Profits elude Amazon India despite $6.5 billion investment: Bernstein

Faces 'immense competitive pressure' and 'unfavourable regulatory environment', says US research group

Amazon is falling behind its rival Flipkart in India as it faces an unfavourable regulatory environment and challenges in spreading to smaller cities, says a report by US-based research group Bernstein.

India is a prized market for global internet companies, but challenging to unlock.

“Who can forget Jeff Bezos’ 2014 visit standing on top of a colourful lorry announcing a $2-billion investment? But nearly a decade later, Amazon India’s report card is decidedly mixed,” the report says, referring to the global e-commerce giant’s American founder.

India is one of Amazon's biggest overseas markets and also one of its fastest-growing with a best-in-class customer experience and a large Prime customer base. The growth has come at a high cost of over $6.5 billion-plus invested to date, while profitability remains elusive (minus 5-10 per cent earnings before interest, tax, depreciation, and amortisation margins), the report observes.

“The company also faces immense competitive pressure in fast-growing categories, a weaker value proposition in ‘New’ commerce, limited traction in tier II/III cities, and an unfavourable regulatory environment for outsiders,” says the report.

India is one of few large and underpenetrated e-commerce markets, with retail penetration of only 5 per cent, compared with the global average of 14 per cent.

India’s e-commerce spending is expected to grow twofold to $130 billion-plus in gross merchandise value (GMV) by 2025, with online shoppers projected to increase to 300 million. Growth is expected to be led by new online shoppers, primarily from tier II/III cities.

“Within grocery, we’re already seeing a shift from slow e-commerce to quick/instant delivery. In fashion, social commerce and direct-to-consumer brands are gaining share,” says the report.

While India is a three-player market — Amazon, Walmart/Flipkart, and Reliance’s JioMart — the market remains quite fragmented with meaningful market differences by market tier, product category, and distribution models. The report said that Amazon leads in core categories (consumer electronics, media) and has done quite well in tier I cities with 5 million Prime subscribers.

“Reliance leads in eGrocery/online-to-offline categories with 15,000-store retail footprint and a stronger inventory-led model,” says the report, adding, “Flipkart has maintained leadership in the apparel category with 2x size of the nearest competition. But newer players like SoftBank-funded Meesho ($5 billion GMV) are winning the faster-growing tier II/III cities where Amazon has struggled to gain traction, given low pricing and zero commissions.”

The report says that regulations don’t allow for an inventory-led/1P model for a foreign entity like Amazon. The company has made investments in Shoppers Stop (fashion), More (grocery), and a rumoured stake in Ecom Express (logistics), but integration has been limited as regulations don’t allow for full control, according to the report.

Reliance, Amazon’s competitor, has scaled up its e-commerce operation, using its stores and an inventory-led model.

Bernstein estimates that Walmart-owned Flipkart leads the Indian e-commerce market with annual sales of $23 billion in 2021. Amazon is the second-biggest player with $18-20 billion of GMV last year. Reliance comes next with e-commerce sales of around $4.6 billion.

“The regulatory market in India remains highly nationalised, prioritising local business over international entrants. Global marketplaces like Amazon are forced to run a marketplace structure in India, charging commission on their platform (Amazon Seller Services),” says Bernstein.

The report says without the ability to operate and fully own a 1P business, Amazon has instead turned to take minority stakes in local offline retailers — More (49 per cent stake) and Shoppers Stop (5 per cent).

“With more than 85 per cent of our customers from tier II/III cities/towns… we are proud to be a catalyst of livelihoods. India’s economic story for small businesses and local stores relying on us to go online,” says a spokesperson for Amazon.

“Around 50 per cent of our 1 million sellers come from tier II/III cities/towns, and over 100,000 exporters sell to our customers globally. We are excited by this momentum and remain committed to our pledge to digitise 10 million micro, small and medium enterprises, generate 2 million jobs and enable $20 billion cumulative exports by 2025,” adds the spokesperson.

“The report should be read as a whole. It positions Amazon as a market leader in certain core categories with a similar kind of market share to that of Flipkart and higher than JioMart or Nykaa. It is high time we appreciate the goodness that Amazon, Flipkart, and Nykaa have brought to us and not demonise them,” says K Giri, director general, Empower India — a think tank promoting corporate governance in the country.