- Exponential growth of online retail in China and India.
- Amazon’s strategy and position within China.
- Amazon’s strategy and biggest hurdles faced in India.
- Main advantages of Amazon in developing countries vis-à-vis other competitors.
Amazon’s business strategy differs significantly in different regions. The Amazon stock price will be affected to a great deal on how the company is able to fare in locations other than US. The difference in strategy stems from difference in culture and the market. Amazon China is an extremely small player in the fast growing online retailing market in China which is dominated by Alibaba and JD.com. Within India, another very fast growing online market, the strategy has been quite different. Amazon’s revenue from India has grown significantly in the past two years to reach a run rate of over a billion dollars annually and has become the second largest player.
Amazon's China Strategy
Amazon China which started out as Joyo.com was acquired by Amazon way back in 2004 and the company has made all efforts to expand its presence in the lucrative Chinese e-commerce market since then. Amazon does not reveal its actual sales in China but according to analysts it is way behind Alibaba (having over 50% of market share) and JD.com (having around 20% of market share), the local rivals in China. Although both have internet portals which allow customers to shop a wide variety of goods without the hassle of actually stepping into a store, they go about doing this in a very different way.
Is Alibaba A Threat To Amazon In China
Alibaba’s model can easily be summed by its founder’s Jack Ma comments:
“Amazon and eBay are e-commerce companies, and Alibaba is not an e-commerce company,. Alibaba helps others to do e-commerce. We do not sell things.”
Alibaba connects buyers and sellers and does not actually warehouse the goods. Through the various shipping options the sellers ship their products to the buyers. However Amazon builds huge logistics warehouse through which it ships the products to the final customers. This is the primary reason between the stark difference in quarterly reports of Alibaba and Amazon. Alibaba reported revenue of $2.74 billion in the September quarter (Q2 2015) and posted profits of $494 million, in the company's first earnings post Alibaba IPO. On the contrary, Amazon earnings in Q3 2014 were dismal. The company reported revenue of $20.5 billion and $437 million loss. This massive difference has to do with a single difference in the model of operation: Amazon is a seller whereas Alibaba is a facilitator.
Amazon profits would have been higher, but its founder and CEO has stressed on revenue maximization at the expense of cost. Currently China has a massive growth of online retailing which is in excess of 40-50% for the past few years. Under such scenario a facilitator model should have an advantage in the short-term as it can instantly connect buyers and sellers without taking the headache of building the infrastructure and logistics. This exponential growth should come to an end when the market saturates. If the current growth continues this saturation in the market can arrive as early as 2017-18. Once it saturates the firms will compete on the basis of service, price and delivery. During this time the firm with a higher logistics depth will be at an advantage. Amazon’s business model can show good returns during this time. Amazon’s chief financial officer, Tom Szkutak commented on Amazon’s investment in China:
“Is it a large investment? Yes it is. And that investment has certainly increased over the last several years.”
Its international business is also showing a subdued performance on the back of heavy capital expenses on warehousing. For any matured retailing market the warehousing-selling model seems to give better cost efficiency than connecting the actual buyers and sellers. Investors of Amazon stock will have to wait another couple of years before this mammoth exercise can reap dividends. However, the pressure on Amazon is rising with the competition getting tougher in the e-commerce space.
The Indian Story
The e-commerce scenario in India is much different than China. India also did not have a major retail revolution and the existence of big scale brick and mortar retailers has been for less than decade. However this low penetration of brick and mortar retailers has helped the online retailers in getting high growth. Prior to 2012 a majority of sales were from online travel segment. Recently the share of e-commerce retailers has increased dramatically. Amazon India sales stood at around $1 billion in 2014 or 5% of the total pie.
Amazon was a late entrant in India and launched Amazon India in 2012. It has been able to grow at a rapid pace and is currently the second biggest e-commerce retailer in India with total sales of over $1 billion. India has a major issue in the retail sector where the rentals in most of the cities are exceedingly high, many times rivaling tony parts of New York and London. This has helped online players as they do not need physical presence in expensive locations unlike brick and mortar competitors thus lowering their operating expenses and giving them a great competitive edge.
Amazon India is trying to replicate its global delivery model and has increased hiring. From a present workforce of 6,000 it is planning to expand to 14,000 by July 2015. Its main competitor, Flipkart, has 12,000 employees. It has also started ‘Easy Ship’ service under which it first tries to directly deliver goods from seller’s warehouse to customer. This has been the main difference in its approach in India and allows it to create a larger marketplace.
Amazon Vs Flipkart
Flipkart was started in 2007 by ex-Amazon employees Sachin Bansal and Binny Bansal, and has reached an annual run rate of over $3 billion revenues. Besides this it has had many funding rounds with the latest valuing the firm at $15 billion. It is not only the biggest online retailer in India but has checked the growth of Amazon through several innovative steps and aggressive acquisitions. Amazon might also face regulatory hurdles in India because multi brand retailing is not allowed in India. However the exact policy framework within the online space is yet to be chalked out. The Indian online space is much smaller than China where the Single’s day revenues of Alibaba alone were over $10 billion. But as the penetration of Smartphones and internet increases it should lead to an explosion within this market.
In both India and China, Amazon has the distinctive advantage of a long experience of building very cost effective warehousing and delivery system. Due to the early stages of online retailing in both these countries there would be a higher capital expense on building the infrastructure. However Amazon should see a huge benefit once both these markets mature.
Currently Amigobulls is bearish on the Amazon stock. View Amazon stock analysis to know why.