Amazon's (NASDAQ:AMZN) honeymoon in India is over. The e-commerce giant has enjoyed a solid run in the world's fastest-growing e-commerce market since it began operations there five years ago. Armed with a multibillion-dollar war chest, Amazon gained rapidly on local rival Flipkart, and cornered more than 31% of the market. But Walmart's (NYSE:WMT) entry changed the landscape.
Walmart bought its way into India's burgeoning e-commerce space, and this seems to have inspired others to loosen their purse strings as well. Alibaba, for instance, is ready to pay up to buy a small stake in one of India's largest retail chains and build its omni-channel retail strategy. Walmart already has a presence on the ground with its cash and carry superstores, while local player Reliance Retail has sketched out big plans to disrupt India's e-commerce market.
While Amazon's path to e-commerce dominance in India is now filled with a lot of speed bumps, its latest move should allow the e-tailer close a major gap with its rivals.
A major void
The one thing that Amazon's rivals have in common is access to physical retail locations. Walmart already has a million square feet of retail space on the ground in India spread across 21 locations, while the Flipkart acquisition gives it access to 21 fulfillment centers. Reliance Retail is a behemoth in its own right, with 17.7 million square feet of retail space distributed across 7,500 stores in 4,400 cities.
Alibaba, meanwhile, is looking to get into the game by acquiring a stake in Future Retail, which has a presence in 25 cities across the country , a store of over 1,000 square feet, and retail space that exceeds 13.6 million square feet. Alibaba plans to integrate the offline presence of Future Retail with its digital payments and online marketplace, Paytm, in which it holds a majority stake, so that it can build an online-to-offline channel.
Similarly, Walmart is planning to set up small neighborhood stores that will allow it to improve delivery times and create an omni-channel wherein customers can order goods online and pick them up from a store.
Amazon, however, hasn't made any notable headway in this department, but its latest move is aimed at filling this gap.
Amazon makes its play
Amazon is set to acquire a 49% stake in Indian grocery retail chain More, which is owned by the Aditya Birla Group and is the fourth-largest supermarket chain in India. Indian private equity firm Samara Capital is Amazon's partner in this deal and will acquire the majority 51% share. The consortium will pay nearly $600 million for the supermarket chain, which pulled in nearly $620 million in revenue last fiscal year and incurred a $68 million loss.
Amazon has done the right thing by making Samara the majority stakeholder in this deal, as it will be able to bypass the foreign-direct investment regulations in India. The Indian government has capped foreign holdings in multi-brand retail stores such as More at 51%, but Amazon can circumvent this by teaming up with Samara and open stores without needing government approval.
This sets Amazon on a path to rapidly expand its physical footprint in India. More currently has 575 stores in the country, putting it behind Amazon's key rivals Future Retail and Reliance Retail. But Amazon aims to boost this number quickly in the coming years, and is planning to open 100 to 150 stores every year and help the chain become profitable by 2020.
All told, Amazon is moving aggressively to expand its offline presence in India. This is important for the company since physical locations are going to play a critical role in driving sales of grocery and food items.
The company's Prime Now grocery platform is currently restricted to just four cities in India, and those are only in select zip codes. But Amazon is scaling up this business rapidly. It opened 15 new fulfillment centers dedicated to groceries and everyday household items earlier this year. The More acquisition will complement those fulfillment centers, as Amazon will now have a broader footprint to sell those items.
Additionally, Amazon can execute quick two-hour deliveries of fresh and perishable items across more cities thanks to More. As a result, the American giant now has a better chance to get its teeth into India's $428 billion grocery market.
More importantly, Amazon can build up its omni-channel presence with this acquisition. The company has already been shipping electronic items through the Prime Now channel. Products such as smartphones, speakers, and headphones are eligible for two-hour delivery in areas where Prime Now is currently available. With the help of More's network, Amazon can cut delivery times of both grocery and non-grocery items and do it across a wider range of zip codes.
An important step
Amazon has been proactively looking to expand its physical store network in India. The company was reportedly in talks to buy a stake in Future Retail earlier this year, but it missed out to Alibaba. Not wanting to miss out again, Amazon moved in quickly for More, strategically giving the majority stake to an Indian partner.
Amazon can now quickly expand its grocery business and build out its omni-channel platform, which will be critical to its future in India's e-commerce landscape.