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BW Businessworld

A Click Away

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Precisely 11 days after e-retailing site eBay.com bought Baazee.com in India on 31 January 2005 and converted it into ebay.in, rival Amazon.com rushed to register Amazon.in, its Indian website. The move was construed as the world's largest e-retailer's intention to enter the Indian market, but that was not to be. At least for almost seven years — that is, until now.

Over the past few months, however, various teams from the $34.2-billion Amazon.com have held several rounds of negotiations with suppliers, headhunters and real estate developers for an imminent entry into the Indian market. BW's calls and emails to Amazon remained unanswered. Amazon, though, has also held discussions with Indian e-commerce upstarts such as Flipkart, Letsbuy and Tradus, who fancy their chances as early movers and have fashioned themselves on the "Amazon model".

Over the 16 years of Amazon's existence, CEO Jeffrey Bezos has pioneered a distinctly asset-heavy model of 60-odd huge company-owned warehouses (which he calls fulfilment centres), where millions of stock-keeping units are stored, packed and dispatched. This tight control over the supply chain and logistics is key to how Amazon manages speed to delivery and a customer experience that has made it the world's largest e-retailer. Its high inventory turnover of 12 times ensures it collects payments from buyers before suppliers are paid.

The model, however, is vastly different from the 16-year-old eBay model of a virtual marketplace where buyers and sellers transact on the eBay platform. Unlike Amazon, eBay does not store goods, although in the US it has physical retail stores. Instead, goods are delivered by the seller directly to the buyer. Even Amazon has a marketplace like eBay, which accounts for a third of its revenues, however, even for those sellers Amazon often prefers to store products at its own fulfilment centres for the quickest delivery to the buyers.











STATUS CHECK


  • Currently, there is no clarity on ecommerce regulations in India

  • In the absence of separate rules, e-commerce firms follow laws that apply to brick-and-mortar retail

  • As per the consolidated FDI policy, a firm can engage only in business-to-business e-commerce, not in retail trading

  • Yet, a foreign-owned, third-party 'marketplace' could pass through the grey area



So, while all these years Amazon's lack of interest in India's nascent e-commerce market (hamstrung by broadband unavailability) was apparent, this distinction in business models has also been a deterrent. Which explains why eBay could enter India when Amazon could not. According to the Department of Industrial Policy & Promotion, e-retailing is another form of retailing, where India does not allow foreign investment in the front end. In backend, 100 per cent FDI is allowed for business-to-business ventures. While Amazon, with its fulfilment centres and direct contact with customers would violate the law, a foreign-owned, third-party marketplace where customers buy from sellers could pass through the grey area.

But with Amazon facing a 33-per cent dip in net income in the first quarter ended March 2011 in the US — which accounts for 55 per cent of its business — there is a newfound urgency to enter India by 2012. Particularly, with the panel of secretaries at the Centre approving a plan to partially open FDI in retail. Amazon is consulting market research firms such as Deloitte for a survey of the e-commerce industry and has reportedly hired Landmark group's retail chain head Madhu M. to head its India operations. It has even hired law firm Nishith Desai Associates to suggest a way out. Amazon already has three R&D centres in Bangalore, Chennai and Hyderabad, which develop software and applications.

Foreign Rules
Unless the government allows FDI in retail, Amazon is likely to break ground in India with a an eBay-like model, to begin with. "It will help them get a local advantage, local expertise and do away with regulatory issues," says Sounak Mitra, consumer specialist at market intelligence firm Mergermarket. "The secular growth of e-commerce and loosening of FDI in multi-brand retail will see an influx of large global players," says Subho Ray, president of Internet Mobile Association Of India. The $6.8-billion domestic e-commerce market is nothing to write home about when compared to China's $38.5 billion and US's $176.2 billion, but it is growing at a furious pace of 40-50 per cent per annum over the past three years. It is estimated to be a $10-billion industry by 2011 end. But about 75 per cent of this is contributed by travel and tourism, where Indian Railways' IRCTC Online, airlines' websites and aggregators such as MakeMyTrip, Yatra, Travelocity and Cleartrip rule. Amazon's entry is expected to give a fillip to the other 25 per cent comprising e-retailing.

Suvir Sujan of Nexus Venture Partners says, "Web services and marketplaces are an important component of Amazon's business. It may enter India with these services first." Says Hitesh Dhingra, founder and CEO of Letsbuy: "Electronics is a different ball game, and it takes time. In categories such as media and books, the tax structure is the same across India, and Amazon already has an international catalogue, and hence it makes sense for it to start with books and gradually look into other products." Experts, however, believe Amazon will be constrained if it cannot roll out the full suite, including the supply chain, fulfilment centres and the logistics. "It took us two years to get the infrastructure in place, to build relations with distributors and we are still building it. By the time any global player gets in, we will get deeper into the category," says Dhingra. "To set up own warehouses and start billing directly to customers, Amazon has to wait for the FDI approval." But there will not be any problem for the marketplace business, which is more like commissioning; invoicing has to be done by the seller, not by Amazon as eBay does. "You can procure anything from here, but cannot sell it in the retail market," says Mitra.

In the UK, Germany and China Amazon has chosen acquisition as its entry strategy. It bought online bookshop Telebuch in Germany, Bookpages in the UK and e-retailer Joyo in China. Amazon could either look into buying a B2B player or tie up with a B2C firm such as Flipkart. But Flipkart says it is in no discussions with Amazon. "But I am not accepting or denying what has happened in the past," says Ravi Vora, head of marketing at Flipkart. But despite Amazon keeping its strategy under wraps, the word in the market is not whether Amazon is coming to India, but how and when it will enter.

shrutika(dot)verma(at)abp(dot)in

(This story was published in Businessworld Issue Dated 05-09-2011)