When Walmart (NYSE:WMT) shelled out $16 billion for a majority stake in Indian e-commerce start-up Flipkart earlier this year, the big-box retailer was looking to tap the country's massive network of mom-and-pop stores to expand its footprint and bolster its delivery capabilities. Backed by Flipkart's existing distribution infrastructure and Walmart's own cash-and-carry stores, that was the logical path to follow to make a dent in the country's fast-growing e-commerce market, which is projected to hit $200 billion in sales by 2026.
However, it looks like Amazon (NASDAQ:AMZN) is beating Walmart in deploying this strategy in India.
Amazon makes a smart play
Walmart's blueprint of promoting its wares through mom-and-pop stores and using them as fulfillment points for everyday items bought on Flipkart's online portal is a sound one. It will allow the retailer to make headway in lucrative verticals such as groceries and also grab a bigger share of India's e-commerce market by speeding up delivery times and product selection.
So Walmart poses a grave danger to Amazon's rise in India, but the latter is now trying to beat its rival at its own game by enlisting India's local mom-and-pop stores as its agents. Local shop owners in India who sell a ton of everyday items, ranging from needles to groceries, out of cramped and disorganized storefronts are acting as Amazon's representatives and educating their customers about shopping online through smartphones, according to a report from Bloomberg BusinessWeek.
At the beginning of each month, these representatives hand out marketing materials such as leaflets in their areas, which could be villages or remote towns. The local populace then orders items that aren't usually stocked in rural areas, which could be anything from high-end razors and expensive healthcare products to smartphones.
Amazon ensures that the items are delivered to the shop owners as soon as possible, sometimes the next day. The shop owners then make deliveries to the buyers, who are now aware that they can buy any item they want through an online portal known as Amazon. This is how Amazon is introducing India's rural population to online shopping and locking them into its ecosystem.
Such a strategy could prove to be vital to the company's long-term growth, as Amazon is now positioning itself to take advantage of an important trend.
The long-term significance
India is still a developing country where the majority of the population lives in rural areas. In fact, two-thirds of the Indian population resides in villages or small towns, according to World Bank data. However, just 18% of the rural population has access to mobile internet in the country, as compared to 59% in urban India.
So India's next round of smartphone and internet growth will be driven by the country's rural areas, and that won't be small by any measure. For instance, there were an estimated 187 million rural mobile internet users at the end of June this year despite the low penetration. This means that millions more will be added in coming years thanks to low data rates and easily accessible smartphones. And internet users in rural areas tend to be young, so getting them hooked on Amazon will set them up to be customers for many years.
As it turns out, smaller towns accounted for 41% of online shoppers in India last year, adding unique shoppers at a faster pace than the metro areas, according to Indian market research firm RedSeer Consulting. What's more, the firm estimates that 55% of the active online shopper base in India will reside in nonmetro areas by 2020.
Rural India accounts for 57% of the country's overall retail market, reportedly worth $650 billion, which makes it much larger than the $38.5 billion e-commerce revenue generated in the country last year. So the shift of offline rural Indian customers to online channels will create a massive e-commerce opportunity for Amazon.
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.