ONDC: How it will Impact Indian Online Retailers?

4 Jun 2022  Read 1525 Views

On the 29th of April 2022, India launched the initial pilot phase of the open network for digital commerce - ONDC which aims to democratize e-commerce. Described as a ‘game changer’ by Union Minister of Commerce and Industry Piyush Goel, the ONDC initiative will promote an open platform for all aspects of the exchange of products and services through e - network. The Union minister Piyush Goyal said that ONDC will create new opportunities and remove monopolistic environments.  

It is touted that ONDC is going to be the next UPI of the e-commerce industry. The way UPI has positively impacted the payments industry in India, the same way it is expected that ONDC will replicate the success. A lot of optimism and belief is being emitted by the central government and other professionals in the commerce industry. But every impactful idea has to go through many tackles and problems before they emerge as a winner.  

So, today let’s take a look at what ONDC is and what it offers. 

What is ONDC?

As per the official government data, Open Network for Digital Commerce is a globally first-of-its-kind initiative that aims to democratize and integrate Digital Commerce, moving it from a platform-centric model to an open network. ONDC will enable local buyers and sellers to be digitally visible and transact through an open network, no matter what platform/application they use. Moreover, the idea is to help small local buyers and sellers to create an identity on the e - platform and do their business. ONDC will empower merchants and consumers by breaking silos to form a single network to drive innovation and scale, transforming all businesses from retail goods, and food to mobility and much more. ONDC is expected to digitize the entire supply chain, standardize operations, provide logistics, and provide value for consumers.

A common integrated platform which will allow businesses to list their products digitally for trade. Then how is it different from Amazon or flipkart?

India’s retail and e-commerce industry

India’s traditional retailers, the kiranas (mom-and-pop stores), continue to dominate the market by capturing 90% of India’s retailing sector. The online retail market in India is projected to reach US$ 350 billion by 2030 from an estimated US$ 55 billion in 2021, due to rising online shoppers in the country. India’s e-commerce sector is expected to reach $ 111.40 billion by 2025 from $ 46.20 billion in 2020, growing at a 19.24% CAGR, with grocery and fashion likely to be the key drivers of the growth. 

So the key to dominate the retail market of India is by dominating the ‘kirana’ segment which is run by local people and families. The prospect of dominating the kirana segment was looking impossible until Covid-19 severely impacted the retail industry. Due to this, the retail players joined the digital commerce market or else they couldn’t survive. It was a new domain for these local players to enter. And things were not in their favour. E-commerce is dominated by very few players. They control the whole market. The barrier of entry is very thick. It is a duopoly market.

Enter Amazon & Flipkart

According to Forrester Research, by October 2020, Flipkart had 31.9% market share — making it the largest online retailer in India. Meanwhile, Amazon India is slightly behind in second, with a 31.2% market share. As you can see, the Indian e-commerce market is mostly dominated by 2 players. Both Flipkart and Amazon India are currently under the scanner of the Competition Commission of India (CCI) for allegedly promoting select sellers on their platforms and adopting business practices that stifle competition. Amazon is already under suspicion of using its influence and manipulative practices to promote its products. 

Amazon has been accused of exploiting proprietary data and manipulating search results to increase sales of the company's goods. It set up Cloudtail, which soon emerged as one of the largest sellers on the local marketplace. In the fiscal year 2021, its revenue jumped by over 45% to Rs 16,639 crore, with a profit of more than Rs 182 crore. At one point in time, Cloudtail had a market share of more than 50% of total sales on Amazon India.

The twist was that Amazon has a 50% stake in Cloudtail. This practice helped Amazon to promote its own goods and sell them on its own platform. Thankfully, currently, Cloudtail is not allowed to list its products or do business on the Amazon platform.

This is the problem. Giants like TATA Group and Reliance Industries have already entered the e-commerce market of India. Major players are going to dominate the market. To tackle this issue, the Department for Promotion of Industry and Internal Trade (DPIT) came up with an idea - ONDC. The objectives of ONDC are simple - ending monopolies of the platforms, democratization and decentralization, eliminating irrational practices, creating new opportunities, curbing digital monopolies and supporting MSME and small traders and helping them transfer to online platforms.

How does ONDC work pragmatically?

Let’s assume there are 2 entities, Ashish, a kirana shop owner who sells homemade pickles and Raj, a retail customer who lives in the neighborhood city. Raj wants to order 80 kg of pickles for his restaurant. From his requirements, he wants pickles for cheap prices. Meanwhile, Ashish has only listed his products on, hypothetically, XYZmart app. Raj has got many sellers lined up for his online order via Paytm like Dmart, amazon, flipkart, XYZmart and more. It becomes difficult for customers to switch from large e-commerce giants as one has already signed up his account details, credit card, etc. 

Here comes ONDC into the picture. It helps Raj (buyer) to sort out his desired product from a pool of varieties and offers. Among the dominating applications, XYZmart is also displayed to Raj. Not only XYZmart, other local platforms where pickles are available for purchase. Now, based on location, reviews, ratings and prices from the sellers, Raj can get a good deal. ONDC will also help Ashish (seller) with many crucial services. Not only visibility to local businesses, but also credit access, logistics services, inventory management, ledger book management, payment services and more. 

While order processing, Ashish can procure the raw materials from other suppliers like ninjacart, shopkirana etc. Here, he has the purchasing choice to buy the right materials for his pickle business. With the help of ONDC platform, Ashish can avail of various logistics services from Dunzo, Swiggy Genie and more to deliver his products to Raj. If Ashish is short on funds, he can get credit from multiple banks listed on ONDC platform. For managing his accounting books, he can use the services of Khata Books, Zoho Books and others. Guess what, everything is under a single platform (ONDC) from Paytm.

This helps Ashish, who is a local kirana store owner in a tier 3 city, to facilitate his business and further expand it.

Benefits ONDC is expected to provide

  • Price discovery and comparison 

  • Local retail business growth 

  • Formalization and democratization 

  • Variety of choices 

  • Ancillary services 

  • Outsourcing services 

  • Rational business process and opportunities due to open platform

  • Reduction in monopolistic domination  

Conclusion

Due to rapid augmentation in the customer base of India, the retail and e-commerce market is going to evolve into a gigantic industry. Also, it is expected to grow to a $200 billion industry in the upcoming few years. But there are many headwinds for the government. The brand value of large companies could affect the sales of local stores. Startups like Zomato, Swiggy could fetch more funding to strengthen their business process and small businesses would get crushed. Also, these loss-making startups who have taken funding and developed plans for their growth can massively get impacted by this platform. Government should develop plans to eliminate these problems.

However, the prospect looks good for the small-medium players. 

More cultural diversity will lead to more cultural changes in lifestyle and habits. This leads to people spending more money on items to showcase their culture and identity. Apparels play a crucial role in the retail industry. Fashion speaks on the behalf of the people’s identity. As the Indian economy grows, more consumption is inevitable. This will further lead to the growth of the retail e-commerce industry. 

 

About the Author: Akshat Yadav | 4 Post(s)

Akshat is a finance enthusiast. Loves to read and write about it. From companies and industries to individual stocks, he shares his thoughts on finance, stocks, and investing.

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