Sunny Sen and Pratik BhaktaJan 17, 2020 12:42:09 IST
Ashish Grover, who runs a wholesale business selling medicines, health supplements and surgical equipment in old Delhi’s Bhagirath Palace, is a worried man.
“Just look at the prices they offer,” he said, referring to the health supplements sold under Amazon’s Solimo private label. A bottle of Solimo Omega 3, for example, is available for Rs 499. Competing brands are at least 10 percent more expensive.
“We can’t compete at that price, even with discounts,” said Grover, whose profit margins average just about 10 percent. His business has dropped by 20-25 percent in the last couple of years and he blames e-commerce platforms for it.
It is not just supplements. Amazon and archrival Flipkart have a host of private brands that compete with independent sellers on their e-commerce platforms. From clothes to cosmetics, food to furniture, Amazon and Flipkart have a wide brand presence with hundreds of products.
Private labels, in this case, are brands created and sold by online marketplaces to compete with brands listed by merchants on their platforms.
Private labels are often cheaper than well-known brands but they operate in a grey area: is it ethical to gather data from those the online marketplaces claim to serve and launch competing products or services? Besides, regulations expressly forbid private labels in e-commerce.
Flipkart and Amazon derive about 10-15 percent of their sales from private labels that are sold through third-party sellers, sources close to the two companies said. The number is expected to grow to 25-30 percent in the next three to four years.
The concerns of merchants like Grover contrast with grandiose announcements by e-commerce giants, which claim they are committed to the welfare of those who sell on their marketplaces.
On 15 January, visiting Amazon’s founder and CEO Jeff Bezos announced an investment of $1 billion to digitise small and medium businesses (SMBs) in India. He stepped up the charm offensive by dangling prospects of global sales for Make in India products of $10 billion by 2025.
But not everyone is charmed. Many traders see private labels as an existential threat.
Even in the United States, Amazon is under fire from merchants and is facing scrutiny, in particular, from Senator Elizabeth Warren, who is seeking Democratic Party nomination for this year’s presidential election. “You can be an umpire, or you can be a player, but you can't both,” she said during a town hall in 2019.
Private labels are not limited to Flipkart or Amazon. Food-delivery platforms like Zomato and Swiggy, too, have set up cloud kitchens, either on their own or through partnerships, and created brands that compete with restaurants listed on their sites.
Zomato has more than 180 affiliate kitchens and Swiggy’s private labels include The Bowl Company, Homely and Breakfast Express.
Private brands also allow marketplaces, which are largely loss-making in India, to earn higher margins even at a lower selling price.
So, what’s the problem?
In the home, kitchen and electronics spaces, Amazon has brands like Solimo and AmazonBasics and Flipkart has Smartbuy; in fashion, Amazon has Myx and Symbol, and Flipkart offers Amni, Divastri and Metronaut; and for appliances Amazon has Symbol and Flipkart has MarQ.
“When you search for a product, they (the platforms) show their products, which are cheaper than those offered by competing third-party sellers,” said Praveen Khandelwal, Secretary-General, Confederation of All India Traders (CAIT), a lobby group that represents millions of online and offline domestic sellers.
The association had asked the anti-trust body the Competition Commission of India (CCI) to look into private labels, which were unlawful and unfair, he said. “There is cannibalisation and cartelisation happening on the platforms,” Khandelwal said.
A CCI source said a large number of sellers and restaurants had flagged concerns over “platform neutrality”, especially in two areas: private labels and preferred sellers, who enjoy preferential treatment.
The problem is there in the food delivery segment as well. According to a CCI survey, “The dual role played by platforms who own and list their cloud kitchen brands exclusively on the platform, akin to private labels, created an inherent conflict of interest between the platform’s role as an intermediary on one hand and as a market participant on the platform on the other.”
As a result, e-commerce and food delivery platforms are both marketplaces and competitors to sellers. Since the marketplace is controlled by the platforms, there is a rising concern that private labels and preferred vendors are getting preferential treatment. “This is a disadvantage for other sellers on the platform,” said Khandelwal.
Amazon doesn’t agree. Gopal Pillai, vice president for Seller Services at Amazon India, said in the US, where a lot of the private labels are born, accounted for 42 percent of the sales. “Fifty-eight percent still comes from third-party sales. Whether it is a private label or sourced product, what matters is quality,” said Pillai.
Government regulations on foreign investment in e-commerce say that companies like Amazon and Flipkart can only operate as marketplaces that facilitate online transactions between buyers and sellers.
Foreign direct investment (FDI) is allowed only in marketplaces and not in inventory-led online businesses. The law also says that marketplaces can provide warehousing, logistics, fulfilment and customer support, but can’t exercise control over inventory or sell their own products on the platform. Swiggy and Zomato are marketplaces, too.
“It is ethically not correct for companies which had started as platforms to start competing with the players themselves,” said Anurag Katriar, director, deGustibus, and president, National Restaurant Association of India.
A questionnaire sent to Zomato did not elicit a response.
But platforms have worked a way around the law. They licence the brands to a seller or sellers who list their products on marketplaces.
Executives in the Department of Promotion of Industry and Internal Trade (DPIIT) did not respond to multiple calls made by Tech2.
A former DPIIT official, however, said it would take time to solve the private label problem. "Marketplaces have found ways to go around the law and do business," the person, who doesn’t wish to be identified, said.
The data play
Online marketplaces have a massive data advantage. They gather competitively relevant data, including product prices, volumes, demand, seller performance, and how geographic regions behave. This allows marketplaces to understand which product will sell well. They launch private labels in those categories, boosting their sales or those of preferred sellers.
Usually, private labels are introduced in top-selling categories. A senior data scientist, who has experience working with marketplaces, explained on condition of anonymity how it is done.
The first data sets that a platform looks at are volumes in a product category, sell-through rates and margins. “Clothing has very high margins of about 30-40 percent, and more than 30 percent of sales in clothing come from private labels,” the data scientist said.
Electronics, on the other hand, have only a 5-7 percent margin but with private labels, it can double.
The other factors that are considered are the power of the top independent brands in the category, specifications that consumers like and geographies where a certain product will work. Platforms have all this data.
But merchants or restaurants who list on the marketplaces are practically in the dark. A restaurant-owner who lists on Swiggy, for instance, does not even know who the buyer is. All they get at the end of the month is a summary report, while the rich data stays with the marketplace. The data that merchants and restaurants generate could end up working against them.
With the launch of private labels, the phone accessories business has had a 20 percent impact, All India Mobile Retailers Association President Arvinder Khurana said. Also, platforms charge a heavy commission — 18-20 percent — on the sale of the product. “For private labels, the commission is less and their brands get featured on the top of the search list,” he added.
But, Amazon doesn’t agree. “We are 100 percent unbiased,” said Gopal Pillai. “(Sellers’) success wouldn't have come if you were not providing a level playing field and equal opportunities… We want to be the catalyst for our SMBs to succeed.”
Flipkart said it was leveraging homegrown technology and innovation to drive economic prosperity in India by helping lakhs of sellers, MSMEs and artisans connect with more than 200 million customers through an “efficient and cost-effective marketplace and distribution system”.
“These sellers decide the prices of their products independently on our platform and we also provide them with relevant data insights that help them meet consumer demand and requirements,” a spokesperson said.
For food-delivery platforms, the launch of cloud kitchen brands in high-demand categories in hyper-local markets is done through cross-usage of data.
“In the goods category, the platforms’ private labels reportedly are typically showcased as bestsellers to customers, while in the food-services segment, the platforms’ own cloud kitchens are given prominent placement,” the CCI survey found.
Swiggy has denied pushing its own brands. “Swiggy’s private brands do not receive any preferential treatment as compared to the rest of the partners and are levied standard commissions for operating on the platform, these brands receive actionable insights which are made available to other partners as well and bear marketing costs for all promotions on the platform,” spokesperson said in an email.
Thomas Fenn, the founder of Mahabelly, a restaurant that showcases Kerala’s food in Delhi’s Saket, wondered how Zomato and Swiggy guaranteed footfalls and online orders to restaurants if they didn’t have an understanding of consumer behaviour. “They have such deep insights and visibility into home deliveries that they are capable of shaping customer behaviour,” he said.
At the end of the month, restaurants get some top-level trend analysis. “They are gathering data points about consumers... What is the guarantee that they will not use it to eventually push traffic to their private label offerings and cloud kitchens?” said Riyaaz Amlani, CEO of Impresario Entertainment and Hospitality that runs restaurants like Social and Smoke House Deli.
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