Much is being made of how Amazon India has lost ground to its competitors during this Diwali season. Some are even claiming that this trend is here to stay. But I would counter that they are mistaking the tree for the woods. Based on my personal experience working with and selling to all major ecommerce firms, as well as my understanding of industry fundamentals, Amazon is unequivocally going to be the winner in this metaphorical race.
My conviction is based on five reasons:· Amazon’s goal is to acquire long-term loyal customers whereas competitors are working to increase their GMV (gross merchandise value or in simpler terms sales). Amazon is willing to burn money as long as it is customer-centric. Amazon is investing in creating loyal customers through Amazon Prime, in onboarding small sellers through Amazon University, and gives discounts only when it is absolutely necessary to retain customers. In contrast, competitors offer large discounts greater than their margin in order to increase their GMV. Tautologically, there is a limit to how much one can do that. Therefore, high Diwali sales are not a good indicator of who is going to win out in the long term.
· Amazon has a lower cost of capital and has more patience than private equity/venture capital firms that typically have a 5- to 10-year cycle and are the ones backing its competitors. Amazon Inc’s weighted average cost of capital is 10.25%. In comparison, PE/VC firms will have to show their limited partners (LPs) returns in the range of 20 to 30%. Furthermore, the average length of a PE/VC fund is 5-10 years. This puts a natural limit on the amount of patience that the investors in Amazon competitors will have as they need to return money to their own investors after that point. Amazon, in contrast, has shown that it's okay with zero profits over a 20-year period.
· Despite being a global firm, Amazon has succeeded in localising itself very well. Its entire senior management is Indian, and it has been able to deeply understand the Indian shopping habits and preferences. For example, it has 13,000 IHS (I have space) stores—the vendor can deliver your product to the local kirana store where you can pick it up or have the kirana’s runner deliver it to you when you are home. Some of Amazon’s competitors, in contrast, have gone for the more western style lockers to solve the problem of delivering when customers are not home. This approach has unfortunately had limited uptake.
· Amazon is a process-driven company. For a seller on any e-commerce website, reconciling account and getting money back is a complex and challenging process. From personal experience, reconciliation on Amazon is like solving a medium difficulty sudoku puzzle, but for some of its competitors, it is like playing multi-dimension chess—the same report for the same time period says three different things on three different dates. The implication is that sellers will prefer working with Amazon. More importantly, being a process-dependent company and not a people-dependent firm helps Amazon to be corruption free. The process ensures that there are no kickbacks.
· Amazon has massive global scale, which gives it access to the best technologies from warehouse robots, Kindle and Prime Video. Last financial year, Amazon global’s annual R&D spend was $17.4 billion, higher than the valuation of most of its Indian competitors. It gives Amazon customers access to the Amazon Global store and helps Amazon get better sourcing deals from brands and original equipment manufacturers (OEMs).
In summary, Amazon has a better strategy, cheaper and more patient money, higher adaptability, better execution and larger scale. India’s ecommerce race is a marathon, its best to bet on the long-distance runner.
Ramesh Kumar P Shah is a Harvard Business School alumnus and promoter of e-commerce services firm Rocket Kommerce. Views are personal.
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