Amazon (NASDAQ:AMZN) views India as one of its most crucial markets. The e-commerce giant has been busy pouring billions into the country in fear of missing out on the massive growth potential afforded by India's booming Internet population.
As it stands, Amazon has invested nearly $3.3 billion since it began operations there in 2013. But it will now have to step up its game in response to Walmart's (NYSE:WMT) $16 billion acquisition of a majority stake in local player Flipkart, in what's being called the world's biggest e-commerce deal.
Amazon hasn't faced much resistance in India ... until now
Flipkart, the Indian e-commerce start-up that was founded in 2007 by two Amazon employees, has been the only serious challenger to the American company in India. But financial constraints meant that Flipkart has been unable to offer up as much of a challenge to Amazon.
Before Walmart entered the picture, Flipkart had raised a total of $7.4 billion in funding. This pales in comparison to Amazon's massive war chest, and not surprisingly, the U.S. company has grabbed significant market share in the region.
The American tech giant burned an estimated $35 million to $40 million every month in India last year -- spending money on amenities like faster delivery. On the other hand, Flipkart's monthly cash burn was around $17 million to $18 million, and it had no choice but to tighten its purse strings as losses surged 68% in fiscal 2017, while revenue was up just 29%.
Not surprisingly, Flipkart was finding it difficult to catch consumers' attention. In fact, Amazon had become the online marketplace of choice for Indian consumers, with searches on its platform outpacing Flipkart's by two times. But with Walmart throwing its own weight into the e-commerce race, the equation changes entirely.
A Walmart-sized roadblock for Amazon
Amazon also tried to buy out its Indian rival, but Flipkart management decided to go with Walmart, citing regulatory concerns. As a result, Amazon will now be going up against a well-heeled Walmart that already has a physical retail presence in India, and it could use the same to its advantage to quickly ramp up Flipkart's operations.
Walmart entered the Indian market in 2007 in partnership with Bharti Enterprises. The joint venture produced 21 cash and carry superstores in the country, christened Best Price Modern Wholesale, before Walmart bought out Bharti's stake in 2014.
Each Best Price store is around 50,000 square feet in size; carries a range of items from clothing to food, consumables, office supplies, and personal care; and sources 90% to 95% of its products from local producers. So Walmart already has one million square feet of retail space in India at its disposal.
Flipkart, on the other hand, has 21 fulfillment centers spread across the country, and it plans to take this number up to 25 in the next year and a half. What's more, Flipkart recently announced plans to build a logistics park in the southern part of India that will eventually provide 4.5 million square feet of warehousing space over the next decade, with a third of this space expected to be ready by mid-2019. By comparison, Amazon currently has the largest warehouse in India with a size of 400,000 square feet -- just one among its 41 fulfillment centers in the country.
Amazon needs to step up its game now
Amazon has so far relied on its speedy delivery that allows customers to select between one-day and two-day delivery options across several cities. But the combined might of Flipkart and Walmart's warehouse infrastructure should definitely boost the former's fulfillment capabilities, allowing it to make faster deliveries and increase item selection.
This is where Walmart's $2 billion capital infusion into Flipkart will come into play, and it could put both Amazon and Flipkart on equal footing in the Indian e-commerce market. As a result, Amazon will need to boost its spending above and beyond the $5 billion figure it had originally specified.
Of course, the company has always said that it's willing to spend more money if needed and that investments won't be restricted to the initial sum. Amazon CFO Brian Olsavsky had mentioned during an earnings call that they will "continue to invest in India where we are seeing great progress with both sellers and customers." But this also means that Amazon's international losses are unlikely to improve.
In fact, losses from the international e-commerce business shot up nearly 30% last quarter. The operating expenses of the international business rose almost 35% to $15.5 billion last quarter. Given the freshly minted competition in India, this figure will only grow as the two retail giants fight for market share.
Why Amazon will keep going at it
However, Amazon investors must keep in mind that India is a market worth fighting for. Despite the potential to reach an estimated $200 billion in online retail sales by 2026, this channel will still account for just 12% of the country's total retail sales. Though a prolonged arms race with Flipkart and Walmart will result in additional losses for Amazon, the long-term opportunity is too great for the company to pass up as it seeks out growth outside its core North American market.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.