The Indian e-commerce market is undergoing major changes and Amazon.com, Inc. (NASDAQ:AMZN) wants to make sure it has enough dry powder to build an unassailable lead over other players in this market. Amazon has recently announced an incremental investment of $3 billion in Indian market on top of close to $2 billion it has already invested. There are many reasons for this aggressiveness in a market which is still considered to be in the early growth phase.
Take advantage of errors made by competitors
In the past six months, there have been considerable changes in the startup ecosystem in India. The main reason has been the huge burn rate due to discounts and the dearth of any kind of profits in the startups. This has led to drying up of new capital by venture capital funds, a majority of which were invested in the e-commerce market.
The extent of the damage can be gauged by the fact that the leading player in this market, Flipkart (PRIVATE:FPKT), has also seen its valuation downgraded by several investors. Morgan Stanley Mutual Fund Trust lowered the valuation of its investment in the company by 27% in December 2015 and by another 15.5% in March 2016. This lowered the estimated valuation for the company from $15 billion to $9.39 billion in less than six months. Several other smaller investors have also reduced the value of their investments by as much as 39.6% in the company.
Another major player, Snapdeal (Private:DEALS), valued at $6.5 billion has seen similar issues. Both Flipkart and Snapdeal have found it difficult to raise money in the recent months and should see a much lower valuation in the next funding round, thus lower available capital for expansion.
This works out well for Amazon which has made it a point not to repeat its mistake in China, where it was overcautious in earlier investments thus leading to the dominance of other players. There were rumors that Amazon would buy one of the e-commerce players in the Indian market but with the current investment announcement it will have enough resources to simply outspend other competitors and gain primary position by 2018.
Growth of the market
According to KPMG report, the estimated size of this market will reach $80 billion by 2020. Amazon grabbed 40% of market share in the last holiday season in US. However in the Indian market it can easily corner a much higher market share as the competitors are startups with low resources as compared to the US market where behemoths like Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and others are plowing huge sums in this segment.
A conservative estimate of 40% e-commerce market share in India will allow Amazon to have sales of close to $30 billion, based on the estimate of the size of Indian e-commerce market in 2020. Currently the international segment is the slowest performer, showing sales increase of only 5.7% in 2015 compared to 25% increase for North American market. As it improves its infrastructure in India, Amazon should start getting higher sales which should lead to better performance of its international segment.
Advantages of Amazon in India
The biggest advantage which Amazon has in India is the low penetration of organized retailers. Within three years of launch, Amazon is already getting higher sales than any of the organized retailers like Reliance Retail and Big Bazaar, which shows the growth potential within this market. Amazon has a footprint in over 2,100 cities and towns in India which gives it a far greater reach than any of its competitors.
It is yet to launch Amazon Prime in India which should be a major draw with the growing upper middle class as they look for convenience and greater variety of products.
It is a clear road ahead for Amazon in this market as the online competitors do not have enough resources and the brick-and-mortar companies do not have enough scale to be an obstacle.
One of the biggest risks in this market includes the sudden changes in regulatory policies. Although the government has encouraged the building of retail infrastructure by e-commerce players, any policy changes in the future can prove a major obstacle for Amazon.
As the market size increases, other players have also shown an inclination to gain a foothold in this market. Alibaba (NYSE:BABA) is setting up its team from scratch and hopes to gain market share from incumbents. However, there is a steep learning curve in this market which should provide Amazon sufficient time to meet new challengers.
Due to the fragmented nature of retail environment in this market there is an added pressure to educate and motivate new sellers to join the platform. Amazon has started several programs like "Amazon Tatkal" which allows small sellers to join the platform within one hour.
In the end, Amazon might have to adjust its operations according to the local needs of the Indian market. So far the company has been able to provide innovative ways of reaching a wider customer base and increasing its market share quickly.
Amazon has grasped the opportunity in the Indian market with both hands and is investing heavily to make sure it has an unbeatable lead in terms of infrastructure, brand recognition and operations. This market should be the second biggest for Amazon after the US by 2020 and should provide great upside for the stock. I don't think the potential of this market is currently built into the price of the stock as the company can get significant prime members in India on the launch of this program and also see incremental sales in tens of billions of dollars in the next few years. Although the stock is currently trading near historic high, it is still a great investment for long-term investors who are betting on continuous growth momentum for the company.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.