Amazon, Flipkart and their quest to control India’s e-commerce

Amazon India and its largest local rival, Flipkart, which was modelled on the American online retailer, are changing their strategies in diverging ways, as they seek to dominate India’s fast-growing e-commerce market.

Amazon India and Flipkart, the country’s biggest e-commerce firm, are supposed to operate as marketplace platforms that connect small merchants with buyers. They aren’t allowed to sell directly to shoppers.

But both the companies have adopted complex corporate structures and used loopholes in the law to deploy a mix of the marketplace and the direct-selling business model.

Mint reported on Thursday that Amazon is using a joint venture to increase the direct selling component in its model (albeit in a roundabout way), even as Flipkart is fast moving towards a marketplace.

Clearly, Amazon is willing to do whatever it takes to succeed in India, the last big unconquered e-commerce market in the world. (Amazon has already lost out to Alibaba Group Holding Ltd in China.)

Amazon has stuck to its long-held view that the best way to serve customers is to have its own products, as well as those of third-party merchants, as this approach leads to a wider product assortment. Competition among merchants on the platform also drive down prices.

Amazon’s success has been built on its avowed principles of offering the widest product assortment possible, coupled with low prices. To stay true to these in a nascent market, such as India, where merchants struggle to meet Amazon’s exacting standards of customer experience, the company has decided it needs to have more control over its supply than what a pure marketplace allows.

This shift requires more cash, but then, the online retailer has anyway promised to pump in $2 billion into its India business over time.

Amazon’s rival and one-time admirer, Flipkart, has changed its role model to China’s Alibaba.

This switch is driven largely by the success of Alibaba’s record initial public offering (IPO) and the growing pressure on Flipkart to find the elusive path to profitability.

Flipkart was started in 2007 by two former Amazon.com Inc. employees—Sachin Bansal and Binny Bansal. The firm began as a book retailer, just like Amazon in 1995, but gradually added all kinds of other products, including mobile phones, laptops and clothes.

Until 2013, it sold all these directly to shoppers, not through third-party merchants.

However, that model is simply not conducive to making profits.

Flipkart, which has raised $2.6 billion over the past 18 months, is expected to report huge losses this year because of its aggressive expansion and deep discounting. At some point, it needs to go public, and the pressure to do that increases every year.

Flipkart believes that the Indian e-commerce market, with its deficient infrastructure and smartphone-driven shopping, resembles that of China more than the US. Hence, the change in loyalties to Alibaba, which is now an investor in Flipkart’s rival, Snapdeal.com (promoted by Jasper Infotech Pvt. Ltd).

The success of Alibaba’s IPO —whose valuation at one point exceeded $250 billion after it went public in September 2014 (its value has now reduced significantly from that peak)— strengthened Flipkart’s resolve to try and adopt Alibaba’s advertising-driven revenue model.

Under this model, Flipkart plans to operate as a marketplace and earn the bulk of its revenues from ads and other services, such as logistics and warehousing charged to sellers.

Though Flipkart hasn’t discussed its plans publicly, sellers would, presumably, also bear a large part of the discount.

The transformation from an inventory model to an ad-driven marketplace is complex and it’s far from clear whether the shift will deliver profits.

So, Flipkart is still trying to find the success formula that will work in India. Its massive cash cushion and No.1 position mean its investors will give the company time to figure out the right strategy to make money.

Amazon, on the other hand, is on familiar ground, adopting its mantra of low prices and wide product assortment through its direct selling plus marketplace model to please customers, without bothering too much about making profits.

Currently, both companies, along with Snapdeal, have the same goal: to dominate e-commerce sales, which may increase to anywhere between $48 billion and $60 billion by 2020 from $4.47 billion last year, according to Swiss financial services firm UBS AG.

While grabbing market share drives the short-term strategies of these companies, at some point, however, both will have to develop viable businesses to satisfy their respective backers. In Flipkart’s case, that is chiefly its biggest investor—Tiger Global Management Llc.

For Amazon, it is the company’s founder and chief executive Jeff Bezos and the shareholders of Amazon.com Inc.