Even as Amazon finds profitability elusive in India despite pumping in about Rs 50,000 crore, the going will get even tougher as it will have to compete with the likes of Meesho, BlinkIt and Swiggy, to capture the next phase of growth. Amazon India will have to compete with the ‘new’ commerce players with a drastic shift from slow e-commerce to quick/instant delivery, and high margin businesses such fashion, beauty and personal care, where it has struggled so far, brokerage firm Bernstein said in a recent research note.
With India’s e-commerce spending expected to double by 2025, growth is expected to be led by new online shoppers – primarily from tier-II and -III cities and there will be continued online migration of key categories including fashion and grocery. “Within grocery, we are already seeing a shift from slow e-commerce to quick/instant delivery. In fashion social commerce and D2C brands are gaining share,” the Bernstein note said.
Tier-II, Tier-III growth difficult to come by for Amazon in India
Further, under penetration in the tier-II and tier-III towns along with India’s regulatory market, which prioritises local business over international entrants, are the reasons for Amazon’s struggle in India, the note said. India is one of the few large and under penetrated e-commerce markets with retail penetration of only 5 per cent, which is well below the global average of 14 per cent. Amazon India’s profitability remained elusive (-5 to -10 per cent EBITDA margins) even with an investment of more than $6.5 billion till date. Despite India being one of the biggest overseas markets for the company, and with a large Prime customer base, Amazon in India is facing immense competitive pressure in fast growing categories.
Amazon’s low impact in high-margin businesses
“Besides growth-related investments, profitability has also been impacted by a higher mix of low margin product categories (e.g., smartphones with sub 5% net margins). Amazon has struggled to scale volumes in higher margin categories such as fashion and beauty and personal care,” said the Bernstein report. Also, the inability to operate a 1P model has limited the availability of private labels vs competition which further pressures margins.
Competitive landscape in an underpenetrated country
Amazon entered India in 2013. Almost a decade later, the company is not only lagging behind its Indian peers like Flipkart and Reliance but also new age social commerce startups like Meesho in many aspects. “Newer players like the Softbank-funded Meesho ($5 Bn GMV) are winning the faster growing tier -II and -III cities where Amazon has struggled to gain traction given low pricing and ‘zero commissions,” the analysts noted in the report.
While competitor Reliance Retail has been driving scale with a first-party (1P) model, regulations in India don’t allow for an inventory-led/1P model for an overseas company like Amazon, which uses a third-party (3P) model in the country. “The regulatory market in India remains highly nationalised, prioritising local business over international entrants. Global marketplaces like Amazon are forced to run a marketplace structure in India charging commission on their platform (Amazon Seller Services),” the report maintained.
The company has made investments into Shoppers Stop, More, and a rumored stake in Ecom Express but integration has been limited because of the regulatory issues. On the other hand, competitor Reliance has scaled up its online operations (~19 per cent of core retail sales) utilizing its strong footprint of stores (~15,000) and an inventory led model.
A look at India’s e-commerce landscape
Bernstein expected the e-commerce market in India to grow at an annual rate of 30 per cent to reach $130 billion by 2025. Also, the number of internet users in the country is expected to grow to 1 billion by the same year with 33 per cent of them turning into online shoppers and the total addressable market is expanding with new opportunities in social commerce and quick commerce leading the charge and domestic players building out new products/services accordingly.
While there is a sweet spot for the growth of e-commerce in India in tier-II cities that’s seeking products tailored to their needs, new age brands like MyGlamm, MamaearthBewakoof and Sleepy Owl are catering to that demand and a large chunk of their business is coming from these areas. Amazon cannot make headway here as well due to regulatory issues.