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FEATURES/Big Bet | Jul 2, 2013 | 25530 views

Amazon's Perfect Timing for India

Why Jeff Bezos’ late India entry will work to the company’s advantage
Amazon's Perfect Timing for India
Image: Shannon Stapleton / Reuters
Amazon founder Jeff Bezos. Amazon.in is the tenth countryspecific website since Bezos started the company from his garage in Seattle, USA

O

n June 5 Amazon launched www.amazon.in . The consensus opinion among most internet watchers was that founder Jeff Bezos and Amazon would need to work very hard to play catch-up in the Indian ecommerce market that homegrown players like Flipkart had largely sewn up. Worse, Amazon was starting off as a third party marketplace (ie, it provides the platform for others to sell), instead of selling directly.

But reality may be exactly the opposite. Amazon seems to have chosen an entry date and strategy that allows it to use its strengths to maximum advantage.

Advantage 1: Others have done the groundwork already
Despite all the frantic coverage it generates in the media, the size of the Indian ecommerce market last year was estimated to be only between $1-2 billion (around $1 billion said McKinsey, while Forrester Research pegged it at $1.6 billion). These estimates exclude $6-7 billion worth of travel bookings that are made online.

For a company like Amazon whose 2012 revenues were over $61 billion, a sub-billion-dollar market is simply not worth the effort. It would have been happy to see the likes of Flipkart, Jabong, Myntra and numerous others (many of whom have shut down) spend millions of venture capital dollars on advertising, logistics, technology, discounts and customer service over the last five years to convince the notoriously sceptical Indian consumer to transact more often online.

Their results have now started to pay off. Forrester estimates that the Indian market will grow at a compounded growth rate faster than any other country in the Asia-Pacific region to reach $8.8 billion in 2016.

So, not only is Amazon entering a sufficiently large market, it also knows the tactics that have enabled Indian players to win market share—cash-on-delivery payments, liberal return policies, free or subsidised shipping and in-house logistics. All of these it has incorporated into its operations right from day one.

Perhaps the biggest advantage Amazon is coming with, which many confuse as its weakness, is its third-party marketplace model.

A few years ago marketplaces were rare in the Indian ecommerce space; eBay was the only exception. But over the last 6-12 months many leading players like Flipkart, Jabong and Shopclues have started focusing on selling through a marketplace model. Snapdeal, once a Groupon clone, is now a pure marketplace.
 
Marketplaces are attractive propositions because the costs of running one are significantly lower than direct sales, thus resulting in faster and fatter profits. Marketplaces are the dominant ecommerce models in large markets, including China, South Korea, Japan and Latin-America.

Given that marketplaces are only just taking off in India, no one player has a clear lead over Amazon.

Advantage 2: AN Exhausted Competition
Amazon is also entering India at a time when almost every player is struggling to conserve cash and yet grow business. After a boom in ecommerce venture funding, the last two years have seen a progressive withering away of additional rounds. Smaller players have had to shut shop, while even larger ones are realising that catching the chimera of profit requires an almost endless source of funding.

Take Flipkart, the industry’s leader by far. After having grown at a breakneck speed using over $180 million in venture funding, the company has in recent times been forced to lay off employees, streamline operations, reduce discounts and shipping subsidies, and slash categories in an attempt to bring down the amount of money it loses every month, or ‘burn rate’. Sources say it managed to bring that down from the $8 million to about $6 million over the last six months, with around $80-85 million still left in the bank.

Amazon knows this, and is twisting the knife where it knows Flipkart is hurting. Having launched with books, movies and TV shows to begin with, it is attacking Flipkart’s undisputed area of strength by throwing in ‘introductory’ offers of free shipping; higher referral commissions (10 percent versus the industry’s 5-6 percent) and lower prices on many books.

Flipkart, the incumbent, has to defend itself. In doing so, its burn rate has again started creeping up even as sales aren’t growing as fast as in the past, say the same sources. This will further push back its deadline to turn a profit, which in turn will make attracting the next reported $100 million in funding even tougher.

Amazon in contrast, with its deep pockets and uncharacteristically long-term stock investors (who give it a really long rope, compared to most other ecommerce investors), can easily keep increasing its investment in India with nary a blip on its financial operations. And once it launches mobile phones and electronics over the next few weeks, Amazon will be competing with nearly three-fourths of Flipkart’s overall revenue base.

This article appeared in the Forbes India magazine issue of 12 July, 2013
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Comments (21)
Ryan Aug 28, 2013
Flipkart will be destroyed, their quality is suffered, huge dissatifaction among customers...it's end is neer
Anand M Aug 14, 2013
1. Amazon is expected to offer free delivery and discounts till mid of next year (Jun 2014).

2. Flipkart is under pressure to match the discounts with Amazon to keep up sales and avoid market share loss. Whoever has deeper pockets will manage to grow with absence of significant profit. After the loser withdraws discounts, prices would become normal across the market.

3. Sooner than later both would stop burning cash and co-exist with minor differentiation/specialization in the market while some of the smaller players can disappear.
Sambit Chakraborty Jul 20, 2013
Flipkart has managed to score big~ $ 200 mn in the single largest funding in the Indian e-commerce space. This leads us to believe that Flipkart has regained the investors’ confidence by controlling the negative cash flow by streamlining its operations. However, team flipkart needs to ensure that the change is sustainable. Flipkart has been steadily building up its consumer base with focus on customer loyalty and satisfaction. It is too soon to predict that Amazon will have an easy walk over Flipkart. The fundamentals of Filpkart remain strong and they are not scared to venture into new business models or withdraw one if deemed necessary ( flyte for example). The online Indian consumer is still cynical to the marketplace model for high priced goods and prefers a single point entity for reliability and return mechanisms. The problem with flipkart has been too much inventory, a wary buyer, high returns, weak supply chain and well documented problems with management and attrition. But, all said and done, it's not going to roll over and cede ground to Amazon.
Response to Sambit Chakraborty:
Cgn Global Jul 26, 2013
Flipkart has turned over a new leaf over the last few months with increased efforts to reduce inefficiencies in their value chain and optimizing manpower. The funding will definitely help in upgrading their technology and logistics. Amazon should get ready for a stiff competition. With flipkarts IPO around the corner, the next 12-18 months will be very interesting for India's largest e-retailer.
Guy Portman Jul 5, 2013
A fascinating strategy that will no doubt pay dividends for Amazon. When Bezos strikes he rarely misses. Customers are not going to be loyal to Flipkark and the like when Amazon are a far superior interface and use algorithms that present the shopper with products that customers are potentially interested in. I just wrote a blog post about Amazon's global domination - http://guyportman.com/2013/07/05/amazons-domination/
Abhishek Jul 5, 2013
well can not say which company will be profitable or which will close,but can get a hint from own buying habit.i was a loyal flipkart customer from last 3 years,but has shifted to amazon .reasons
1)flipkart own whim and fancies.
a) min order size of 500 rs,suppose i need a book costing 495 rs i had to compulsory add some other item or pay 50 rs extra.
b) will not group my orders,they had no option to group the order together .suppose i order 3 books with different delivery date on COD,then each day flipkart delivery guy will come and deliver one item daily .and someone has to present on each day to collect the item daily. wereas in Amazon this facility is present from day one.
c) can not order for more than 10000 from up.Why this special treatment to regular customers. not even prepay allowed
Response to Abhishek:
Maaz Kalim Jul 17, 2013
What did you mean by "up(sic.)"? Uttar Pradesh [abbreviation/short form/code: UP]? If so, I don't understand till date why people remember to save energy when writing the name of Uttar Pradesh almost?
Response to Maaz Kalim:
Abhishek Jul 17, 2013
oh sorry.a great mistake on my part.using up instead of UP.thanks for pointing out.
Srikanth Jul 2, 2013
Rohin: a good analysis, and unique perspectives - as always. Particularly liked your call on the different investment philosophies that drive Amazon vs. the rest. Agree with you that Amazon's timing is great - sometimes, being a first mover is a disadvantage.

I disagree with your POV of a zero-sum game. This market is far too large and complex for one player to serve all by itself. Provided they keep the fundamentals straight - a customer-led approach and not spreading themselves too thin - Flipkart, and perhaps two other players can survive. With enough differentiation, a couple of them could even achieve a meaningful market position.

In the longer term, retailers and the supporting ecosystem have to think of solving for:

(1) New-to-net consumers - cash-rich, but not SEC A . Think of a rich farmer in Haryana with enough cash to spend, but no exposure to e-commerce. How do you educate this segment to shop online?

(2) Payment systems: the RBI's 2FA mandate was well intentioned, but poorly implemented. How do we solve for small-value payments, without turning away genuine customers with a forbidding user experience? The guys who crack this will gain disproportionate customer loyalty.
Response to Srikanth:
Rohin Dharmakumar Jul 3, 2013
Thanks Srikanth.

While I agree that in the long run the ecommerce market is a nowhere a zero-sum game, you cannot deny that in the short term (6-12 months, 12-24 months) there will be a fair amount of competitive effort to steal each other's customers and orders.

Flipkart, as the market leader, will need to work double-time to avoid losing customers or orders to Amazon. What will that do to its own profitability-timeline? Let's wait and watch.

Completely agree on both your additional points!
Vissu Jul 2, 2013
Logistics will be huge advantage for flipkart as they have their own courier service. Amazon's success isn't a given thing at this point, however big they are.
Ravi Verma Jul 2, 2013
Amazing move by Amazon. But Indian retail spaces have proved to be proverbial death nail for several multinationals. Plus there are peculiar things to India that Amazon is not used to...just for fun purchases, cash on delivery, an aggresive appetite for discounts etc. To quote from Anavaran's report on Indian e-commerce:

"Most of the e-commerce entities have found to be lacking in focus and execution abilities, including moteworhies such as Flipkart and Make My Trip, leading to surmounting losses for their investors. Infoedge perhaps is the only notable exception of running a profitable site-based business model. Worries on online front are further compounded by loss making record of Indian retail players who are faced with daunting task of yielding paltry profits despite commendable pedigrees and deep pockets."


Only time can tell, whether Amazon becomes a bellwether in such torrid fields or joins the rising list of also-rans.
Sudhir Kumar Jul 2, 2013
no market strategy is smarter then genuinely looking in to improving services and marketing products to the people at an appropriate competitive price with quality in mind always-if that is the game plan Amazon is going to succeed in its mission.
Manjunath M Gowda Jul 2, 2013
I completely agree; the trust and the great user experience of buying from Amazon is a bonus and added to great offers as well as the Kindle offerings, I have already ordered many items and more to come.....
Broadwit Jul 2, 2013
Any website selling pathetically outdated computer programming books and still calling itself Amazon India portal does a great disservice to Indian customers. Indians are not fools to buy substandard and cheap products from Amazon. Amazon must get its act together and has still a long way to go to match FlipKart in India. So please stop denuding yourselves that "competition will melt away merely because Amazon is here"!! thanks.
Response to Broadwit:
Omer Khan Jul 2, 2013
@Broadwit: Amazon does not sell Pathetically outdated books it has a wide variety of books that when a customer looks for he gets it at a good value and at convenience and only standard products are available on the website !!!
Response to Omer Khan:
Broadwit Jul 2, 2013
That is my point! Rather than stocking world-class authors Amazon India is selling bad Indian-authored programming books which are poorly made (printing and binding) and suffer from badly organized content. Not to mention rampantly plagiarized content found in these books. By the way, you may be satisfied with what they offer but I am eclectic and I am used to a different sense of what is worth from a book.
Weeks Jul 2, 2013
Rohin,

Excellent analysis. Very important arguments made by you.
1. This will increase the time to become profitable for flipkart.
2. Flipkart will run out of the funds (80Million $) sooner

I would like to add few more possibilities.
1. No investor would like to bet against Amazon at this point, so no new investors will even think of putting money to flipkart now. So either Flipkart will go on sale or the existing investors will have to fund a little more with HOPE to pull it off.
2. I see that Yebhi.com / infibeam.com will not see the light of 2015. The sooner they close/exit the better for the investors.
3. Flipkart's best bet is to sell out to Amazon, anything else will be a disaster.

Can you share the approximate revenues of flipkart along with the segment wise revenue breakup?

~Thank You
Anubhav Jul 2, 2013
Amazon has already launched mobile and electronics category. Update your article..
Response to Anubhav:
Shyam Jul 2, 2013
Hi Anubhav,
The moral of this story is not about accuracy of which categories are live and which aren't, that any one can find out on the respective sites. This is an article about insight which is not easily available outside, so read this article in the right perspective and comment only when you can add value.
Response to Anubhav:
Rohin Dharmakumar Jul 2, 2013
Anubhav, this article was closed on 14-June for the magazine, but put online today. Hence the discrepancy. Will update it nonetheless.
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