Amazon's global margins feel Flipkart heat

Amazon’s fight with Flipkart to become India’s largest e-commerce marketplace has emerged as the biggest source of drain on its international margins.

Since mid-2014, Amazon has pledged to invest $5 billion to grow its business in India, far higher than the $3 billion unlisted rival Flipkart has raised so far.

“By far the biggest individual thing is the investment in India that we continue to make and are very excited about it,” said Brian T Olsavsky, chief financial officer at Amazon, during a call with analysts and investors on Thursday.

Since entering India three years ago, Amazon has invested in building warehouses in major hubs, buying Bollywood rights to power its upcoming Prime video streaming service, undercutting costs of products by charging lesser commission from traders on its platform and marketing aggressively to build the brand. It has also expanded its India technology team, which helps build products for global operations, besides solutions for the local market.

In September quarter, Amazon’s international losses, which include India, more than doubled to $541 million, largely due to investments in India. Amazon’s international business, which contributes a third of its total revenue, stood at $10.6 billion in the quarter. The losses would have spiked in the quarter due to its aggressive spending during the Great Indian festival sale, which saw Flipkart, which was almost written off, fight back.

Since mid-last year, Flipkart’s value eroded by a third from a peak of $15.2 billion to as low as $9 billion after several investor markdowns. Amazon’s aggression forced Flipkart to overspend on discounts to customers and hire expensive talent, a plan which soon backfired.

It led to massive management change that saw co-founder Binny Bansal replace his partner Sachin Bansal as the chief executive and also exodus of top leaders such as Punit Soni, Mukesh Bansal and most recently Sanjay Baweja. At the same time, top investor Tiger Global stepped in to rationalise costs, weed out expensive talent and push the company towards profitability.     

“As people get more and more comfortable with the convenience that e-commerce offers, the scale, the diversity and more customers come into the fold, the business structure is such that we will see profitability. It may not be in the next six months but we definitely are on that path,” said Sanjay Baweja, outgoing CFO of Flipkart in an interview on Wednesday.

Now that Amazon is within striking distance of Flipkart, the pace of investment isn’t expected to slow down soon as the Indian company is looking to raise $1 billion, reportedly from Walmart.

“We are very encouraged by what we are seeing in India but it is certainly very early on still. Most recent highlights would be the launch of the Prime program in India this past quarter. It’s now one of the top selling units based on Amazon.in. And so it’s very been very well received by customers,” said Olsavsky. “It’s hard to compare India to any other country. It’s very different in its stage and structure.”

Amazon to buy Westland for Rs 40 cr

Amazon on Friday said it will pay Rs 39.80 crore to acquire the publishing arm of Westland, giving it access to a library of popular books and offer local content to push higher sales of Kindle readers in India. The acquisition will also help Amazon score over Flipkart by offering ahead books by authors such as Amish Tripathi and Ashwin Sanghi exclusively to its customers.