The e-commerce giant opened its biggest office building, right here in India. It’s a new campus in Hyderabad, India covers 9.5 acres with 1.8 million square feet of office space. This makes it the largest Amazon building by total area. It can hold around 15,000 workers. Even its headquarters buildings in Seattle can’t hold that many people in one building.
This shows the level of amazon’s commitment towards the Indian market and gives us a hint about its aggressive investment strategy. This makes sense as India is a major growth market for the retail giant Amazon. It began its retail operations in India back in 2013. Since then the company has invested more than US$ 5 billion into the country.
Why is Amazon interested in the Indian market?
India represents enormous untapped potential. At the moment, e-commerce represents just 3% of total consumption in India. The number is not as demeaning as it appears if we take into consideration India’s vast population. While it’s the population has swelled to 1.3 billion, less than half are online. The country recently rolled out its 4G network and as Internet penetration rates continue to rise, Amazon hopes to edge out local and international competitors.
The War Between Amazon & Walmart
Amazon is investing a lot in India because the projections are excellent. The analysts state that the Indian market is going to be worth at least US$ 100 billion by 2022. However, Amazon faces steep competition from Walmart which completed its US$ 16 billion acquisition of domestic e-commerce company Flipkart in 2018. Before the acquisition, Flipkart controlled an estimated 40% of the Indian e-commerce market bolstered by its fashion and apparel brands. Now Amazon and Walmart are locked in a tight competition for market share.
Despite their growing influence, roughly 90% of India’s retail market is still controlled by small stores as local retailers wield a lot of political power. This has led to updated e-commerce regulations that make it much tougher for multinational corporations to take on domestic competitors. The direct-to-consumer sales were already banned for foreign-owned retailers leading Amazon and Walmart to set up a network of affiliate companies that allowed them to continue selling their products.
But after Walmart’s Flipkart acquisition, the Indian government banned foreign e-commerce companies from selling products through affiliates that they owned. Amazon has a lot of its private label products like the echo, batteries and other products. So when the government put in regulations, amazon was unable to sell its products through merchants. This led amazon to take down thousands of products on its Website.
Could its investment in India be stifled by these regulations?
The New York Times estimated that Amazon would have to pull about 400,000 items in total. This accounted for nearly a third of its sales in the country. However, these regulations could only be a short-term setback. Some analysts say it’s just a matter of time before Amazon finds a subtle way to reconfigure its business models and partnerships to comply.
Amazon is pouring a lot of money into the country. Most analysts believe that it can deal with regulatory obstacles. It has a reasonable track record of executing well despite obstacles whether they are economic, cultural, logistic or regulatory. Amazon is already taking major steps to adapt by expanding its brick-and-mortar presence in the country.
In August it signed deals by a minority stake in future retail which operates over 900 stores and owns several supermarket brands. With this investment, Amazon is taking a hybrid retail approach by combining the brick and mortar. The localization of an Indian partner and its own e-commerce experience is its strategy to succeed in the Indian market.
The company is also expanding its online grocery business. “Amazon Fresh” grocery deliveries will be available in some parts of Bengaluru and eventually in other cities. Food and grocery by far is the largest retail segment in India. It’s almost 55% – 60% of household expenses.
Amazon also hopes to learn from past mistakes. The company shut down its e-commerce operations in China in July 2019 as it failed to make headway in the market. It faced entrenched competition from companies like JD.com and Alibaba. Both the companies did a better job than Amazon as they offered products and services fitting to the Chinese market.
How is Amazon approaching the Indian market?
In India, it is taking a different approach. There’s more emphasis on rural customers. About 80% of Amazon’s customers in India currently live outside the nation’s big cities. Amazon plans to eventually set up tiny stores in rural areas. These stores will teach and enable the rural population to make future purchases through the smartphone on their own.
Now, Amazon even offers an alternate version of its app designed to run on inexpensive smartphones with spotty internet access. It also launched its Hindi website last year and hopes to add a variety of regional languages soon. But whether it’s designing new apps, setting up small brick-and-mortar retail stores or building huge new campuses; these long-term investments don’t come cheap. It may take a while before these efforts are reflected in profits.
It would be an expensive market initially and it must be willing to sustain losses for a long period before it picks up pace. Amazon’s international e-commerce unit consistently operates at a loss but as growth slows in North America, the company hopes that eventually, India can be the other cash-cow. In essence, Amazon sees India becoming a potential security net.
Opening a campus for 15,000 employees anywhere else in the world wouldn’t be nearly as profitable. Amazon’s international business can perform equally well in nations like Europe and Australia but it needs a big market like India to fuel its future growth.