THUNDERBIRD SCHOOL OF GLOBAL MANAGEMENT

Amazon India Imminent Debut in Retail e-Commerce

Dayvisson Dasilva, Erik Luthy, Huiling Liu, Ranjit Bhalerao

7/3/2013

EXECUTIVE SUMMARY

Amazon is poised to enter the multi-brand online retail market in India upon regulatory approval

for foreign direct investment. While Amazon’s core competencies include serving customer

preferences, fulfilling orders, and maintaining low costs, its India debut will require a deviation

from its tried and true methodology. As India is an emerging market, lower Internet connectivity

means Amazon will have to consider expanding the number of channels to reach customers. We

recommend mobile phone based ordering, direct selling through channel partners, and new

payment options. India’s consumer segmentation and preferences are changing along with their

economic development. To compete effectively against the market incumbent Flipkart, Amazon

should not only leverage its strengths (greater bargaining power with suppliers, industry best

practices, and superior operating platform) but also differentiate Amazon’s brand by emphasizing

the customer experience and enhanced benefits suggested in our implementation plan.

CONTENTS

Macro-Economic Environment .......................................................................................................................................... 2

Amazon’s Current Marketing Approach ........................................................................................................................ 3

Competitive Environment .................................................................................................................................................... 4

Consumers .................................................................................................................................................................................. 5

Recommended Implementation Plan .............................................................................................................................. 6

Product .................................................................................................................................................................................... 6

Addressing technology access issues .................................................................................................................... 6

Small seller integration through co-operatives ................................................................................................. 7

Customizing the Product Offering ........................................................................................................................... 8

Promotion .............................................................................................................................................................................. 8

Place ......................................................................................................................................................................................... 9

Delivery/Order Fulfillment Processes - Service Delivery ........................................................................... 10

Trusted Direct Sales/ Delivery with a Social Responsibility Cause ........................................................ 11

Price........................................................................................................................................................................................ 12

Financial & Non- Financial Results................................................................................................................................. 12

Bibliography ............................................................................................................................................................................ 14

Exhibits ...................................................................................................................................................................................... 15

MACRO-ECONOMIC ENVIRONMENT

Amazon’s future business strategy in India will depend largely on its educated and diverse labor

force. Even though economic progress is found across the emerging country, poverty is still one of

the major socio economic issues. A few key indicators help to analyze advantages and

disadvantages for future business investments. The country’s GDP in 2012 was $4.784 trillion. The

labor force of 498.4 million was concentrated in three major sectors of the economy (agriculture

53%, industry 19% and services 28%). The unemployment rate reached 9.9% of the entire

population in 2012 with a 29.8% of the population below poverty line, amounting to over ¼ of the

country. In contrast, 80% of India’s wealth is held by a 30% minority of the population1.

Indian retail industry has recently spent approximately $300B to upgrade its infrastructure and

create a more modern, yet locally influenced environment. Investment opportunities for mass

merchants and food retailers have drastically increased. Global companies are leveraging India’s

proven skills in product design, configuration and customization to change the industry.2

India currently faces diverse challenges of poor infrastructure. The power grids, roads network, and

Internet access are behind the developed world due to poor equipment and a history of poor state

infrastructure management. These issues directly limits the transportation of goods, keeps rural

population deprived of the benefits of the recent economic developments, and creates an

unmanageable migration from the interiors to the already congested cities. 3 An estimated one

trillion US dollars are going to be invested in India for infrastructure over the next five years.

However, high interest rates and inflation create very high debt for the infrastructure development

companies, leading to the failure of many major projects over time.4

The railroad system is mostly state owned. Currently, only 49% of roads are paved and only 16% of

roads have four lanes or more. The country has thirteen major ports that are government owned

1 The CIA World Factbook 2013 2 India Country Guide - Industry and Employment Trends 2011 3 KPMG India 2012 reports, World Bank Report 4 The Economist, Bloomberg

with a 60% of water traffic handled by the Mumbai port alone. Outdated air traffic control

technology at airports increases total travel time.5 Customs clearance at port of entry is a big hurdle

due to corruption and innate inefficiencies.

As a result of the improving economic conditions, prices and inflation both have gone up.6 Annual

consumer price inflation peaked to 10.3% in August 2012 owing to the higher prices of fuel and

manufacturing.7

AMAZON’S CURRENT MARKETING APPROACH

In India, Amazon is offering an online cataloging service through Junglee.com for retail purchases

that facilitate transactions fulfilled by third party suppliers, including Amazon US. Junlgee.com

offers a broad array of categories from electronics, personal items, household goods, and media.

The overall platform is quite similar to what is offered in the US, however due to the FDI

constraints, Amazon is unable to sell their own inventory directly from within India. Hence, to this

date, they do not have to overcome on their own the unique logistical and infrastructural issues.

For promotion, Amazon relies heavily 8 on word of mouth publicity and online ads. Since all

purchases are made online, the rationale is to advertise only to those who have the capacity to use

the medium. Globally, two thirds of Amazon sales are in the form repeat purchases which indicate

that they do have a high number of potential brand champions. However, in India they are not a

first entrant into this market. So, relying on the parent company brand recognition may hinder

growth of the market share. Indian Facebook users are the third largest in the world--around

61,697,7909. Currently, this population is not necessarily purchasing online or more specifically,

from Junglee.

5 Word Association for Waterborne Transport Infrastructure 6 India Country Guide and Impact of Pricing Study in Mumbai City 7 The Economist, 2012 8 Amazon PowerPoint 9 Amazon India pptx - Amazon Competitive Landscape/ Quintly 2013

Traditionally, Amazon has relied on a combination of highly efficient order fulfillment centers,

seller price competition, proprietary payment processing software, and a highly sophisticated

online platform to deliver competitively priced products to their customers.

COMPETITIVE ENVIRONMENT

Retail e-Commerce (e-tail) in India is a high growth-potential, underdeveloped business with a

maximum current market penetration of only 5%10. The scene is dominated by online travel portals

having the biggest share of 80%, followed by the sale of electronics, financial services, and clothing-

-each having negligible share. The only national level competition Amazon/ Junglee may face is

from Flipkart, a company launched in 2007 by two ex-Amazon employees. Flipkart offers a wide

range of products from books & stationary, entertainment, electronics, healthcare, grooming, toys,

clothes to home appliances, but does not offer non-perishable grocery items. Flipkart offers some

unique services for the online shoppers which Amazon does not include in its platform: a 30-day

replacement policy, and an array of payment options such as through online gateways connected to

the leading banks, cash-on-delivery, and monthly installments.

Established retailers such as Reliance, Big Bazaar, etc. lack a multi-channel strategy with focus only

on driving brick-n-mortar store expansion and driving foot traffic there. Finally, they are dependent

on third party platforms for conducting the typical e-Commerce functions at large scale, namely

Web and mobile storefronts, shopping experience (cart/ transactions management, promotions,

personalized recommendations, product/ seller feedback, abiding by the tax regulations, customer

relationship management, vendor/ supplier management, etc.).

Other single- or limited-brands retailers having limited reach are FutureBazaar, Homeshop 18,

Bigbasket (previously Fabmart), and IndiaTimes. Google has recently launched brick-n-mortar

10 Praveen Sengar, “E-Commerce in India”, Gartner Hype Cycle for ICT in India, July 31, 2012 (ID:G00233973)

Android Nation stores11. This development has a disruptive potential of developing into a hybrid

multi-channel model, like order online and pick-up at physical locations.

Some hurdles that Amazon India may face will be getting the B2B suppliers to invest in IT from

their side for required integration, and driving general awareness for e-Commerce.

Lastly, Amazon already has an established R&D center in India that supports its global software

needs. This will be a significant competitive advantage for the company over its competition for

customizing the e-tailing platform for unique needs of the Indian market.

CONSUMERS

The Indian consumer market is changing rapidly. With increased urbanization, old buying habits

are changing and new consumer segments are emerging. First, the market structure is divided into

the following five groups:12 The rich, the consuming class, the climbers, the aspirants, and the

destitute. Within each of these groups, the consumers have different preferences and buying habits.

The rich focus mostly on luxury goods and premium brands. The consuming class buys utility

durables like white goods. The climbers typically possess one major durable. The aspirants possess

very basic goods but want to move up. Finally, the destitute have practically no personal

possessions. Within these segments are different value orientations. The rich are benefit

maximizers, they believe that top brands deliver quality proportionate to price. The consuming

class balances the benefit tempered by price. Climbers focus on receiving the best value with their

limited available funds. Aspirants typically require specially sized products, like in the form of

sachets, in order to be able to participate in the market. The destitute are unable to consume in the

traditional markets.

11 Google brings Android Nation stores to India to spice up its retail market (June 20, 2013) 12 Sameer Mathur Ph. D, PowerPoint, Consumer Segments in India, McGill

More importantly 77% of Indians below the age of twenty use the Internet, while 73% between the

ages of twenty and twenty nine do. Further, 8% of Internet users have made an online purchase in

the past month, and 12% intend to shop in the next six months.

The number of young college educated has dramatically increased over the recent years. This is

notable considering that the IT sector reaching 7.5% of Indian GDP in 2012. The Influx of

outsourcing opportunities in India has led to a more educated and technologically savvy workforce

that is increasing the consumer base.13

RECOMMENDED IMPLEMENTATION PLAN

PRODUCT Amazon India, through its front-end portal Junglee, needs to transition from being a mere

cataloging aggregator of products offered by other vendors into a full scale e-tailing platform

similar to its original form in the US. Here, we propose localization of the brand Amazon/Junglee for

the Indian market in the following innovative, yet, scalable ways that meet the unique challenges

and opportunities in the region.

ADDRESSING TECHNOLOGY ACCESS ISSUES Text message based product ordering

India has one of the fastest growing markets in the mobile industry with recent $24B investment

and expected to grow to $60B.14 In 2011 India had about 900 million people subscribed to mobile

services, not to mention that the country population was one of the world leader to mobile phones

usage, second only to China.15 Regular access to Internet or a computing device may be a challenge

for a vast population of potential customers even from the tier-1 cities. This may be due to

economic affordability, unfamiliarity, or inadequate infrastructure. However, there are more than

900 million mobile subscribers according to the telecom regulatory authority, TRAI16. A simple SMS

13 business.gov/in 14 Passport GMID - India 15 CIA World Factbook 16 Highlights of Telecom Subscription Data as on May 31, 2012

text message based 17 interactive menu provided in conjunction with telecom operators can be

harnessed to offer brief listings of popular brand items. This will work with even the simple most

mobile phones without fancy operating systems or expensive hardware. A consumer may also place

orders directly using previously known product codes that are sent via text messages. Payments

can be authorized using the prepaid mobile phone account balance of the subscriber. Alternate

mobile payment solutions already exist that do not need Internet access18 or phones with high-end

hardware/ software.

SMALL SELLER INTEGRATION THROUGH CO-OPERATIVES Various states within India are formed on the basis of the dominant regional language and the

associated cultural ethnicity. The unique food and traditions of each region offer multiple product

categories. With the higher availability of jobs in various tier-1 and tier-2 cities of the country, the

educated middle class population has migrated across the regions. According to India’s Ministry of

Statistics, over 300 million Indians (⅓ of the whole population) are internal “migrants”. This fact

combined with the FDI regulation that requires sourcing at least 30%19 from local suppliers, can be

an opportunity for offering the regional food and craft products online that were previously

unavailable in other regions. This ease of availability may develop consumer demand for products

from other regions.

However, some specialty artisans work on a very small scale and mostly at a family level. To

address their inability to fulfill larger volumes of orders, and to avoid from having to deal directly

with too many of them, we propose that Amazon should partner with existing multi-state or

regional cooperatives, such as Amar Kutir (arts & crafts) 20, Amul (milk products) or Co-optex

(handloom weavers). Amazon will augment the cooperative’s existing physical channels with online

ones. This will further the social cause that Mahatma Gandhi advocated during India’s

17 Unstructured Supplementary Service Data (USSD) 18 http://www.c-sam.com/mobile-transaction-platform 19 http://ibnlive.in.com/news/fdi-in-retail-30-pc-sourcing-rule-changed/291532-7.html 20 http://en.wikipedia.org/wiki/Amar_Kutir#Revolutionaries_and_Village_Craft

independence struggle: think village-bound21 for self-sustained grass root economic empowerment.

Amazon will not only support local artisans and meet their local sourcing needs but they may also

gain access to unique and culturally vibrant goods they can sell globally.

CUSTOMIZING THE PRODUCT OFFERING Some products just don't make sense in India. For example do-it-yourself (DIY) hardware and

service items which Amazon offers in the US would not perform well as most Indians hire help to do

these sort of activities. Amazon will need to add locally appropriate products. Due to the migration

of much of India’s workforce there is an opportunity to provide Indians away from home products

which meet their regional preferences. Often, local shop owners are unlikely to offer spices and

products from other regions of India. To meet this unsatisfied demand, Amazon can offer regional

spices, and non-perishable food products, in addition to regional sourced literature (e-reader),

crafts, and clothing. This will help increase Amazon's local appeal. In addition, India also celebrates

39 national holidays, one of the highest number of holidays in the world. Each of these comes with a

wide array of holiday specific goods and products. Amazon can capitalize on these holiday

requisitions by offering an online holiday portal to make sure the large number of Indian migrants

can celebrate their holidays.

PROMOTION The major obstacle for Amazon is that Flipkart is already holding the position of reliable, low cost,

and trustworthy online retailer. Plus they are an Indian company headquartered in Bangalore. The

result is both companies have the same value proposition. Amazon must do more to clearly

differentiate them from Flipkart. Amazon’s online marketing has traditionally been very passive,

using banner ads, pay per click, and Google search results. Three quarters of India's Internet

population uses social media22 which Amazon can use increase their level of engagement with the

already enormous online social media population in India. They can tell the story of how they are

21 http://en.wikipedia.org/wiki/Mahatma_Gandhi#Gandhian_economics 22 "Of Tweets and GDP." MintMar 18 2013. ProQuest. Web. 2 July 2013 .

helping Indian cooperatives bypass middlemen and bring their products to market. They can show

the convenience and reliability of Amazon and how customers can pick shipments up at their local

trusted shops, and they can also tell the story of the migrant enjoying his home cuisine and reading

an eBook by an author back home thanks to Junglee. By telling this story they can both differentiate

themselves from Flipkart and educate the consumer about what Junglee/Amazon is about.

Offline, to facilitate phone ordering, and increase understanding of Amazon’s brand offering.

Amazon can send small catalogs of high volume products through the Indian postal system which

include codes to facilitate orders via mobile phone. This will educate aspiring consumers who may

lack Internet but who are still interested in gaining access to low cost products. Since mobile phone

access is far ahead of Internet access, this will allow Amazon India to reach customers before they

are exposed to the Internet and build brand awareness ahead of the pace of socio economic

development. When these customers become Internet users, they will already know what amazon

is and its value proposition.

PLACE Amazon is famous for its discounted offers, and reliable and efficient delivery. When the company

was started in the US, this business model benefited from the existing infrastructure of sourcing

and logistics. The company cannot count on the same in the emerging markets. We recommend the

company shall employ the best practices it developed while doing business in China—another

emerging market in the region. For example, Amazon offers expedited delivery only on the items

that are stocked in the warehouse closest to the point of delivery. Otherwise it transparently shares

the logistic details with the online consumers to set the expectations right.

For the first right impression, it is recommended that Amazon starts offering direct delivery to the

consumers residing only in the tier-1 and tier-1 cities 23 that are well-connected by the existing

23 http://www.mapsofindia.com/maps/india/tier-1-and-2-cities.html

network of national and state highways, and the major railroads. Upon establishing the reputation,

smaller towns can be reached with appropriate delivery commitments.

DELIVERY/ORDER FULFILLMENT PROCESSES - SERVICE DELIVERY Poor infrastructure and logistics in India largely increases the cost of goods. Logistics makes up to

14% of total cost of goods. A few reasons for high costs are mainly attributed to three major

problems. The congestion costs (higher inventory costs and longer delivery times), transactional

costs (insurance and government taxes) and lastly the overall lack of infrastructure result in very

high average freight costs in India—currently 7.0 cents/Km.( Canada 2.0 cents/km, Japan 3.7

cents/km and France 5.5 cents km)24.

Due to India’s current state of development, certain aspects of Amazons regular delivery process

will need to change. Amazon will have access to the major traditional package handling carriers like

FedEx, UPS, and Blue Dart in India. However, these carriers primarily service top tier cities. As a

result, Amazon needs to figure out how to service potential customers in more remote locations.

India’s national state transport system does typically service all areas but there are issues of

security, timeliness, and cost which could impede the desirability of Amazon products. In the case

of lost shipments, this can harm Amazon’s carefully developed reputation for consistency and

timeliness. Due to wide economic disparity, it is impractical to leave packages at a buyer’s doorstep

as would frequently be stolen if left out for any considerable time.

To overcome these issues, we have come up with a few options for Amazon to adopt to increase the

efficacy of their delivery process. Similar to the Amazon Sellers program, we propose creating a

program for Amazon Delivery and Order Partners. There are a number of components to this

program. First, business owners in more remote locations who already have relationships with the

local community could earn additional revenue being a pickup/returns location. This would help

Amazon avoid the security issues of leaving packages on the doorstep and reduce the number of

24 Word Association for Waterborne Transport Infrastructure

door to door deliveries. Plus customers in more remote locations could receive their orders when

they came into town to do their regular shopping. Second, either these same shops/businesses or

separate partners could go a step further and generate revenue by going the extra step and

delivering orders shipped to the first set of partners to customers. For example a local courier or

taxi driver might stop by a shop and go deliver orders during a slow time. These local partners

would have to be registered with Amazon as approved partners and would have to have made some

form of deposit to prevent theft of goods. Thus Amazon could rely on crowd sourced partners as

part of their logistics network in locations where it would be overly costly to develop their own

presence or where traditional carriers did not provide service. A third component of the program is

including an Amazon order platform which could pay the store owner a commission on sales. This

would allow potential customers without Internet to browse an online catalog from their local store

and place orders for which they could pay the store owner in a similar arrangement to COD. Of

course, Amazon would have to be careful to not compete directly with their partners or they would

be unlikely to cooperate. These three components would increase the potential customer base,

reduce the logistics costs of accessing remote locations, and increase awareness and community

engagement and create jobs which would build support for the Amazon brand.

TRUSTED DIRECT SALES/ DELIVERY WITH A SOCIAL RESPONSIBILITY CAUSE Beyond relying on local store partners, catalogs, and the traditional direct online sales channels, we

also suggest creating Project Shakti25 like direct sales ambassadors. Similar to the store partners,

Amazon could rely on the reputation of these women trusted by the consumers and help the

ambassadors earn a respectable livelihood. Amazon could grant these women credit and lend them

some technology platform for registering the orders. She then could go around suggesting products

to members of her community and selling them at a small markup on top of what Amazon already

25 http://www.hul.co.in/sustainable-living/casestudies/Casecategory/Project-Shakti.aspx

charged. She could also let her customers browse the product offering and explain the process to

them so that later these customers understand the process and trust the online medium.

PRICE Due to the emerging market status of India, a large portion of the population will be very price

sensitive. Aspiring customers with lower economic status will benefit from monthly installment

plans that allow them to become customers. Further, due to distrust in online retailers, Amazon will

also need to adopt a cash-on-delivery (COD) payment option for customers who don’t want to pay

for something until they see it. Amazon’s primary competitor Flipkart already offers this option and

it is typical in Indian online retail. Incorporating COD into their delivery model means Amazon will

have to carefully monitor delivery carriers to ensure no loss of payment occurs. This is easily

overcome by requiring carriers to make security deposits to cover COD amounts. In addition,

Amazon will need to focus on maintaining cost leadership when transitioning from a cataloger to an

order fulfiller and multi brand online retailer. As mentioned above, a number of initiatives will be

employed to increase access to as wide a portion of the population as possible. In addition, Amazon

will have to source a large portion of their product offering locally to be able to keep prices low,

meet the Indian consumer preferences, and comply with the 30% local sourcing requirement

imposed upon foreign owned enterprises. Cost reduction and operational streamlining are already

a core competency of Amazon. While they will be somewhat constrained by infrastructural barriers,

Amazon should have little trouble here and won't need to change their model significantly.

FINANCIAL & NON- FINANCIAL RESULTS

Currently, Indian e-commerce market revenues are estimated at about $1.6 billion, likely to double

to more than $3 billion within three years, and could reach almost tenfold to about $15 billion by

201726. Our strategy promotes offering a vast selection of products, maintaining the lowest price,

and high quality service and delivery, so Amazon can achieve the most effective and cost efficient

26 http://www.internetretailer.com/2013/01/11/indias-online-retail-market-could-double-size

word of mouth referral by satisfying consumers, and successfully attracts more customers. In the

last several years, Amazon already invested significantly in its India operations27 and it will achieve

more revenues and profits by attracting more consumers. Furthermore, our strategy chose to use

online advertising and global suppliers, so Amazon maintains a low cost on advertising and

sourcing. For example, the ads on Facebook will cost much less than the offline advertising, yet,

reach the target customers. The costs savings on global suppliers and online advertising will enable

Amazon to maintain low price, enhancing competitiveness in the price sensitive market.

Non-financial results of our strategy will be an enlarged market share, increased brand awareness

and reputation, more employment, and much better relationship with the local government.

Furthermore, our strategy concentrates on providing high quality service and using social networks

and other online mediums to advertise Amazon, therefore, Amazon may achieve a high brand

awareness and good reputation. The increasing trend to share interesting, fun, and cool videos with

friends in India is the same as it is in the other parts of the world, and Facebook is the No. 1 popular

social network in India. There are 62.7 million Facebook users in India, representing 68% of the

country’s online population28. Viral ads and exclusive special offers on Facebook may target the

exactly consumer and encourage them to engage with the brand, achieving word of mouth. On the

other hand, high quality service will definitely ensure customer satisfaction, and increase loyalty to

brand Amazon. Additionally, Amazon may employ more people as India develops. Currently,

Amazon has development centers at three locations in India: Hyderabad, Chennai, and Bangalore

with about 3,000 employees.

27 Amazon to invest Rs.500 cr in India 28 India’s online retail market could double in size

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EXHIBITS

Exhibit 1: E-commerce growth projection for India29

Exhibit 2: Retail market CAGR

29 Hype Cycle for ICT in India, 2012 (Gartner, 31 July 2012 ID:G00233973, Sanish KB | Vishal Tripathi)

Exhibit 3: Current Junglee.com and Amazon.in: mere catalog aggregation

Exhibit 4: Mckinsey Report Rise of the Middle Class

30

Exhibit 5: Market Segmentation - Middleman

31

30 McKinsey Consultants - India report (picture) 31 BCG: Distribution Channels in India