Amazon (AMZN, Financial) is looking to capitalize on the big growth in India’s e-commerce market through big investments in the country. These investments are likely to make Amazon a big player in India in the years to come and India is likely to be one of the growth drivers for Amazon.
On Wednesday, Amazon announced that it will invest $2 billion in India and this came just one day after India’s e-commerce giant, Flipkart, announced that it will be investing $1 billion of fresh funds. Amazon is clearly taking on India’s biggest e-commerce player head-on and Amazon has the size and scale to get ahead of Flipkart.
Amazon’s website growth in India has been nothing short of phenomenal since its launch one year before. Amazon has rapidly expanded selection to serve customers in India, averaging a launch of one new category every 13 days.
Currently, Amazon has over 17 million products from a rapidly growing group of small and medium businesses. The growth potential is therefore immense and it is not surprising to see Amazon ready to invest so heavily in India.
The sale of e-commerce goods through sites like Amazon and Flipkart was $1.6 billion in 2013 according to researcher Forrester. To give an idea of the impending growth, Technopak expects the number to increase to $76 billion by 2021. The next 5-7 years will therefore be very big for e-commerce in India and Amazon is going the right way by making big investments.
According to Jeff Bezos, according to the current scale and growth rate, India is on track to be the company’s fastest country to reach a billion dollar in gross sales. This kind of growth will drive overall growth for the company.
Another factor, which is important to Amazon’s growth and India’s e-commerce growth, is the rapidly increasing internet population. Double-digit growth rates in India’s Internet population are expected throughout eMarketer’s forecast period (2012-‘18). This, coupled with a rising middle-class will boost the market for e-commerce in a big way.
Another trend in the Indian e-commerce industry is likely to b e increasing number of acquisitions and consolidation in the markets. In May 2014, Flipkart acquired online retailer Myntra for a consideration of nearly $370 million. Going forward, more such deals are likely and Amazon might also look for some acquisitions to boost its market position further.
Amazon has a big advantage over Flipkart when it comes to financial flexibility. As of June 2014, Amazon had cash and marketable securities of nearly $8 billion and this gives Amazon a big edge over Flipkart.
Most recently, Flipkart raised $1 billion and the funding valued the company at around $7 billion. Effectively, Amazon’s cash and marketable securities are more than Flipkart’s current valuation. In addition, Amazon generated $5.3 billion from operating activities for the twelve month ended June 2014.
Flipkart’s revenue reached $1 billion recently after 7 years of operation in India and Amazon is likely to reach the $1 billion revenue mark in just over a year of operation. These factors are just an indication of the wide gap between these two companies.
Overall, it’s a big challenge for Flipkart to compete with Amazon and the latter is likely to scale up investments in India further as strong cash inflow starts coming from the country. The strategy of big investments in India is a positive even from a broader picture as Amazon needs to make inroads into high growth markets to sustain its growth momentum. Innovation always remains the biggest growth driver, but investment in markets such as India will yield strong long-term results for Amazon.
In conclusion, Amazon is doing the right thing by betting big on India and the country is likely to be one of the key growth drivers for Amazon going forward. I expect the Indian e-commerce industry to be very eventful over the next 3-5 years and Amazon will be the biggest beneficiary.
