Amazon Revs Up in India

By Knowledge@Wharton | July 31, 2014

The past year has been action-packed for Amazon in India. The country’s online retail market is around $3 billion at present, but it is expected to cross $50 billion by 2020 — and the global online retail giant is gearing up to play a dominant role in the sector.

While Amazon has been compelled to adopt different a business model in India to comply with foreign direct investment (FDI) regulations — India does not permit FDI for online companies that have their own inventory — the ramp-up of its operations in the country has been the fastest globally for the Seattle-based $75 billion firm. When the company launched Amazon.in, its online marketplace in India, in June 2013, it had just 100 sellers across two categories — books and movies, and television shows. Amazon now has a base of 5,000 sellers and a selection of more than 15 million products across 25 categories including music, video games, toys, home goods, luggage, jewelry and beauty products. According to media reports, industry estimates put Amazon’s India sales at around $200 million.

Amazon has been active on other fronts, too. For instance, it took the lead among online retailers in India to introduce same-day and next-day deliveries. To reach its customers faster, Amazon is now running a pilot for last-mile delivery by partnering with neighborhood mom-and-pop stores. Amazon also has two fulfillment centers in the country — one on the outskirts of Mumbai, and the other in Bangalore, each about 150,000 square feet. These two centers stock products across several categories from sellers using “fulfillment by Amazon” – a service in which Amazon takes complete care of packing, shipping and delivery of the sellers’ products.

“India is a very important market for Amazon globally. We are committed to India and are here for the long term,” says Amit Agarwal, vice president and country manager of Amazon India. “We take it as an article of faith that customers will shop on Amazon.in only until the very moment they find a better customer experience elsewhere. It’s truly ‘Day 1’ for us, and we are committed to aggressively investing over the long term and relentlessly focusing on raising the bar for the online shopping experience in India.”

Pragya Singh, associate vice president of retail at research and consultancy firm Technopak Advisors, notes that Amazon has been present in India since 2012, when it launched Junglee.com, a comparison site the company bought more than a decade ago. That purchase, she says, helped Amazon build an initial understanding of the market. “Amazon has spent the past year strengthening its backend, has added categories one by one, expanded its vendor base in India and worked on the fulfillment aspect, which is a very critical piece in Indian e-tailing,” she adds. “Amazon is changing gears now, and if FDI in (inventory-led) e-commerce opens up anytime soon, it won’t be surprising to see (the company) going full steam to grab the top slot.” According to recent media reports, the new government in India, which took over in May, is considering easing restrictions in this sector.

Domestic Players on the Move

But even as Amazon is getting its act together, the major domestic players in the space are making waves as well. In March, India’s largest online retailer, Flipkart, announced that it had crossed the $1 billion mark — the first online retailer in India to do so — a year ahead of its target. Founded in 2007 by ex-Amazon employees Sachin Bansal and Binny Bansal, it currently offers 15 million products across more than 70 categories.

In May, in the largest-ever transaction in the Indian e-commerce space, Flipkart acquired Myntra, the leader in the online fashion and lifestyle sector in the country. The two firms will leverage their synergies but will continue as independent entities. While both Flipkart and Myntra have refused to divulge the size of the deal, industry analysts peg it at around $350 million.

Calling the acquisition a “game changer,” Sachin Bansal says: “This is an acquisition for scale and not for cost. We believe that with this acquisition, we both can grow five to 10 times (faster) in the fashion category than what we would have done independently.” Myntra co-founder Mukesh Bansal adds: “This is probably one of the few sales in the e-commerce segment in India that is not out of distress. There was no compulsion for us to sell, only a very strong business case to accelerate our roadmap and create a strongly differentiated organization.”

The Flipkart-Myntra deal is important because fashion and lifestyle is not only one of the largest categories in online retail in India — it accounts for more than 25% of the market and is expected to increase to as much as 40% — it also has among the best margins. While margins in branded apparel can go up to 35%, for in-house brands it can be as high as 60%. The companies are looking to increase their combined market share in this category from 50% at present to around 70%. Flipkart has already committed to investing upwards of $100 million in the combined fashion business over the next 12 to 18 months.

According to Kartik Hosanagar, a Wharton professor of operations and information management, the acquisition makes “tremendous sense” for Flipkart, given both the higher margins associated with apparel and the threat from Amazon. But he is surprised that Myntra agreed. “Myntra is well positioned in a high-margin business, and I believe they will fare better than their main competitor, Jabong. I have to believe that their common investors … had a big role to play in pushing the deal through.”

Soon after its acquisition of Myntra, Flipkart also raised $210 million in a fresh round of funding led by DST Global. Since its inception in 2007, Flipkart has raised more than $550 million and, with money from the previous rounds not yet fully utilized, it is flush with funds for more growth-related investments. “Acquisition is an important strategy for us,” says Binny Bansal.

Meanwhile, another major domestic player, Snapdeal, which is expected to reach $1 billion in sales this year, recently raised $100 million from a consortium of investors, including Wipro chairman Azim Premji, Singapore-based Temasek Holdings and Hong Kong-based Myriad Asset Management. With the deal, Temasak and Myriad, which have also invested in Chinese e-commerce giant Alibaba, are making their first investments in Indian e-commerce.

In February, Snapdeal, which has over five million products from more than 30,000 sellers, raised $133 million in funding. This was led by eBay, which, following an initial investment in 2013, increased its stake in Snapdeal to around 20%, according to industry estimates. In a press statement in February, eBay senior vice president and APAC managing director Jay Lee said: “Accelerating growth in India and other emerging markets continues to be a core strategy for driving eBay’s global e-commerce leadership. We continue to invest in Snapdeal due to its complementary business model, good management team and strong brand.” EBay has been present in India since 2004 with the acquisition of Baazee.com and is estimated to have around 1.1 million products across nearly 2,000 categories.

According to Venture Intelligence, a research services firm focused on private equity and M&A deals, from January 2014 to now, there have been 13 venture capital/private equity investments in the Indian e-commerce space totaling $309 million. Last year, there were 30 investments totaling $540 million, while in 2012 there were 48 investments totaling $316million.

Domestic online retailers have also been active on other fronts. For instance, soon after Amazon launched its one-day delivery service, Flipkart, Myntra and Snapdeal followed suit. Flipkart is now pushing the envelope when it comes to customer service by piloting a “try and buy’ concept for apparel in Bangalore. Customers can try out the garments before deciding whether or not to purchase them. The firms are also making concerted efforts to hire top-notch professionals and aggressively woo consumers with high-decibel advertising and steep discounts.

Does Amazon Need to Rethink?

What does all this increased activity mean for Amazon? Does it need to rework its strategy if it wants to gain the top slot in the Indian online retail market? Sudhir Sethi, founder and chairman of IDG Ventures India, which is an investor in Myntra, says that with the Myntra acquisition, Flipkart “has taken a significant lead over Amazon in having the largest and most profitable vertical in their stable at a significant scale. Both Amazon and Snapdeal will be forced to scale faster in the fashion vertical now.” However, Sethi adds that “with its deep domain and sector knowledge, as well as access to a deep pool of capital, Amazon is clearly well placed to be a leading e-commerce player in the Indian market.” Both Flipkart and Snapdeal, he notes, will have to raise more capital to scale, invest in logistics and inventory handling automation, as well as raise the bar on consumer satisfaction.

K. Ganesh, a serial entrepreneur and strategic investor in five e-commerce start-ups, suggests that Amazon needs to rethink its strategy to bridge the gap between itself and the combined Flipkart-Myntra entity. “Amazon is the pioneer in this space and has a huge war chest and patience to drive the outcomes in the Indian market,” he notes. “It has great domain knowledge, and the learnings it brings are unparalleled. But the size and leadership of the Flipkart-Myntra combination, the top investors and their ability for further funding will certainly affect Amazon’s plans in India. From Amazon’s point of view, it would have been better to have two competitors with relatively smaller cash, traction and resources, (rather) than their joining forces.”

Agarwal declined to comment directly on the competition. “We remain customer obsessed and not competition focused. We are going to relentlessly focus on expanding sellers and selection on the platform, innovate on various customer touch points, and provide fast and reliable delivery services.” He says that his team draws lessons from Amazon’s experience globally. “Amazon has built one of the most sophisticated logistics infrastructure that has ever been built to serve sellers and customers. We learn a lot from that and localize that to India,” he notes.

Global vs. Local

Given the peculiarities of the Indian market, can global platforms, processes and models, even if they are tweaked, work in India? No, according to Ganesh. “Many of the things that companies take for granted in terms of the ecosystem do not exist or are not developed in India,” Ganesh points out. “These need to be developed from scratch here. For instance, the entire concept of cash-on-delivery, the high returns and refunds, the lack of a credit score for nonpayment of debt, the inability to prosecute to recover any bad debt, the high price sensitivity and the obsession over getting best value for money are all things that require local solutions. Transplanting U.S. models here will not work.”

Flipkart’s Sachin Bansal says that across the world, e-commerce is a space where being local is a key benefit. “Be it online retail, jobs, classified ads — local aspects play an important role.” Bansal cites an example: “If Flipkart had started in the U.S., we would have built our logistics system very differently. Our supply chain structures would be very different because the cost of labor in the U.S. is very different from what it is in India. What we automate and what we don’t automate makes a big difference. There are also cultural differences.” Myntra’s Mukesh Bansal adds: “A lot of global players were built in the desktop era. The whole Indian ecosystem will be built on mobile from scratch. Global players come with a lot of legacy that is not relevant in the Indian market.”

But Agarwal counters this argument, noting that India is the fastest-growing mobile commerce site for Amazon globally. “We launched the Amazon mobile shopping app for Android and iOS phones within a couple of months of our India launch and, today, we get more than 30% traffic through mobile.” He also points to some of the features and programs developed by Amazon specifically for India: Pin code-based delivery to deal with challenges around logistics, payments functionality that allows customers to start where they left off in case of an incomplete transaction, the “fulfilled-by-Amazon” service and a small business accelerator program.

“We strongly believe in three things that have helped us succeed globally: customer obsession, innovation and long-term focus,” Agarwal notes. “The Indian e-commerce space is still in a very nascent stage with significant potential for innovation to improve customer experience. The growth (here) is at an inflection point and there is tremendous opportunity. We believe there is room for multiple formats and players, and most importantly for innovation.”

Hosanagar agrees with Sachin Bansal’s view that e-commerce is a local play. He points out that India’s e-commerce market looks more like that of China than the U.S. “If you look at China, Amazon hasn’t fared that well,” he notes. “So we shouldn’t assume that Amazon will bulldoze the local players.” However, Hosanagar adds that his “overall prognosis” is that Amazon will do well in India. “They have learned their lessons from China and will not look to replicate their U.S. model in India. Further, they have had a chance to observe the Indian market for the past couple of years. While I think they will do well, I don’t think Flipkart is in trouble, either. I think Amazon poses a larger threat to Snapdeal, which has a similar marketplace model.”

The Winning Formula

S. Ramesh Kumar, a professor of marketing at the Indian Institute of Management in Bangalore, suggests that the major challenge for any e-commerce portal is to create a sustainable differentiation. “Both Amazon and Flipkart need to be worried about each other, as both are capable of scaling up. Unlike established categories, I am unsure if local brands would have an advantage.” Singh of Technopak adds: “Where global players have an edge is experience in terms of technology and processes that are important in scaling up. Most of them also have deep pockets.”

Ganesh, however, says that many of the advantages that global players have work better in the product space than in services. “The best option for (multinationals), in my opinion, is to get the best of both the worlds by going in for big, bold acquisitions — the way Naspers did with redBus, Pearson with TutorVista and Disney with UTV — rather than start from scratch.”

According to IDG’s Sethi, the Indian online retail market has peculiarities that give local players an edge, but only for a short time. “In the medium to long term, international players have the advantage of having the experience of building scale, which the local entrepreneur may not have,” he says. His list of success factors: convincing consumers to buy online, enabling mobile commerce, efficient logistics, managing cash-on-delivery across the country, high consumer satisfaction, hiring the right team and availability of capital for rapid and sustained growth.

Rishikesha T. Krishnan, director and professor of strategic management at the Indian Institute of Management in Indore, notes that Amazon has made its name in global e-commerce for “its brilliant and dependable execution.” Managing logistics effectively in India is not easy. If Amazon manages to crack that, it will be “a formidable threat to Flipkart.” But Krishnan notes that Amazon has a more serious challenge than dealing with India’s logistics. “Amazon is under pressure in the U.S. to improve its financial performance. India will be a long-term bet, and Amazon will succeed (here) only if it is committed for the long term.”

Drawing an analogy from mobile services, Krishnan adds: “We need to see whether Amazon is more like a Vodafone — (i.e., a company that is willing to) take a big bet on India, dig in and fight in spite of investor pressures in Europe — or like a DoCoMo, (i.e., one that) gives up too early.”