Amazon struggles in India unlike Reliance, says Meesho, asset management firm Bernstein

• The Indian e-commerce market is expected to reach $130 billion by 2025.
  
• Social Ecommerce Businesses in India like Meesho outperform traditional e-commerce companies.
  
• The world’s largest e-commerce company is struggling to gain a foothold in India’s Tier 2 and 3 cities due to regulatory setbacks.

Amazon marked a spectacular entry into India in 2013, and not just because Jeff Bezos sat on top of a colorful truck or it invested $7 billion in the market. India is one of the largest emerging e-commerce markets in the world, estimated to be $130 billion by 2025.

Nearly a decade later, its success is questioned by an asset manager, Bernstein, in his latest report.

Amazon is now the second largest player behind Flipkart with a gross trade value of $18-20 billion and has over 170 million products. But it has yet to become profitable in a market where the average order value is below $10 (about ₹800).

“In addition to growth-related investments, profitability was also impacted by a greater mix of low-margin product categories (e.g. smartphones with a net margin of less than 5%). Amazon is struggling to scale volumes in higher-margin categories such as fashion and beauty and personal care,” the Bernstein report said.

Fashion has seen the greatest growth in recent years, and so has the supermarket. But the latter is led by fast commerce players like Dunzo, Zepto and Blinkit. Amazon and Flipkart are market leaders in mobile phones and consumer electronics. But this segment’s share of the e-commerce market is declining.

giving Indian precepts to trust an edge over Amazon

Despite having 700,000 sellers on its platform, Amazon has yet to gain ground in a very important category in India – tier 2 and tier 3 markets. According to the report, these markets account for about 50% of all e-commerce sales, and they are growing.

“Reliance leads in India with a strong 1P business with more than 15,000 store branches. Flipkart is the frontrunner in the apparel category and Meesho, a social e-commerce company, is winning in tier 2/3 cities where Amazon is struggling to perform,” it said.

1P business is where retailers have an online presence like Reliance with a broad physical footprint. However, Amazon is a 3P player that works with sellers. Regulations in India are skewed towards the former, and stricter for multinationals.

“Regulations do not allow an inventory-driven 1P model for a foreign entity like Amazon. The company has made investments in local retailers such as: Shoppers stop (fashion), More (groceries) and a rumored interest in Eco Express (logistics), but integration is limited because regulations do not allow full control,” the report said.

At the same time, its main competitor Reliance expanded its e-commerce business to about 19% of core store sales, thanks to its 15,000 stores and the ability to manage an inventory-driven model.

“Amazon’s management turnover has also increased recently, possibly indicating difficulties in achieving the desired scale,” the report said. Dave Clark, Amazon’s global CEO, left the company after 23 years in 2022.

This is where the growth of e-commerce is

The sweet spot for e-commerce growth in India is Tier 2+, the report says, a market looking for products tailored to their needs. MyGlamm, guard and Sleepy Owl are able to achieve this with much of their business from these cities.

But here too Amazon is not getting ahead due to regulations. The inability to use a 1P model has limited private label availability relative to the competition, further putting pressure on margins, the report said.

“Despite the importance of the market, we estimate that it contributes less than 5% to Amazon’s total value. According to Amazon’s current valuation, we see the Indian business as a call option for Amazon investors, as long as the company is disciplined around capital allocation,” said Bernstein.

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