Amazon India takes to automation, other means to cut costs
The Indian unit of Amazon.com Inc may soon face the same problem that has dogged Internet startups in the country over the past 18 months: how to cut losses without sacrificing sales growth.
Amazon India (Amazon Seller Service Pvt Ltd), which until recently had been spending freely to win market share, has been quietly trying to reduce losses to reach its target of getting on to a path to profitability by 2019, four people familiar with the matter said on condition of anonymity.
Amazon came up with this cost-cutting initiative called “Get Fit” around the time that chief executive Jeff Bezos committed an additional $3 billion towards expanding the India business in June 2016. This came on top of the $2 billion investment Bezos had announced in July 2014.
The initiative involves reducing packaging costs, introducing more automation in warehouses and delivering products more efficiently. Amazon has also started reducing marketing spending and discounting from the levels of 2016, the people cited above said, adding that these expenses will continue to diminish over the next two years.
Get Fit is one of the two biggest initiatives at Amazon India – the other one is called “Get Big,” which is about making the company the largest online retailer in the country, the people cited above said.
A central piece of both the large initiatives at Amazon India is Prime, its annual membership programme that offers customers fast product deliveries, additional discounts, video streaming and other benefits. The company launched Prime in July 2016 at a 50% discounted annual price of ₹499. Since then, millions of customers have signed up for Prime, which has become a key differentiator for Amazon in its fight with arch-rival Flipkart Ltd, reports have shown.
Prime subscribers spend more than the average customer, they order more frequently, spend less on rival platforms and have higher satisfaction levels, research shows. All of this helps Amazon sell more and bring prices down as economies of scale kick in and it doesn’t have to rely only on discounts to sell products.
Since its launch in June 2013, Amazon India has spent more than $2 billion to rapidly expand in the last big unconquered Internet market in the world. Amazon has been running neck and neck with Flipkart for more than a year but at the same time, its unprecedented spending spree has been questioned by analysts.
Amazon India’s loss soared to ₹3,572 crore in the year ended March 31, 2016, from ₹1,724 crore in the previous year. During the same period, Amazon reported revenue of ₹2,275 crore compared with ₹1,022 crore in the previous year. In 2014-15, Amazon had reported a six-fold jump in sales to ₹1,022 crore even as losses soared to ₹1,723.6 crore.
In the past two quarters, the India business has been specifically called out as one of the biggest loss drivers in Amazon.com Inc’s international business.
“There’s always been a struggle between Get Fit and Get Big. This being Amazon, the Get Big programme will always tend to have the upper hand,” one of the people cited above said. “When the $3 billion was committed, the US headquarters had sent a clear message to the India team that it has to show the path to profitability within three years. It cannot always be spending unlimited money to win here. But if Flipkart starts becoming more aggressive, Amazon will match.”
Despite the Get Fit initiative, Amazon India may be forced to raise spending over the next year given that Flipkart has raised nearly $3 billion since April.
“India is strategic for us and we are committed to invest for long period of time with the vision of transforming how India buys and sells,” an Amazon India spokesperson said in response to questions sent to the company.