Jeff Bezos isn’t one to do photo shoots. Unless it’s for a staged product launch or the rare magazine cover, Amazon.com AMZN +0.05% billionaire founder tends to shy away from the spotlight, reserving his presence for appearances that lend themselves to obvious opportunities for his online retailing powerhouse.
One such appearance came about last month during Bezos’ week-long visit to India, an event that Amazon officials made sure was packed with spark and spectacle to counter the exuberance of a massive 10-figure investment in the company’s largest local rival. In July, Bangalore-based Flipkart announced it had raised $1 billion, prompting the stateside Bezos to publicly commit double that amount toward his own company’s Indian operations. Two months after that power move, Amazon’s CEO flew to the country to seal his promise and made Flipkart’s home city one of the first stops of his media tour.
At an event in Bangalore, Bezos, clad in a sharp, vanilla Bandhgala jacket and burgundy Dupatta scarf, did not waste the pageantry. He climbed atop a rainbow-painted lorry and guffawed at trigger-happy cameramen before presenting a Publisher Clearings House-sized check for $2 billion to Amazon India country manager Amit Agarwal. It was a show, but more importantly, it was a statement: Amazon was ready for war.
The second-most populous country in the world, India has become a battleground for companies like Amazon and eBay EBAY -0.63%, which hope that its 1.2 billion people will one day wake up and find that they can buy everything online. That hypothesis has led to billions of dollars of investment in the country’s nascent e-commerce ecosystem, as established retailers, global investors and some of the world’s richest people are betting that the best capitalized businesses will survive the low-margin dogfight of Internet commerce.
“India is a perfect example where we’re taking free cash flow that we’re generating in other businesses and we’re investing,” said Bezos in an interview during his visit. “We wouldn’t invest this much–we wouldn’t invest $2 billion–if there wasn’t evidence that it was working.”
Amidst its forays into smartphone manufacturing and television show production, Amazon’s adventure into India may represent its riskiest investment yet. Online retailing margins in the country are basically non-existent, as current customers spend little online and competition for attention has led to high marketing costs. Amazon’s $2 billion is by no means a guarantee for success, especially in a country where only 4% of the population will buy off the Internet in 2014.
“They all have been attracted by the potential size of the market, but every market is fundamentally different and what moves over here, doesn’t necessarily move over there,” said Mark Tluszcz, an investor in Indian technology companies with Mangrove Capital Partners. “It’s going to be a bloodbath in India.”
Amazon vs. Flipkart vs. Snapdeal
The blood will be shed upon piles of cash. While Amazon has committed $2 billion on top of what it has already spent in India since launching there in June 2013, the Seattle retailer faces two deep-pocketed competitors that were both founded by Indian entrepreneurs. The largest is Flipkart, whose backers include Tiger Global Management, DST Global and Singapore sovereign wealth fund GIC. Founded in 2007 by ex-Amazon employees Binny Bansal and Sachin Bansal (no relation), the company’s $1 billion round in July took its total funding to more than $1.7 billion, and left it well-positioned to defend its perch as India’s number one e-commerce platform.
EBay and Intel INTC +0.16%-backed Snapdeal poses another threat. Started in 2011 as a daily deals site, the New Delhi company has since transformed into a marketplace that’s also commanded 10 figures in private equity backing. Most of that came in a $627 million round in late October from SoftBank, whose billionaire chairman Masayoshi Son compared Snapdeal to his most impressive investment ever: Alibaba Group.
“I strongly believe that Snapdeal has the potential to be like the Alibaba of India,” he told CNBC, before detailing the initial $20 million investment he made in the Chinese giant 14 years ago. “Several years ago, people still didn’t understand the value of Alibaba. Right now Snapdeal has significant growth and a great team. India’s future opportunity is so huge.”
Right now however, the investment going into India’s e-commerce leaders far outstrips consumers’ online annual spend. Forrester Research estimates that in 2014, consumers will buy $3.2 billion-worth of goods, excluding travel purchases, online. For perspective, last year worldwide buyers on Amazon alone purchased $116 billion in books, sneakers and everything else, according to IDC.
That should change as more Indians move online and consumers bypass traditional brick-and-mortar chains, said Vamsi Vutukuru, whose retail analytics company, Boomerang Commerce, has an office in Bangalore. In India, big box stores have failed to gain traction among consumers, leaving the market wide open for the next phase of retail.
“If you look at India, organized retail did not put a strong foot forward,” said Vutukuru, who oversees Boomerang’s operations in the country. “The vast population in India is making the leap from disorganized retail to e-commerce and Amazon and Flipkart can capture part of the overall retail space, not just online commerce.”
But how long could that take? In a country where only 20% of the nation uses the Internet, Forrester projects that there will be $16 billion in goods bought online by 2018, eight times the amount in 2013, but still a small fraction of the global market.
“We have a long-term view of the business,” said Amazon spokesperson Meenu Handa in an email. “We endeavor to raise the bar for online shopping in India and believe it is still Day 1.”
$2 Billion Well Spent?
While Amazon was the fastest company to reach $1 billion in good transacted of any Indian platform, officials recognize that the company still lags behind Flipkart and has a ways to go before it can claim domination. With its $2 billion in backing, Amazon will build “infrastructure [and] logistics,” said Handa, and make “investments in technology with a focus on mobile platform[s.]”
The first two components are key as Amazon builds out operations in a country where it currently cannot sell its own inventory and relies on local businesses to list and supply products. National law prevents companies with foreign investment from storing their own goods goods on Indian soil and selling those items to the country’s consumers, forcing Amazon–for now–to operate as a marketplace where merchants can store, list and peddle their wares.
Juveca Panda, a cofounder of local women’s fashion brand Anonymous Co., said she expects Amazon to continue building out its Indian warehouses (of which Amazon currently has seven in India) in order to store more third-party products and get items closer to its customers for easier shipping. Currently, Panda uses both Fulfillment By Amazon, where local businesses store goods inside Amazon warehouses and allows the company to pack and ship ordered items, and Amazon Easy Ship, where Amazon couriers pick up and deliver packages from companies that sell on its marketplace.“A lot of [companies] coming up these days don’t have a platform to showcase their products,” she said. “Some don’t really have time or resources to take part of marketing or shipping the product. Through their fulfillment model, you don’t really have to do any of that.”
Still, Panda is not entirely happy, explaining that several customers have complained about delivery times through Amazon. It’s something the company is still solving, said Amazon Vice President of Seller Services Tom Taylor, who noted that a lack of courier infrastructure in the country and local practices like paying with cash on delivery have complicated package shipment.
“We have to get the last-mile customer experience right and the last-mile customer logistics right,” he said. “That will also change over time as people get more comfortable with online shopping.”
India’s Costs
Getting those people acclimated to the world of online retail will not be easy, said Tluszcz. India’s 39 million online shoppers will each spend just about $80 on internet retail in 2014, “economics that don’t make sense” if you consider the amount spent on logistics, infrastructure and marketing, said the venture capitalist .
In dislodging Flipkart, which will do $2 billion in gross merchandise volume by mid-2015 according to Forrester analyst Satish Meena, Amazon has engaged in a marketing blitz. The company is sponsoring television programs and engaging in heavy discounts and daily deal promotions, part of a race-t0-the-bottom price battle that is only taking a further toll on bottom lines. Flipkart is also doing its own part in the cash-burning customer acquisition one-upmanship, employing large discounts on a flopped promotion known as “Billion Dollar Day” and even buying billboards that surrounded the Bangalore airport and its competitor’s headquarters for its “Welcome Mr. Bezos” campaign during the Amazon CEO’s visit.
That’s all been made possible by the billions that have poured into these companies, some of which has fueled acquisitions like Flipkart’s $300 million purchase of Indian fashion retailer Myntra in May. Those close to Amazon, however, say the company will go down a different route, making smaller complementary acquisitions and focusing on internal growth as opposed to making a splash for another big name player. Rumors linking the company to Rocket Internet-begat apparel retailer Jabong in a $500 million deal far from true, say sources, though Amazon may be considering smaller targets like Indian gift card platform QwikCilver.
Amazon’s critics, though, advise caution. Wolfe Research Managing Director Aram Rubinson, who doesn’t agree with the company’s investment strategy, highlighted companies like Sears and Circuit City, retailers that branched out too far from their core and market, only to find that their models didn’t work in foreign markets.
“[Amazon is] fighting battles on way too many fronts, that, historically, was the Achilles heel of these companies,” he said. “It’s like a game of ‘Risk.’ You need more than two armies in Ukraine.”
And as the company increases its focus in India, risks are mounting, as outlined in the company’s most recent quarterly report. There, Amazon noted that it could possibly shutter the country’s operations if it’s unable to maintain its investment or finds itself on the wrong side of Indian law.
Those close to the company said not to read too much into those statements, however, and that the country is among Amazon’s important long-term commitments. Unlike China, where governmental and language barriers have created local winners, India offers an open competitive landscape and a population that has yet to fully tap the power of the web.
“Google of India is Google,” said Vutukuru. ”The Facebook of India is Facebook. I don’t think being an Indian company gives you unfair advantage. From that standpoint, it’s very likely that the Amazon of India could be Amazon.”
No comments:
Post a Comment