NEW DELHI, India — It is estimated that one third of India’s population of 1.2 billion people lives on less than $1.25 a day. The Wall Street Journal reports that only 13 percent of the Indian population utilizes the Internet and only 1.5 percent of the population made purchases through e-commerce in 2012.
With half of India’s population lacking bank accounts and a consumer class consisting of approximately 300 million people, India poses many challengers for investors. However, that has not stopped Amazon or Flipkart from investing further.
India’s population is the second highest in the world and Amazon Founder and CEO, Jeff Bezos, sees enormous potential for its economy. “At current scale and growth rates, India is on track to be our fastest country ever to a billion dollars in gross sales, we’ve never seen anything like it.”
Although online retail in India only amounted to approximately 0.5 percent of India’s retail market in 2013, Crisil Research estimated in February that online sales in India are growing at a rate of “more than 50 percent annually” and are projected to hit “8.3 billion dollars by 2016,” a total growth of approximately one percent in India’s online retail market. The Wall Street Journal reports that analysts foresee annual online sales reaching 30 billion dollars by 2020, an additional growth of six percent.
Amazon announced that it would be investing another 2 billion dollars towards expanding its e-commerce market in India. This announcement came a day after Flipkart, Amazon’s local competitor, raised a total of one billion dollars to fund its expansion. Flipkart’s new investors include Singapore’s sovereign wealth fund and GIC.
Amazon entered India’s online market in 2012 through the website junglee.com, which helped Indian sellers communicate to target audiences through free site advertisement. Amazon now functions in India by allowing Indian businesses to sell products through the website.
Both Flipkart and Amazon are limited to third party merchant sales, as Indian law forbids the companies from selling directly to India’s consumers. The companies provide these third party merchants with space in storage facilities and networking that allows them to “sell and deliver their products.” The online retailers then make their profits by charging merchants fees in exchange for these services.
Amazon’s third party merchants have increased from 100 last year to 6,500 this year as reported by Mint, a local Indian newspaper. Amazon places front-page advertisements in Indian newspapers and offers 17 million products in more than 28 different categories for Indian consumers. The company is planning to open five additional warehouses, which will double their storage capacity.
Two former employees of Amazon, Sachin Bansal and Binny Bansal formed Amazon’s local rival Flipkart in 2007.
Flipkart reports 22 million registered users, 5 million shipments per month and hosts 3,000 merchants. The company also reports that “more than 1 billion dollars in goods have been sold through its website in the year ended March 31, making it India’s largest online marketplace.” However, Flipkart Chief Executive Sachin Bansal said “he doesn’t plan to focus on making a profit until it has signed up more than 100 million users.”
Estimates of the companies worth have been reported $5-7 billion dollars. This means at its lowest estimate the company is close to “ranking as one of 10 most-valuable venture-backed companies in the world.”
Flipkart claims its advantage over Amazon will be its position in the local marketplace. Their innovative efforts, like cash on delivery services, have also aided their local success. Amazon has struggled in countries such as China due to local competition, but The Wall Street Journal notes that because many Indian consumers are English speaking and are in favor of international brands over local brands, Amazon will have an easier time dominating the market in India.
Regardless of the competition between Amazon and Flipkart, one thing is for certain — India wins. The multiplier effects, positive externalities and economic spillover from this competition will benefit the country greatly and effectively reduce its poverty rate, even if only slightly.
The most significant benefit is that as long as both companies continue to make their sales using third party merchants, the local economic impact is maximized. This will provide many young entrepreneurs the opportunity to escape the country’s unfortunate abundance of poverty.
– Christopher Kolezynski