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Going big

Srinivas MazumdaruJuly 31, 2014

Lured by the growing number of online shoppers in the world's second most populous country, US e-commerce giant Amazon has decided to massively expand its activities in India, despite significant challenges.

Logo des Internet-Versandhändlers Amazon
Image: Getty Images

"We see huge potential in the Indian economy and for the growth of e-commerce in India," said Amazon CEO Jeff Bezos on July 30, adding that with the additional investment, the company can "continue to think big, innovate, and raise the bar for customers in India."

The plan includes creating new warehouses that would help the company deliver better and quicker services to buyers. The decision comes days after the company posted a bigger-than expected second-quarter loss of 126 million USD. The loss, however, did not deter the Seattle-based firm from taking a bet on India's expanding online retail segment.

Compared to China and the US, India's e-commerce market size is still small. However, it is seeing a rapid pace of expansion, with the Amazon's compound annual growth rate estimated to be over 30 percent. According to a report published by the New Delhi-based management consulting firm Technopak, the country's market for online shopping will swell to around 32 billion USD by 2020.

India is the next frontier for online retailing and as such it is not surprising that big players are eyeing this opportunity seriously, says Pragya Singh, vice president at Technopak. "Amazon's investments are a reaffirmation of global confidence in India's online market potential and the giant retailer's intention to be a serious long term contender in this area," she told DW.

Amazon-Gründer Jeff Bezos
Jeff Bezos: 'We see huge potential in the Indian economy and for the growth of e-commerce in India'Image: picture-alliance/dpa

Rapid growth

Deepanshu Mandlekar, a Mumbai-based retail analyst at Planet Retail, a consultancy for the retail sector, explains that increasing Internet usage and a large population in urban areas with money to spend on electronics, clothes and other products are the reasons behind Amazon's decision.

The company made its foray into the Indian market a year ago. But unlike in other countries, the retailer doesn't sell goods directly to consumers in the South Asian nation as Indian law forbids foreign investment in multi-brand retailing. To circumvent the ban, Amazon made its website and logistics infrastructure available to domestic third parties who use them to sell their products. In return, these local entities pay fees to Amazon.

India is one of the fastest-growing regions for the company, with around 8,500 suppliers currently using the corporation's e-commerce platform. Amazon now sells some 17 million items in 28 product categories, while its revenue in India is set to reach one billion USD.

"At current scale and growth rates, India is on track to be our fastest country ever to a billion dollars in gross sales," said Bezos.

Strong competition

But analysts say competition could intensify in the coming months as Amazon's announcement comes a day after India's largest online retailer, Flipkart, said it received a billion USD in fresh funding to scale up its expansion plans. "We expect increased competitive intensity and maybe more consolidation," said Technopak's Singh.

The latest capital inflows involving billions of dollars reflect a growing confidence in the segment, despite significant challenges, market experts pointed out. "The main issues facing the e-commerce industry are infrastructure and trust-related challenges," underlined Mandlekar.

Given that robust logistics are limited to major urban centers, online businesses find it difficult to reach prospective customers in rural areas, where a majority of Indians live, he said.

Adding to these problems is the low penetration of banking services. Indeed, around a half of the country's population does not have a bank account, which effectively bars them from shopping online. Further limitations include limited Internet access and poverty.

Cultural challenges

Achieving success in such a business environment is tricky. Experts believe that Amazon's fight to get more customers has had a negative impact on its profit margin.

The discount strategies may help create a large customer base, but overall it may take years for the company to become profitable, particularly keeping in mind the investments made in logistics and cash collection, said Jatin Patel, a retail sector analyst based in Mumbai.

For international players like Amazon succeed in the long run in places like India, the integration of local knowledge - in areas such as warehousing and logistics as well as suppliers - will play a crucial role, stressed Singh.

Paket des Versandhändlers Amazon auf dem Förderband
Experts say Amazon's fight to gain more customers has had a negative impact on its profit margin in IndiaImage: Reuters

Patel told DW that until Amazon and other online retailers manage to change Indians' attitudes towards Internet transactions, issues surrounding payment security, logistics and the absence of the touch-and-feel-element in online shopping will remain a challenge to e-commerce.