Can Amazon Succeed In India?Apr 07, 2020
The hype about Amazon's HQ2 location has died down, but the e-commerce giant has just opened its biggest office building yet. However, this one is not in the US. The new campus is in Hyderabad, India. It covers 9.5 acres with 1.8 million square feet of office space, making it Amazon's largest building by total area. It has the capacity to house some 15,000 workers. Even his headquarters, individual buildings in his hometown of Seattle, can't fit that many people in one building. The construction of the new campus in India is just another sign of how committed Amazon is to the market, how aggressively they plan to invest in the market, how much commitment they are making to India.
India is seen as one of the last big growth markets for the retail giant. Amazon began its retail operations in India in 2013. Since then, the company has invested more than $5 billion in the country. Now the reason Amazon is so interested in this market is because it represents huge untapped potential. Right now, e-commerce accounts for just 3 percent of total consumption in India. While India's population has grown to 1.3 billion, less than half are online. The country recently rolled out its 4G network, and as internet penetration rates continue to rise, Amazon expects to outpace local and international competitors. They are investing a lot of money in India because the projections are crazy.
I mean, analysts say this is a market that will be worth $100 billion by 2022. Amazon, however, is facing stiff competition from Walmart, which completed its $16 billion acquisition of the national retailer. e-commerce Flipkart in 2018. Prior to the acquisition, Flipkart controlled approximately 40 percent of the Indian e-commerce market, driven by its fashion and apparel brands. Now Amazon and Walmart are locked in a fierce competition for market share. Yet despite their growing influence, about 90 percent of India's retail market is still controlled by small, mom-and-pop stores. These local retailers wield a lot of political power, which has led to updated e-commerce regulations that make it much more difficult for multinational corporations to take on national competitors.
Direct-to-consumer sales were already prohibited for foreign-owned retailers, prompting Amazon and Walmart to establish a network of affiliated companies that allowed them to continue selling their own products. But after Walmart's acquisition of Flipkart, the Indian government banned foreign e-commerce companies from selling products through affiliates in which they owned a majority stake and from negotiating exclusive deals with sellers. Amazon has a lot of its own private label products like the Echo, like batteries, like a lot of things, and groceries too, that it's trying to sell in the Indian market. So when the government put in regulations that said you couldn't even sell your own products through merchants you had a stake in, that led to Amazon removing thousands of products on its website.
The New York Times estimated that Amazon would have to recall some 400,000 items in total, representing almost a third of its sales in the country. However, these regulations could only be a short-term setback. Some analysts say it's only a matter of time before Amazon finds smart ways to reconfigure its business models and partnerships to comply. Amazon is investing a lot of money in the country. Could all of that be stifled by these regulations? That's a great question. I think Amazon will probably find a way to work its way through the regulatory hurdles. They have a reasonable track record of performing well despite some obstacles, be they economic, cultural, logistical, or regulatory.
Amazon is already taking important steps to adapt by expanding its physical presence in the country. In August, it signed an agreement to buy a minority stake in Future Retail, which operates more than 900 stores and owns several large supermarket brands. With this investment, Amazon is really embracing this hybrid retail approach. By combining brick and mortar, locating an Indian partner, and your own eCommerce experience, that's what Amazon believes will set you up for success in this market. The company is also expanding its online grocery business, AmazonFresh. Now grocery deliveries will be available in some parts of Bangalore and eventually other cities as well.
Food and groceries is by far the largest retail segment in India. It is the largest market in India. Nearly 55 to 60 percent of household expenses are still grocery items. So, you know, without that, it's very difficult for Amazon to capture the market. Amazon also hopes to learn from the mistakes of the past. The company shut down its e-commerce operations in China this summer after it failed to make any headway in the market. They faced some very good entrenched competition from companies that did a much better job tailoring their products and services to that market. And so we are talking about JD.com and of course Alibaba.
In India, a different strategy is being taken. There is more emphasis on rural customers. In fact, 80 percent of Amazon's customers in India today live outside the country's largest cities. Amazon has set up these kinds of really small stores in rural areas so that Indian customers can come in and learn how to buy things and order things on their smartphones. Now, Amazon is even offering an alternate version of its app designed to run on inexpensive smartphones with spotty internet access. It also launched its Hindi website last year and hopes to add a variety of regional languages soon.
But whether it's designing new apps, setting up small brick-and-mortar stores, or building huge new campuses, these long-term investments don't come cheap. And it may be a while before these efforts are reflected in profits. Look, it's going to be a very expensive market, and I think they are willing to take losses in that market for a long period of time, I guess 10 years. So I think we still have several years ahead of losses. Amazon's international e-commerce unit consistently operates at a loss. But as growth slows in North America, the company hopes India could eventually be another source of revenue.
When you think of Amazon opening a 15,000-employee campus anywhere else, you couldn't fill it. I mean, Amazon's international business may be doing well in Europe and Australia, but it needs a big market like India for its future growth.
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