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Amazon India country manager Amit Agarwal says that the e-commerce firm’s aim now would be to make its supply chain more efficient. Photo: Hemant Mishra/Mint
Amazon India country manager Amit Agarwal says that the e-commerce firm’s aim now would be to make its supply chain more efficient. Photo: Hemant Mishra/Mint

Where will Amazon spend its $3 billion?

New regulations have forced Amazon to stop spending on discounts and adsthe biggest source of expenditure

Bengaluru: Amazon.com Inc. announced an additional investment of $3 billion in India on Wednesday, but the e-commerce company still hasn’t announced any sales since March, when India put in place rules that effectively bar marketplaces from discounting.

Amazon Seller Services India Pvt. Ltd, and other online retailers, temporarily suspended their sales so as to comply with new e-commerce regulations, Mint reported on 28 April.

While Amazon, Flipkart India Pvt Ltd, and Snapdeal (owned by Jasper Infotech Pvt Ltd) continue to fund discounts purportedly given by third-party sellers on their platforms, they have cancelled planned sales and accompanying advertisements to avoid potential punishment from regulators, Mint reported then.

While Flipkart has held one smartphone sale since the new regulations were announced, Amazon India and Snapdeal have avoided sales. Snapdeal has anyway been cutting spending on discounts, advertising and other areas to conserve cash as it is struggling to raise cash.

For Amazon, the new regulations have forced it to rein in spending on discounts and ads. While it is still funding part of the discounts on its platform, the Amazon has not held big-bang sales, where e-commerce firms sometimes offer discounts of up to 80%.

These sales and their accompanying ads are among the biggest sources of expenditure as well the biggest drivers of revenue for Amazon and the other online retailers.

Amazon hasn’t gone off sales, its India head said.

“We have occasionally done sales events, and I don’t think that will change," said Amazon India country manager Amit Agarwal over the phone.

Nor will the company stop advertising, Agarwal added.

“You’ll always look for advertising your marketplace to customers to drive adoption."

But Amazon’s main focus, Agarwal said, would be to make its supply chain more efficient. The company’s preferred way of offering low prices to customers was to reduce sellers’ costs, such as warehousing and product delivery, he explained.

“Programmes such as Easy Ship, Seller Flex and Fulfilment by Amazon help sellers reduce costs in shipping, warehousing, packaging, customer service, returns—across the board. These programmes not only reduce costs for sellers but also increase their sales and conversions."

Still, there’s no denying that the foreign direct investment (FDI) rules have temporarily hurt Amazon India’s ability to discount heavily. It has the money to do so. Rivals Flipkart and Snapdeal are looking at ways of cutting costs, and, therefore, can’t really announce too many sales.

Amazon ran through nearly $2 billion in India in less than two years since its chief executive Jeff Bezos announced the investment in July 2014. (Amazon has pumped in more than 12,000 crore into its Indian entity since that announcement but its exact spending isn’t clear as the company hasn’t filed its latest financial report.)

Since its launch in June 2013, Amazon India has spent heavily on building its logistics network, setting up as many as 21 warehouses. It has hired thousands of delivery professionals, engineers and others and set up sales teams to recruit sellers.

The company has also launched new businesses, such as Amazon Now—its grocery ordering service, and introduced warehousing and shipping initiatives for its sellers like Fulfilment by Amazon and Easy Ship.

But much of that $2 billion went toward discounting and advertising.

For the year ended 31 March 2015, Amazon Seller Services Pvt. Ltd (Amazon India) spent 743.9 crore and 661.6 crore on advertising and sales promotion, respectively, documents with the Registrar of Companies (RoC) show. Those costs are likely to have increased significantly in the year to 31 March 2016 as Amazon ramped up its expansion and gained significant market share at the expense of Flipkart and Snapdeal.

So far in fiscal year 2016-17, however, Amazon India has not announced any sales because of the new FDI rules. That will change once the e-commerce giant figures out new discount funding mechanisms.

Amazon will continue to spend the $3 billion on building more warehouses, hiring people, launching new business initiatives, signing up new office space and expanding its cloud services business, Amazon Web Service.

But, for now, the firm won’t be able to spend as much on discounts and advertising as it would like to, offering some respite to its relatively cash-constrained local rivals.

In March, the government allowed 100% FDI in online retail of goods and services under the so-called marketplace model, seeking to legitimize existing businesses of e-commerce companies operating in India. However, the government added two riders that have far-reaching consequences for the online retailers. One, marketplaces cannot influence pricing of products and services on their platforms, directly or indirectly. Two, no one seller can contribute more than 25% of the sales of any marketplace.

Both regulations affect Amazon India and Flipkart. In Amazon’s case, Cloudtail India Pvt. Ltd is the largest seller on its platform, contributing at least 40% of the company’s sales in some months, Mint reported on 29 October. Cloudtail is a joint venture between Amazon and N.R. Narayana Murthy’s Catamaran Ventures.

In response to the new FDI rules, Amazon regularly informs its sellers whether they are exceeding the 25% threshold.

“The part about large sellers having to modulate their sales—we’ve put in place a process to give data to our large sellers about how their units are faring so that they can decide how to manage their business. That will allow the large sellers on our platform to get a sense of what they should or should not do," Agarwal said in an interview published on 20 May.

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