New e-tail rules hurt Amazon, Walmart market cap

Amazon and Walmart, which owns 77% stake in India’s largest online retailer Flipkart, together lost over $50 billion in the value of their shares on Friday, the same day the Indian government’s revised e-commerce policy came into effect - and at least a part of the loss is being ascribed to the new rules.

Both companies have made big bets to drive global growth from the Indian retail market - with Amazon committing $5 billion here while Walmart spent $16 billion last year to buy a controlling stake in Flipkart — as they missed out on the China market.

The new policy puts a series of curbs on how both Amazon India and Flipkart operate— restricting discounts, no ownership in sellers on the marketplace platform and disallowing exclusive product launches — forcing them to restructure operations and take a hit on sales.

Nasdaq-listed Amazon’s stock fell 5.4%, losing $45 bn in market capitalization while Walmart’s dipped by over 2% on NYSE, losing $5.7 bn. At close of trade on Friday in the US, Amazon was valued at $795 billion, and Walmart at $273 billion.

Part of the reason for the fall in the share price of Amazon, which also reported its fourth-quarter results on Thursday, was on account of the company’s plans to increase spending not related to India and weaker guidance. Also, its international sales, which includes the India business, saw a slower growth even before the new policy came into effect. Amazon’s International net sales grew by 15% compared to 29% in the year-ago period. Walmart is expected to declare its quarterly results later this month.

The department of industrial policy and promotion said on Thursday that it would not extend the timeline for implementing the updated e-commerce policy, which was released late December and caught the industry by surprise. Amazon and Flipkart, which account for about 75-80% of online retail business in India and rely on a handful of large sellers for a majority of sales, had intensely lobbied for an extension — Amazon for four months and Flipkart for six — to comply with the new rules.

Under the changed policy, e- tailers cannot hold a stake in entities that sell on their marketplace, causing Amazon India to delist lakhs of products overnight. Before the regulation, Amazon India had two seller entities — Cloudtail (a joint venture with Narayana Murthy’s investment firm Catamaran) and Appario Retail (a joint venture with Ashok Patni family office) — which accounted for a majority of the sales on the platform. Amazon may have to sell its shareholding in these two entities.

E-commerce firms also need to check they are not sourcing over 25% of a seller’s gross sale through wholesale units like Flipkart India Private Limited and Amazon Wholesale. The impact of this is likely to be felt in a few weeks as sellers start running out of inventory even as both Flipkart and Amazon India restructure agreements with brands, especially exclusive launches. Further, e-tailers cannot directly or indirectly influence the pricing of products on their platforms.

A Barclays analyst note earlier in the week stated the growth of Amazon India could fall from 40% to 0%.

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