India contributes to Amazon's 77% profit plunge: Why company will still continue to invest here
Amazon can make profit if it wants to but its business model is such that it believes in investing in the future especially in developing markets
Seattle-based Amazon, known for its strategy of investing in the future, has reported a 77 percent plunge in profits to $197 million from $857 million a year ago in the second quarter. The sharp fall in profit has been attributed to the investments the company is making in faster growing economies like India and in video content, Reuters reported. It could lose up to $400 million in operating profit during the current quarter, Reuters reported.
Though his company's profit plunged, founder Jeff Bezos briefly displaced Bill Gates as the world's richest man in the Forbes list before conceding the spot back to Gates after Amazon shares pared their gains reacting to the results. This shows that the investors' faith in Bezos' business strategy is strong, analysts say.
“The company is in India for the long haul,” said Harish HV, Partner, India Leadership Team, Grant Thornton India LLP, adding that its valuation is strong at $500 billion. Amazon’s market potential is huge and it views the Indian market as having huge potential. “They will continue to invest in the market,” he said.
Though Amazon singed its hands in China where its site has less than 1 percent of market share in the $378 billion e-commerce business, according to Business Insider, India is the only big market that can match China in size and Amazon is keen to have a solid presence here. India can even beat China in terms of population and government-friendly policies. Also, it has to be remembered that India has no linguistic and cultural biases like China. Clearly, Amazon can't afford to lose India.
Unlike China, e-commerce is immature in India with many parts of the country not being fully penetrated, says Sanchit Vir Gogia, Chief Futurist, Founder and CEO of Greyhound Knowledge Group, a strategy and transformation research, advisory and consulting group. “With consolidation happening in the Indian e-commerce arena, this is the time Amazon should invest more heavily here. The competition is going to get intense especially now because the earlier confusion caused by having too many players has been whittled down with consolidations,” Gogia said.
In the future, there will be only three big players in the e-commerce space in the country, believes Gogia, viz. Alibaba via Paytm, Flipkart, and Amazon, though not in that order.
Amazon India recently invested an additional Rs 1,680 crore in India as part of its commitment to invest $5 billion to expand its local business, a PTI report said. It will continue to invest in expanding infrastructure and bringing in solutions to enhance consumer and seller experience in the country, the report said. “Amazon India will persevere and try to find market share in India,” said Paula Mariwala, Partner, Seedfund, and Co-Founder, Stanford Angels.
Unlike Flipkart, Amazon is a veteran in the e-commerce game as it has had a head start years ago in the US. However, in India it is not as if only Amazon is bleeding. According to Kotak Institutional Equities, losses in the sector was at Rs 10,670 crore. Amazon India, Flipkart and Paytm alone contributed 70 percent of the total losses, according to a report in The Financial Express.
Amazon has an advantage over Flipkart in that it has deep pockets unlike the latter which has to get investors’ approval to scale up. Though Flipkart’s market share has grown to 57 percent in March 2017 from 45 percent in June 2016 thus maintaining a lead over the other top players in the sector, it is only a matter of time before Amazon outperforms and claims the leading position, said Devangshu Dutta, chief executive of Third Eyesight, a consulting firm.
Amazon can make profit if it wants to but its business model is such that it believes in investing in the future especially in developing markets. If it stopped doing that, it could have been profitable a long while ago, say analysts. “Investors believe in the Amazon story and its business model. It can turn around the e-commerce game and be in a leading position within a decade in India,” said Dutta.
India will not be that easy for Amazon though. It may be leading in Cloud, but faces competition from IBM, Google and Microsoft who are getting more competitive in India. “Amazon will have to work hard on that front too to retain its lead,” Gogia said.
The e-commerce market in India has changed with discounting being no longer the name of the game. The focus is on margin realisations and customers are willing to pay for services like delivery charges as they see value in it. With the dynamics of the e-commerce market changing, it could make the competition among the few players fiercer.
But Amazon has the patience to wait it out in this market, say analysts, unless it decides to drastically alter its India plans, which seems unlikely. Who will emerge the winner in the long run depends on who has the staying power and the funds to invest in the e-commerce space in India.