Indian e-tailers have much to learn from Amazon’s success, Flipkart's fall
It would have been easy to brush off the travails at home-bred e-commerce firms Flipkart and Snapdeal, if not for the existence of their MNC rival Amazon. While Flipkart has seen a huge slide in valuations after posting losses even a decade after launch, the latter is executing a massive layoff to stay afloat.
Talks are also on among investors of both Flipkart and Snapdeal regarding a merger to create size and resources to take on the might of Amazon India.
At this juncture, it will be interesting to examine what exactly has made Amazon successful in India, less than four years after its launch here.
First, what is the measure of success? Judging e-commerce firms by their gross merchandise value (GMV) or the total value of goods sold on a platform is inaccurate, going by the recent experiences of these e-tailers.
GMV does not take into account the cost of reaching a product to the customer, which can be humongous. However, considering that it has long remained the favourite tool of e-commerce players, a close look at GMV figures shows Amazon has led the charge in the Indian market, although it is relatively the youngest to set shop here.
At the end of May 2016, say reports, while GMV of Indian e-tailers grew 13.3 per cent year-on-year to $10.2 billion (more than Rs 65,000 crore), much of this growth was from Amazon. The Indian unit of the US retail giant grew to $2.7 billion (Rs 17,500 crore) from $1 billion (Rs 6,500 crore) in 2015.
There is another report, more recent, which helps to compare Amazon with its Indian rivals. Bank of America Merrill Lynch said in September 2016 that Amazon's GMV market share will improve to 37 per cent by 2019 from 21 per cent in 2015, close behind Flipkart's 44 per cent market share.
It also expects Snapdeal's market share to fall from 14 per cent in 2015 to 9 per cent by 2019. BoA-ML is acknowledging Flipkart to be the leader still in India (this has been contested by certain others, who say Amazon went past Flipkart mid last year), but is also saying how fast Amazon is growing its business here to close in on its rival.
Second, what are the factors that have helped Amazon in emerging successful in a highly fragmented and price sensitive market, where logistics problems are paramount? The answer probably lies in the question itself.
 |
| Talks are on among investors of both Flipkart and Snapdeal regarding a merger. Photo: Reuters |
Since e-commerce is all about logistics (the Founder-CEO of a fashion portal recently told me she is not running a retail firm, but a logistics company), succeeding in overcoming the hurdles in distribution and delivery is half the battle won.
What has Amazon done differently here? While all major players have their own warehouses or fulfilment centres, Amazon went ahead and created the largest fulfilment infrastructure for any e-commerce firm, and at present has 34 such centres across 10 states, covering a total area of over 3 million square feet with a storage capacity close to 10 million cubic feet.
Remember how Jeff Bezos, the firm’s founder, has committed a $5 billion (Rs 32,500 crore) investment in India, which will include this logistics infrastructure.
Great logistics is one major aspect of creating a great shopping experience - timely delivery of a product, zero damages to the product, and fast replenishment in case the product is faulty or not up to specifications as required by the customer.
But logistics is not only about the buyer, but equally about the seller too. With the Amazon Easy Ship, products are picked up by the company from the seller’s doorstep, the returns are handled and buyers are responded to, and payments are made on a cash-on-delivery model.
The inventories of sellers are stored at various fulfilment centres, and the retailer takes the responsibility to pick, pack and ship the products to various customers as soon as the orders are placed online.
When sellers are able to lower their cost of logistics, naturally the benefit gets reflected in prices. Lowering the cost of operations for sellers effectively helps them invest back in the form of lower prices. Technology also helps bring more sellers on to the site, and to manage the logistics better.
More sellers with more products means a greater variety of products on the e-tailer’s site, which is a further attraction. Add to it a more orderly listing of products, and easy to search categories, and the shopping experience gets only better.
A combination of the three factors discussed above - better customer experience through superior logistics, lower prices not through artificial discounts but through gains from lower cost of operations for sellers, and a huge variety of goods on the portal - is a potent weapon to decimate rivals.
And that is what Amazon has done. In an interview last year, Amazon’s Indian head Amit Agarwal told me that lower costs, higher sales and lower defects were enabling the company make more absolute rupees per sale.
When several entrepreneurs or sellers grab that opportunity and funnel back the benefits as low prices, Amazon India is able to achieve what it calls an “every day low price” in India, as opposed to sales and discounts doled out by its competitors.
At a time when discounting by selling below the cost continues to bleed domestic firms, Amazon is saving on its costs through more efficient operations. It will be no surprise if the company manages to reach its break even period sooner rather than later, as a result of this, although it is a given fact that e-commerce firms have longer gestation periods, and some could take even a decade to break even.
Can Indian e-tailers emulate the Amazon model? Then can, only if they have an inclination to. It’s true that Indian companies did not have the learning that Amazon had globally, before it set on its journey in India. However, India has the fine example of success of online firms such as Make My Trip or Book My Show, or even the IRCTC.
But with a hyped up market, soaring valuations and plenty of investor interest, they did not pay much attention to running a tight ship and expanded their business and hired personnel much beyond their requirement. As investors get more cautious, these firms have started paying the price for their profligacy. However, it’s never too late to make a comeback.