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Diwali gives Indian e-retailers reason to celebrate

Outlook is gloomier for offline shops struggling with country's new tax system

Customers shop for lanterns at a roadside Diwali market in Mumbai, October 2014.   © Reuters

NEW DELHI/MUMBAI With India's biggest festival, Diwali, just around the corner, the country's e-commerce sites have been letting the discounts flow. Homegrown Flipkart and global giant Amazon, the two market leaders, say they are ringing up strong sales and pulling in new customers from smaller cities and remote towns thanks to the spread of affordable smartphones.

But for India's traditional retailers, many of whom are not yet online, weak sales and trouble with the country's new goods and services tax have cast a pall over this year's festivities.

Diwali, India's festival of lights, is celebrated on the 15th day of the Karthik month of the Hindu lunar calendar, which falls either in October or November, depending on the lunar cycle. People light candles, distribute sweets, exchange gifts and set off firecrackers. The festival, which honors Lakshmi, the goddess of wealth, and Ganesha, the god of auspicious beginnings and prosperity, also marks the beginning of the Hindu financial year.

Flipkart, whose Big Billion Days sale ended on Sept. 24, said it captured 70% of the e-commerce market in India during the five-day period. Within the first 20 hours of the sale, it said, it sold 1.3 million smartphones, "higher than the total number ... [normally] sold across India in a single day, both through online and offline" outlets.

Amazon India, the local arm of the U.S. online retailer, held its Great Indian Festival sale on Sept. 21-24 and said it too broke records. "We are humbled that the latest version of the Great Indian sale was our biggest shopping event ever, with remarkable growth across categories, led by smartphones and large appliances growing multiple times [versus] last year," said Manish Tiwary, vice president for category management.

SHOPPING SANS CROWDS Online shopping is taking a bigger slice of Indian spending. Neither Flipkart nor Amazon disclosed the gross merchandise value -- the total value of goods sold -- for their preholiday sales. But research and advisory specialist RedSeer Consulting found that online retailers had their best-ever performance for the five-day period from Sept. 20-24 this year, raking in sales of $1.5 billion. That is up more than 40% from the $1.05 billion logged in 2016 and more than double the 2015 figure of $720 million, according to RedSeer.

India's online retailers are boasting robust sales ahead of the Diwali festival. (Photo by Ken Kobayashi)

Out of the $1.5 billion total, Flipkart and its fashion portals Myntra and Jabong accounted for 58%; Amazon 26%; and other online retailers including Paytm, Snapdeal and Shopclues 16%. Last year, RedSeer said, Flipkart and Amazon accounted for 50% and 32%, respectively, of GMV for the period.

Amazon and Flipkart, both of which are flush with capital, offered discounts of 40-90% on products such as smartphones, mobile accessories, home appliances and branded apparel. Cash refunds and product exchange offers also helped woo customers. Amazon's second holiday sale ahead of the Oct. 19 Diwali festival ran from Oct. 4-8 and included discounts of up to 40% on mobile phones. Flipkart also held another sale from Oct. 5-8, offering discounts of up to 80% on clothing, footwear and furniture.

These promotional efforts do not come cheap. In August, Flipkart secured about $2.5 billion from Japan's SoftBank Group through its SoftBank Vision Fund nearly four months after raising $1.4 billion from Chinese internet company Tencent Holdings and U.S. tech companies eBay and Microsoft. Amazon, in June last year, announced plans to pump an additional $3 billion into its Indian business, raising its total investment in the country to $5 billion.

Flipkart said its customer volume doubled this year, with 35% of them new. "We have seen an over 1,000% increase in orders from remote locations," the company said, including such places as Jammu and Kashmir in India's north and Arunachal Pradesh and Mizoram in the northeast. Amazon, meanwhile, said 85% of its customers in smaller "Tier 2" and "Tier 3" cities are new.

OFFLINE BLUES The cheer of the web emporiums, with their aggressive pricing, is matched by the gloom of brick-and-mortar retailers, particularly small ones. They do not appear to have high hopes for this Diwali.

"Now we don't rely on festivals for customers to indulge in extensive shopping," said Devendra, who runs a textile shop in New Delhi. "It's not like old times anymore, when people waited for festivals to buy clothes. Now they are buying every week, especially the younger generation, and mostly from online marketplaces."

Sachin Sethi, who sells menswear, said this holiday season has been lackluster so far. Traders are still adjusting to the new goods and services tax, which took effect on July 1. Many are having trouble registering with tax authorities.

"Several of my manufacturers have not received their GST [registration] number, even a month after applying for it. Authorities must fast-track this process," said Sethi, who plans to go online and hopes to join Amazon's platform soon.

Sachin Sethi, left, said he has seen weak sales this festival season as small manufacturers struggle with India's new goods and services tax. (Photo by Kiran Sharma)

Amit Narula, who also sells clothing, said there is nothing to look forward to this festival season. "First we suffered due to demonetization of high-value bank notes, and now there's the GST, which we still have not gotten used to," he said, adding the government should have waited until after the festival to implement the new tax regime.

In November last year, Prime Minister Narendra Modi scrapped 500- and 1,000-rupee notes in an effort to curb untaxed wealth, corruption and counterfeiting. The drastic step withdrew some 15.4 trillion rupees worth of bank notes -- 86% of the total value in circulation -- from the cash-heavy economy, disrupting business activity.

In Mumbai, a costume jewelry seller said he is taking a beating on margins. He has not raised the price of his products for fear of hurting demand, and is paying the higher GST on those items out of his own pocket. He said he is making up for this by selling beauty and wellness goods, as they come with a fixed maximum retail price.

The Indian economy has suffered one of its biggest slumps in recent years. Gross domestic product grew 5.7% in the April-June quarter, its slowest expansion in three years, mainly due to the lingering impact of demonetization and manufacturers trimming back inventories ahead of the July 1 rollout of the GST.

But consumption is likely to remain robust on the back of strong growth among online retailers. According to Anurag Mathur, a partner at accountancy PricewaterhouseCoopers, the formal retail industry, online and offline, will grow 20-25% over the next five years.

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