When it Comes to the East, Amazon’s Ultimate Prize is India, not China
If the 2014 announcement of a US$2 billion investment in India was not enough to convince people of its intent to become an e-commerce leader in India, Amazon put to rest all doubt of its commitment to win in India with an additional US$3 billion announced in 2016. The new money will go towards further increasing the support of its 3rd party marketplace facilitation and fulfilment capabilities in the largest developing nation.
India may not as developed as China, but that is precisely the point. After having lost too much ground in China, Amazon has decided that it is more worthwhile to establish roots in a country where the boom has yet to happen, but is very likely to occur in the near future. Even if India’s middle class takes longer to grow to the point that China’s is now, Amazon has the money and the patience to wait this out. All it needs to do until then is apply the lessons it has learned elsewhere to establish logistical excellence and customer loyalty to lay out the foundation for future success in India.
Why India? Because it’s the new China
Source: Euromonitor International’s Income and Wealth Distribution Model
Based on the an analysis of purchasing power parity, the percent of the middle class adults in India is expected to rise by nearly 20% in the next 14 years. That’s significant for any country—doubly so for one whose population is expected to be over 1.5 billion by that time. If Amazon can establish itself as a market leader before that rise, it will get in on the ground floor for the country’s retail modernization, an opportunity it missed in China.
Saying that Amazon missed its chance in China is a bit misleading, because it certainly tried to build a name for itself in the country as early as 2004. The company was simply too attached to its domestic sales model at the time, demanding trust from consumers that it (nor internet retailing in general) had not earned yet. Insistence on pre-payment and slow delivery times eventually gave way to more convenient options like cash-on-delivery and expedited shipping, but by then homegrown rivals like Alibaba and JD.com (known then as 360buy) had already established unassailable footholds.
Having learned these lessons the hard way (Amazon’s internet retailing share in China fell from 4%-1% from 2010-2015), Amazon was ready to apply its new knowledge to India from the beginning. It realized that it needed to endure the short term costs of making the shopping experience more consumer friendly with services like cash-on-delivery and easy returns, in addition to making sure its parcels arrived on time in both cities and the country to benefit from the long term rise in the middle class and internet retailing.
Amazon’s real keys to success comes from its home market
Amazon may have learned how to set the foundation in India from another developing nation, but it hopes to transplant the future of retailing as it knows it from its incredibly successful domestic market. Two components of its strategy at home look to be integral to its future success right now—the 3rd party marketplace and Amazon Prime.
Many retailers find it hard to enter India because it forbids foreign direct investment in any company that sells more than one brand. This is a great barrier to entry, but Amazon’s B2B2C operations in the US and elsewhere have given it an indirect entryway. Instead of being a retailer, Amazon is content to facilitate logistics for a number of 3rd party retailers that are completely domestic. This lets them focus entirely on difficult navigation problems in a country with rife with far-flung rural populations and notoriously inadequate infrastructure. Having already honed this model in the similarly spread-out US, Amazon is poised to help a number of Indian businesses discover the power of e-commerce, embedding itself in the lifeblood of that ecosystem in the process.
To bring shoppers to its site, Amazon will need more than just a large number of sellers. Its tool to engender loyalty year-round is Amazon Prime, a yearly subscription that offers access to free 1-2 shipping in 100 cities, morning shipping to 20 of those cities, and exclusive deals. The video streaming component that is available in other countries will be coming later to the plan. At an introductory cost of only 499 INR ($7.50 USD), it is clear that Amazon is willing to take on the short term loss for long term gains in its customer base. As of now, the service is very new and unknown to many, but look for further services to be included in the basket moving forward to help increase value and have customers spread the word—in 2016 Amazon introduced Kirana Now, a hyperlocal grocery delivery service, that is reminiscent of their Prime Now offering in the US.
Application of past knowledge and an unstoppable desire make success likely
Amazon seems to be willing to commit an endless amount of resources to the country in order to win in the long run. This is an onslaught which its venture capital backed rivals, Flipkart and Snapdeal, may not be able to sustain. It seems as though this strategy is working. 90% of Amazon’s sellers use its logistics and warehousing services according to the Economic Times and multiple reports have been issued stating that Amazon’s traffic is above their largest competitor, Flipkart, as of 2016. According to a company spokesperson, “at the end of Q3-2015, we saw an approximately 500% Y-O-Y growth in volume, and in Q4-2015 we sold more than we did in all of 2014”. The acceleration of the Amazon in India is apparent and will only increase. Winning in India means getting to taking advantage of the network effects of a country that is on track to become the most populous in the world—a prize that is well worth the investment.