India a Major Cost Centre, but Amazon has Long-term Plans
With Alibaba entering Indian ecommerce, the US etailer’s focus on promotions and discounts is unlikely to go away any time soon
In 4th quarter
In 3rd quarter, primarily due to spends in India Loss reported in previous 4th quarter Bengaluru: US-based online retail giant Amazon continued to report significant losses in international business for the quarter ended December as it continued to spend aggressively for leadership in the Indian online retail market.
The company said losses in the international business unit were $487 million in the fourth quarter, over four-fold more from $108-million loss in the same period last year.
Net sales for the international business went up by 18% to $13.96 billion during the fourth quarter. In the third quarter of 2016, Amazon’s international unit had reported a $541 million loss primarily due to spends in India.
That was the biggest operating loss that Amazon's international business has re- ported in its history, according to company filings reviewed by ET. Aggressive promotions and spends on developing exclusive content for its Prime service were other reasons that saw Amazon Inc’s revenue fall short of expectations. This caused Amazon’s shares to fall by 4% during the day.
During the earnings call, the company indicated that of the factors affecting the muted guidance for growth by the company include investments in India. The investments in the market “continues to be a rather large investment,” according to CFO Brian Olsavsky. The Jeff Bezos-owned company, which operates the online marketplace Amazon.in, is estimated to have lost about ₹ 9001,000 crore to woo customers with special offers and discounts in the festive season in October. Its average losses per month are estimated to be about ₹ 600 crore ($90 million), according to two sources briefed on the matter.
With Alibaba entering India’s e-commerce landscape, Amazon’s long term strategy and focus on promotions and discounts is unlikely to go away any time soon.
“Globally, Amazon’s strategy has been to make ecommerce a natural choice for shopping, through assortment such as exclusive mobile phones, discounted items which the marketplace can provide due to no cost of distribution and bringing online the instances when people don’t want to buy offline, like groceries. They will continue to do this in India,” said Anil Kumar, CEO of e-commerce re- search firm RedSeer Consultancy.
The other factors included Amazon Inc’s push in digital marketing, developing content for its Prime video programme, and Amazon Now and Amazon Fresh.
“Amazon’s strategy in India is for the long-term. While their burns are significantly higher than domestic players, Alibaba entering the India market will not have a significant impact on their strategy. Amazon is pushing Prime subscriptions, FMCG and better customer experience, which is facilitated by Prime. GMV is not an immediate concern for them,” said Anil Kumar of RedSeer Consulting.
Amazon Seller Services, the main India unit of Amazon India received ₹ 7,000 crore over a 12 month period in 2016 from the parent company. Amazon India marketplace has been involved in a neck to neck competition with rival Flipkart for marketshare in the e-commerce space which saw a slow growth due to factors including shrinking discounts and demonetisation. The company declined to comment on the impact of demonetisation on its India business.
Olsavsky called India an early market, adding that, “We are encouraged with the initial response. We have developed new functions for the country in delivery and services -- we launched Prime last summer and launched Prime video recently (as part of a global launch). We will continue to build our business there. We are bullish on India longer term.” Amazon announced in June that there will be additional $3 billion investments routed to the India operations, making it one of the most heavily funded e-commerce marketplaces in the country when domestic players like Flipkart and Snapdeal have been focused on reducing burns over the last one year.