Amazon’s $5 billion investment to take it past combined capital raised by Flipkart, Snapdeal

Madhav Chanchani, The Economic Times
New Delhi, 8 June 2016

Amazon founder & CEO Jeff Bezos said that the company is planning to invest an additional $3 billion in its India operations, coming nearly two years after the Seattle-based online retail giant announced plans to pump in $2 billion. The announcement takes total investment commitment in India by Amazon, which is competing with market leader Flipkart for the top spot, to $5 billion.

The $5 billion investment will take Amazon India past the combined capital raised by both local rivals, Flipkart and Softbank-backed Snapdeal. While Flipkart has raised over $3.2 billion till date, Snapdeal has mobilised around $1.5 billion.

After losing out to Alibaba in China, winning the Indian market has become critical for Amazon and the latest move underlines that it has a blank cheque for the market.

“We have already created some 45,000 jobs in India and continue to see huge potential in the Indian economy,” said Bezos. “Our team is surpassing even our most ambitious planned milestones, and I’m pleased to announce today that we’ll invest an additional $3 billion on top of the $2 billion that we announced in 2014, bringing our total investment in India to over $5 billion.”

The announcement by Bezos was made during Prime Minister Narendra Modi’s visit to US. The PM also presented Bezos with U.S.-India Business Council (USIBC) Global Leadership Award along with Sun Pharmaceutical founder Dilip Shanghvi. USIBC is a lobbying group for businesses in the two countries.

Amazon has been stepping up its investments in India since the start of 2015, and has picked up momentum in the last two quarters, as ET reported earlier this month.

The main India unit, Amazon Seller Services, has received Rs 8,618 crore since beginning of 2015 and over Rs 9,600 crore since it was set up. In March Amazon also made its intention clear to keep pumping in more capital, as it filed to increase its authorised capital from Rs 8,500 crore to Rs 16,000 crore.

Since Jeff Bezos made the announcement of investing $2 billion in India in 2014, Amazon Seller Services has received Rs 9,029 crore. Till the time of announcement in July 2014 the unit had received Rs 600 crore.

The infusion underlines how Amazon India is ramping up its cash burn rate at a time when local rivals like market leader Flipkart, and Snapdeal are conserving capital and focus more on unit economics.

Last week, Amazon also completed its three year anniversary in India, gaining market share from rivals who have been in business much longer than it has. Flipkart which began by selling books as an online retailer in 2007 and counts Tiger Global as its largest investor, is the market leader in India’s online retail industry.

ET reported in April that Amazon India has already overtaken Snapdeal in terms of number of shipments, and is moving close to leader Flipkart’s market share.

The firm has implemented learning from the China market in India, Bezos said at the Code conference last week.

Amazon started India operations in June 2013 with cash on delivery, the preferred mode of payment, and also leveraged local Kirana stores for delivery of goods. It has also introduced a slew of initiatives for merchants like AmazonTatkal, which enables small businesses to get online in less than 60 minutes.

Amazon India has also built its own logistics network in India, which includes 21 fulfillment centers (FCs) owned by company and 50 owned by its sellers.

But recent norms on foreign investments in online marketplaces are widely expected to put a short term pause on Amazon India’s aggressive gains on market share on local rivals, even though many expect that it still has a long term advantage both in technology and capital available.

Government guidelines expected to pause Amazon’s advance include the cap of 25% that a seller can account for sales on an online marketplace, and if a marketplace can “directly or indirectly influence sale price of goods or services.” Both these factors were proving to be significant in Amazon’s advance in India.

Amazon Inc runs a joint venture with NR Narayana Murthy’s Catamaran Ventures- Cloudtail India Pvt Ltd- which is one of the biggest sellers on the Amazon marketplace in India. While Amazon has never directly acknowledged existence of this entity, on January 29, 2016 it acknowledged it as one of the risks for the first time to its international operations in regulatory disclosures in US.

“In India, the government restricts the ownership or control of Indian companies by foreign entities involved in online multi-brand retail trading activities……..we hold an indirect minority interest in an entity that is a third-party seller on the marketplace,” said , Inc filing with Securities & Exchange Commission (SEC) on January 29, two months before Indian government unveiled FDI regulations on online marketplace.

Amazon has also sought clarifications on how to market discounts from the government after the recent regulations came in force, as ET reported earlier.

Before the new regulations were announced, Amazon’s growth has outpaced both its rivals Flipkart and Snapdeal. Amazon India’s shipments in 2015 increased by 250% over the prior year, while Snapdeal revealed that it has seen a growth in its gross merchandise value of 90% between FY15 and FY16.

Flipkart has not disclosed its GMV or growth numbers for 2016. The e-tailer was targeting GMV of $10-12 billion (Rs 64,000-76,000 crore) by June 2016, more than double the $4 billion it achieved in 2014-15 but is expected to have widely missed the target.

But Amazon has continued growth momentum in 2016, having increased 150% in the first calendar quarter from a year earlier. It added 90,000 new products daily between January and March. Now, Amazon India has 55 million products listed on its platform while Flipkart has more than 40 million and Snapdeal has 35 million.

Both Flipkart and Snapdeal have been on the defensive mode in 2016 as they look to extend their runways and monetise existing customers. There is also not much clarity on their next round of financing after pitching to multiple investors since end of 2015. And both these organisations are likely to see more challenges going into the year.

“During the last 12-18 months, with funding tightening up, companies have started looking at margin more seriously. Not only are marketing spends are being refocussed, many senior management exits have happened and more organisational turmoil is likely in the coming months,” said Devangshu Dutta, chief executive of retail consultancy Third Eyesight. 

(Published in The Economic Times)