or 3 search results to boost their sales.
But how did Amazon manage to defy the law?
Amazon’s wrongdoing
Generally speaking, a regular seller would conduct market research, understand customer preferences and study the competition before launching a product.
This process has a cost associated with it - the product may or may not be a success, but that is the risk the seller is willing to incur.
Amazon, being the e-commerce marketplace, has access to such proprietary information - it knows which product is a hit with the customers and which is not.
Undue advantage of proprietary information
Amazon, according to the investigation, uses this confidential information to identify 'successful' goods, to simply replicate them!
Therefore, it eliminates the underlying risk of failure of a product and cuts down on its costs. This cost reduction is being passed on to customers as deep discounts - providing Amazon-supported brands an undue advantage over their competitors!
How legitimate is this investigation?
This is not the first time that Amazon is facing such accusations. But this investigation is turning a lot of heads because it has been spearheaded by Reuters - one of the largest news agencies globally.
Reuters claims that this unfair strategy in India has been signed by 2 senior executives - Senior Vice Presidents, Diego Piacentini and Russell Grandinetti, who currently run Amazon’s international consumer business.
These accusations add to the already mounting criticism Amazon is facing in the country.
FDI violation charges
Amazon is already under a probe for violating the nation’s FDI laws. To protect its native small & medium retailers, the Government of India has prohibited foreign companies from holding inventory.
However, circumventing the laws through a complex web of ownership, Amazon owns and controls Cloudtail India - the single largest seller on the platform.
Bribery charges
Last month, the company also faced charges related to bribery. It is alleged that the company’s legal team used the fees paid by the company to bribe top government officials to bend and navigate laws. Both Amazon and the Government have vouched for an anti-corruption investigation in this matter.
What’s next?
A foreign company in a protectionist economy will have to deal with regulatory changes but the recent accusations have only worsened its public image.
India is strategically an important growth market for this global e-commerce behemoth. But the going is getting tougher for the company in the country.
We will have to wait and watch how the global giant responds to the rising regulatory heat in India!
Buy now pay later: How this innovative credit model has taken online marketplaces by storm!
Business
What is BNPL?
Pioneered by a Swedish company, Klarna, Buy Now Pay Later (BNPL) is a short term microcredit model. It allows customers to defer their payments for purchases by 15 - 45 days, at a cost of little or no interest, post which they can opt for an EMI repayment format for another 12-18 months.
Although it gained popularity as an E-commerce play, it has now quickly found its way into food delivery, travel booking, grocery shopping as well as essential services ecosystem.
How big is it already?
Whilst there is plenty of debate on its current size but It is expected to grow to USD 100 billion in India by 2025, according to Goldman Sachs.
Further, it is also expected to become the fastest growing online payment model, rising from 3% in 2020 to 9% by 2024.
Why does it make sense?
BNPL: Their 1% - 3% interest for credit given for <30 days equate to very attractive annualized interest rates (25% - 30%).
Platform/ vendor: It’s cheaper to give 1% - 3% charges to BNPL companies than to pass on 30% - 50% deep discounts to customers.
Customers: They can avail credit on big-ticket purchases at ‘no to low’ interest costs without cumbersome loan/ credit approval processes.
Despite the high interest rates, the unit economics are negative at present, with players using it as a customer acquisition/ retention model to upsell profitable credit products in the long run.
Consumer behaviour
Consumer behaviour can be studied as a function of ‘Go signals’ and ‘Stop signals’.
Most crucially BNPL model solves for the ‘shopping basket paralysis’, a stop signal which results in items left unpurchased in digital shopping carts, for want of funds. BNPL overcomes this by allowing the customer to defer or even break the payment into smaller more palpable tranches.
Flipkart has reported a 7x increase in spend value from its BNPL model during the festive period, with several other merchants reporting similar numbers.
Gaining traction
Increased E-commerce D2C penetration in Tier 2/3 cities. (~67% of total online demand).
Growing acceptance of digital payments (~30%) with low credit card penetration (3%).
COVID-19 outbreak has amplified income discontinuity and financial instability, increasing the need for credit.
Traditional banks caught on their heels?
Traditional banks are treading cautiously in the BNPL waters to avoid cannibalization of their credit card demand, still a more lucrative and safer financial product.
However, given the benefits of BNPL; quicker disbursement of credit, easier onboarding of new customers, creation of credit history, even banks can’t ignore this space for long.
This can be seen from ICICI’s partnership with Pine Labs, and HDFC FlexiPay’s collaboration with Myntra, Bata, Makemytrip, Curefit etc. for pay later schemes.
Borrowers beware
Interest beyond free period: Repayments beyond the initial free period attract charges of 12% - 18% (annualized ~28%); much higher than the prevailing unsecured lending rate.
Processing charges: BNPLs charge INR 200 - INR 600 per transaction, (~5% of average ticket size) vs 2% standard loan processing fees.
Late penalties and intermediary charges: These inflate the cost of borrowing and hurt consumer credit history/ access to future credit.
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