India e-commerce – Second front.

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Amazon goes for the jugular.

• Amazon is not content just to let its rivals gift it the Indian market through their own bad decisions but is going for the jugular by opening up a second front in bricks and mortar retail.
• Amazon is buying a 5% stake in Shoppers Stop for $28m which will enable Shoppers Stop to increase the number of stores it has by 25% thereby expanding its reach into smaller towns.
• Currently only 5% of retail sales are made online in China meaning that for at least some time to come it will be an advantage to have an offline presence.
• This is exactly the strategy that Alibaba is pursuing in China and is looking to improve the poor offline experience by adding in technology and know-how garnered through its growth online.
• All of Shopper Stop’s stores will play host to Amazon experience centres in order to educate and inform users with regard to the benefit of e-commerce.
• Shoppers Stop’s will also have an exclusive flagship store on Amazon’s Indian website which will help Amazon deepen its offering to Indian consumers.
• This is yet another blow to the local players Flipkart and Snapdeal whose inability to merge looks likely to hand the Indian market to Amazon.
• Flipkart, Snapdeal and Amazon are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
• 20 months ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit (see here).
• Together, Flipkart and Snapdeal would have just about hit this threshold and with flawless execution might just been able to see off the threat from Amazon (see here).
• However, Snapdeal recently ended merger discussions with Flipkart in a move that I think hands could easily hand victory to Amazon.
• Furthermore, having been soundly beaten in China by Alibaba, Amazon is absolutely determined to win the Indian market and I estimate that it is currently burning at least $400m per quarter to make that happen.
• In my opinion, the move by Snapdeal demonstrates a fundamental misunderstanding of how Amazon works and what it is likely to do to win the Indian market.
• Most companies have a strategy that involves trade-offs such as offering high quality or low prices.
• This is the route that Snapdeal is taking by deciding to streamline and focus on giving sellers the best experience in India.
• This is not how Amazon functions as there is no either / or in its vocabulary.
• Instead Amazon goes for dominance and offers high quality and low prices or in this case the best experience for both sellers and buyers.
• Even with extra backing from Softbank, I do not think that Flipkart has the depth of management or the financial resources to withstand this ruthless onslaught and I think that it is unlikely to ever make a good return for its shareholders.
• The outlook for Snapdeal is even worse as it is much smaller with far less to invest.
• I think Amazon will now be able to grind its two main rivals down to the point at which they either exit the market or agree to be acquired.
• Both of these scenarios are likely to result in much lower valuations than were being discussed as part of the merger.
• Hence, I think that Amazon is the only real winner from the strategic choices being made by Flipkart and Snapdeal.
• However, in the short-term $400m cash burn per quarter is unlikely to help Amazon’s fundamentals much and so I remain unenthused with an investment in its shares.
• I continue to prefer Tencent, Baidu and Microsoft.