Amazon’s fight with Flipkart to become India’s largest e-commerce marketplace has emerged as the biggest source of drain on its international margins.
Since mid 2014, Amazon has pledged to invest $5 billion to grow its business in India, an amount far higher than the $3 billion unlisted rival Flipkart has managed to raise so far.
“By far the biggest individual thing is the investment in India that we continue to make and very excited about it, the initial reaction in India from both the customers and also sellers,” said Brian T Olsavsky, Chief Financial Officer at Amazon, during a call with analysts and investors on Thursday.
Since entering India three years ago, Amazon has invested in building warehouses in major hubs, buying bollywood rights to power its upcoming Prime video streaming service, under cutting costs of products by charging lesser commission from traders on its platform and marketing aggressively to build its brand. It also has expanded its India technology team, which helps build products for its global operations, besides solutions for the local market.
In the quarter ending September, Amazon’s international losses, which includes India, more than doubled to $ 541 million, largely due to investments in India. Amazon’s international business, which contributes a third of its total revenue, stood at $10.6 billion in the quarter.
The losses would have spiked in the quarter due to its aggressive spending during the Great Indian festival sale, which saw Flipkart that was almost written off to fight back to top sales during the period.
Since mid-last year Flipkart’s value eroded by a third from a peak of $15.2 billion to as low as $9 billion after several investor markdowns. Amazon’s aggression forced Flipkart to overspend on discounts to customers and and hire expensive talent, a plan which soon backfired.
It led to massive management change that saw co-founder Binny Bansal replace his partner Sachin Bansal as the chief executive and also exodus of top leaders such as Punit Soni, Mukesh Bansal and most recently Sanjay Baweja. At the same time, top investor Tiger Global stepped in to rationalise costs, weed out expensive talent and push the company towards profitability.
“As people get more and more comfortable with the convenience that e-commerce offers, the scale, the diversity and more customers come into the fold, the business structure is such that we will see profitability. It may not be in the next 6 months but we definitely are on that path,” said Sanjay Baweja, outgoing CFO of Flipkart in an interview on Wednesday.
Now that Amazon is within striking distance of Flipkart, the pace of investment isn’t expected to slow down soon as the Indian company is looking to raise fresh funds of $1 billion, reportedly from Walmart.
“We are very encouraged by what we’re seeing in India but it is certainly very early on still. Most recent highlights would be the launch of the Prime program in India this past quarter. It’s now one of the top selling units based on Amazon.in. And so it’s very been very well received by customers,” said Olsavsky. “It’s hard to compare India to any other country. It’s very different in its stage and structure.”