11 min read.Updated: 20 May 2016, 01:43 AM ISTMihir Dalal
After a late start in India, Amazon has grown at a scorching pace to catch up with local rivals Flipkart and Snapdeal in the race to the top of the world's last big e-commerce market
Bengaluru: Every week, Amazon India country head Amit Agarwal and his senior leadership team get into a room at the company’s headquarters in Bengaluru to discuss the previous week’s performance. The meeting starts off with a customer call, what Amazon calls, “the voice of the customer".
Things usually get ugly. Indian customers are extremely demanding and they aren’t exactly shy of voicing their opinion, especially when they are displeased.
“You can see people bristling, recoiling in their chairs because the customer is going on and on about how the service was bad. It sets the tone for what the meeting is about. I get a lot of customer emails myself and then I also get customer emails forwarded by Jeff (Bezos, founder-chief executive officer of Amazon.com Inc.) I get so much email that I can predict reading through the email what the customer issue is. Then, I know if the issue is being worked on or not. If there’s a new pattern emerging, I pass it on to my team," Agarwal said in an interview.
This obsession with pleasing customers, expressed through Amazon’s often repeated mantra and operating principles of widest product selection, lowest prices and fastest product delivery, has paid off handsomely for the company in India.
Though exact market share numbers are unavailable, by all accounts, Amazon is neck-and-neck with rivals Flipkart and Snapdeal in the ongoing race at the top of India’s e-commerce market that is expected to grow to $60 billion by 2020 from $4.48 billion in 2014, according to UBS AG.
That is a staggering achievement.
Amazon launched in India only in June 2013, years after Flipkart (2007) and Snapdeal (2010). For a majority of Amazon’s existence in India, both Flipkart and Snapdeal have been very well funded. In fact, in 2015, when much of Amazon’s growth came at the expense of Flipkart and Snapdeal, the bank balances at the two local companies were at their peak.
The two local companies had also built expensively assembled senior leadership teams that were to take them to the next level of growth and keep Amazon at bay.
They boast a bunch of big investors—Tiger Global, DST Global, T Rowe Price, Qatar Investment Authority and others at Flipkart and SoftBank Group, Alibaba Group, Foxconn and eBay Inc. at Snapdeal—that together have more firepower than even Amazon.
For all that, Flipkart and Snapdeal are faced with the strong possibility that they may be overtaken by Amazon this year.
Mint had first reported on 15 August 2015 that Amazon India was gaining significant market share from Flipkart and Snapdeal.
At that time, the two local companies were still comfortably ahead of Amazon. Since then, Amazon’s market share gains have accelerated.
Consider this. Amazon generated more sales in October-December last year than it did in all of 2014. Amazon’s gross sales, net of discounts and product returns, jumped 250%. In the January quarter, its volumes or number of shipments grew 150%. Snapdeal reported growth of 90% in gross sales, including discounts and product returns, for the year ended March, and its growth cratered in the second half of the year. Flipkart’s monthly sales have remained stagnant since November, Mint reported on 14 April. Flipkart declines to disclose its numbers, but says it’s seen “healthy sales growth".
Snapdeal denies losing market share.
“We have seen rapid growth, year-on-year, followed by a doubling of business on a much larger base. This is an indicator of the pace at which we are growing. Our shipment volumes have grown rapidly, and in the period Jan-Mar 2016, the shipment volume was 1.96 times of the volume in the same period last year. Not only volume, but our share of shipments has also grown," a Snapdeal spokeswoman said.
Flipkart, too, claims it hasn’t lost market share and said it controls about 60% of mobile commerce in India and dominates categories such as smartphones and fashion.
Snapdeal had set a target of overtaking Flipkart in terms of gross sales by March this year, but the company failed to achieve that target, Mint reported on 29 April.
Amazon has the biggest online store by far among the three. The firm offers more than 55 million products from more than 85,000 sellers. In comparison, Flipkart offers more than 40 million products from more than 90,000 sellers, while Snapdeal offers more than 35 million products from 300,000 sellers.
The US-based online retailer also owns 21 warehouses across the country and has provided technology tools and processes for 50 others owned by its sellers. In comparison, Flipkart owns 17 while Snapdeal doesn’t own any.
“Three years ago, if anyone had told us that this is where we are going to be, we would have been very, very surprised in the sense that we have been able to get customer adoption and traction much faster than we imagined. We knew it was a big market and we have a long-term outlook, but we didn’t imagine we would get so big so quickly," Agarwal said.
Last month, Amazon’s Bezos promoted Agarwal into his senior leadership team, in recognition of how fast Amazon has grown in India under Agarwal.
Amazon’s rise in India has been fuelled by an extraordinary splurge of cash.
In February, Amazon Seller Services Pvt. Ltd (Amazon India) nearly doubled its authorized capital to ₹ 16,000 crore, exceeding its massive capital commitment of $2 billion made in July 2014 and indicating the company’s intent to splash whatever cash is needed to become the country’s largest e-commerce firm. Amazon India’s authorized capital was ₹ 1,500 crore in July 2014, when Bezos promised it will invest as much as $2 billion in India over the next few years.
Since Bezos committed $2 billion, Amazon Seller Services has already received roughly ₹ 10,730 crore to splurge on discounts, advertising, hiring and other things, documents with the registrar of companies show. This is apart from the company’s cash infusions in its logistics unit Amazon Transportation Services Pvt. Ltd and Cloudtail India Pvt. Ltd, the largest seller on its platform.
“We’ve never been constrained by an investment cheque. The moment you drive actions on the basis of a number, you will not do what is right for the long term. Our long-term ambition is to transform how India buys and sells. To do that, we will thoughtfully invest whatever it takes to do that," Agarwal said.
What has led to Amazon’s rise in India? Part of it has to do with the fact that Flipkart and Snapdeal lost the initiative last year. Flipkart was trying to undertake three complex shifts in its business model last year: move from retail to marketplace; become a mobile app-only platform; and build a large advertising business. These three shifts caused the company to be distracted even as it cleared out its old management team and replaced it with a new set of leaders, which wasn’t well received by its mid-level managers and others in the organization.
Snapdeal, on the other hand, was always likely to suffer in comparison with Amazon’s high-quality customer service, partly because unlike Flipkart and Amazon, the company doesn’t operate its own logistics service. That’s why Snapdeal is investing aggressively in e-commerce logistics firm GoJavas and working more closely with it to improve its delivery time speed and consistency.
But apart from the mistakes made by Flipkart and Snapdeal, Amazon has done a lot of things right.
From its launch, Amazon has customized its offerings to suit the tastes and habits of Indian customers: offering cash-on-delivery, the preferred mode of payment in India; cutting the size of its mobile app to suit cheap smartphones that have low storage and little computing power; redesigning its daily deals offering; tying up with local partners such as India Post to reach far-off areas in the hinterland; investing in a large logistics network of its own to get products fast to customers.
On the sellers’ side, too, Amazon worked hard towards educating wary local businessmen about online selling and equipping them with the skills and technology tools to improve their product quality and service levels.
Because of India’s foreign direct investment (FDI) rules, Amazon works as a marketplace in India, connecting buyers with third-party sellers on its platform. Amazon launched successful initiatives such as Easy Ship, which provides logistics services to sellers; Seller Flex, under which Amazon helps sellers bring their warehousing practices to the levels acceptable to Amazon; and a bunch of seller awareness and training programmes.
“In these three key things—in-stock selection, low prices and fast delivery—we were able to do India-specific things because we started with what the customer wants and then worked backwards to achieve that. We didn’t take an Amazon model and impose it on India," Amazon’s Agarwal said.
Amazon hasn’t always played by its usual rulebook in India.
Unlike in its other markets, Amazon started advertising way earlier in India. Cloudtail is another instance of Amazon pushing ahead more aggressively than analysts expected.
In October 2015, Mint reported that Cloudtail was the biggest seller on Amazon India’s platform, generating at least 40% of the company’s sales in key product categories in some months.
Cloudtail is dominant in electronics and fashion sales, two of the three largest categories for Amazon India.
In 2014, Amazon Asia and Infosys founder N.R. Narayana Murthy’s Catamaran Ventures jointly formed Cloudtail India to sell items such as books, phones and exclusive Amazon merchandise on Amazon.in under the seller name, Cloudtail, according to documents available with the Registrar of Companies (RoC).
Cloudtail India is a fully-owned unit of Prione Business Services Pvt. Ltd, the documents show. Prione, in turn, is owned by Catamaran Management Services Pvt. Ltd, the acting trustee of Hober Mallow Trust (51%), Amazon Asia Pacific Resources Pvt. Ltd (48%) and Amazon Eurasia Holdings (1%). Apart from owning Cloudtail, Prione also helps Amazon India sign up and train sellers across the country.
The expansion of Cloudtail underlines how the world’s largest online retailer has used the loopholes in the law to continue to have a direct-selling model in the country that bans e-commerce companies from selling goods directly to shoppers.
Amazon has been coy about Cloudtail. Asked whether Cloudtail accounted for a large and disproportionate part of its business, Agarwal replied: “I don’t know about that statement. As I said, we have more than 85,000 sellers on our platform and these range from small to large sellers. Pretty much every large seller that you’re aware of in India is a seller on Amazon."
Cloudtail’s preponderance on Amazon is now under threat.
In March, the government allowed 100% FDI in online retail of goods and services under the marketplace model but prohibited marketplaces from having one dominant seller. The rules cap total sales of one vendor at 25% and also banned marketplaces from affecting product prices, effectively outlawing discounts by marketplaces.
Last month, Amazon’s parent firm, Amazon.com Inc., disclosed to the US stock markets regulator that the company owns an indirect minority stake in a third-party seller on Amazon India.
Amazon made this disclosure in its quarterly regulatory filing with the US Securities and Exchange Commission. “In India, the government restricts the ownership or control of Indian companies by foreign entities involved in online multi-brand retail trading activities. For www.amazon.in, we provide certain marketing tools and logistics services to third-party sellers to enable them to sell online and deliver to customers, and we hold an indirect minority interest in an entity that is a third-party seller on the www.amazon.in marketplace," the company stated in its filing. It didn’t reveal the size of the stake it holds.
Amazon will have to find ways to shift sales away from Cloudtail and continue discounting or else it risks losing the ground it gained last year though even Flipkart and, to a lesser extent, Snapdeal, are affected by the new FDI rules.
All the three marketplaces have put on hold planned sale events and accompanying ads in light of the new FDI rules, Mint reported on 28 April.
“One of the things that is important to understand about pricing is that the core pricing strategy is sellers pricing their items. We as a marketplace don’t price. The way we drive prices down is (by investing in infrastructure and removing inefficiencies in the system)," Agarwal said.
“Occasionally we do promotions on our platform which help not only consumers but also every offline seller that is participating. When you’re a marketplace and you’re trying to drive awareness in a very nascent environment, you would have occasional promotions and events and we will figure out what’s the right, allowed method to do it. Our goal is always to be compliant with the laws," Agarwal said.
Amazon is desperate to succeed in India, the last big e-commerce market in the world, after losing out in China to Alibaba Group Holding Ltd. Alibaba is an investor in two Amazon rivals, Snapdeal and Paytm. Alibaba is also expected to make a direct entry in India’s e-commerce business at some point, probably through an acquisition. Some analysts expect India’s e-commerce will eventually end up being a battle between Amazon and Alibaba, either directly or indirectly.
“Amazon has US, and Alibaba has China; India is the last frontier for both," said Harminder Sahni, managing director at Wazir Advisors, a consultancy. “It’s hard to predict, but, yes, there’s a good likelihood that Amazon and Alibaba will go head to head. It all depends on how the economic situation in China unfolds, and also on how Flipkart does. If Flipkart is able to stay independent, then it’s a different scenario. But if Flipkart cannot, then India’s e-commerce market may just become a head-to-head between Amazon and Alibaba."