Amazon Laying Foundation For Long-Term Growth (India)

With its international strategy primarily focused on making significant inroads into the giant Indian market, Amazon (NASDAQ:AMZN) is starting to ramp up its strategy as it puts its finishing touches on the laying of the foundation there, preparing to scale out in the near future.

The company is rolling out its heavyweight services and products in order to boost momentum, including the debut of Prime Day in India, which now has had Amazon Prime offered in the country for about a year. Amazon is also poised to push its popular Alexa and Echo voice assistant and speaker to the market, suggesting it’s utilizing a similar strategy as it has used in the U.S.

Add to that the announcement it has been given the go-ahead to stock and sell groceries in the Indian market, and most of the pieces are in play for the company to start think in terms of scaling.

The process will take some time to accelerate, because there’s still the need to expand infrastructure; meaning mostly increasing the number of fulfillment centers it has in the country.

Amazon will start to consistently grow revenue and earnings in India, but it’s preparing for improved long-term performance by increasing brand awareness first.

Amazon’s strategy

I find it interesting that Amazon, overall, is approaching the Indian market in a similar manner as it has the U.S. market, with the exception that it has its products and services already in place, whereas in the U.S. market it has worked for a long time to improve the business.

That means to me that branding and fulfillment centers are the key obstacle for Amazon, and the steps it’s taking now are dealing with that. About the only major difference between its past strategies as it relates to India is fulfillment centers, at least over the next few years, may include a more localized flavor than they did in the U.S. That’s because it may be forced to enter into numerous partnerships while it builds out its fulfillment infrastructure. Once that’s in place, the company will probably operate just as it does in the U.S. market; there will, of course, be a few exceptions, but they aren’t likely to be at the macro level.

The reason for the need to enter into a lot of partnerships in the short term is because of the way mom-and-pop operations dominate the country at this time. It’s also why Amazon has a great opportunity to gain market share for many years. Just like in the U.S. and other countries, these smaller retailers will come under pressure from larger competitors.

As for branding, the major way Amazon has been working on that is with Amazon Prime, which it offers for the equivalent of $8 a year in India. That has been offered for about a year, and the debut of Prime Day in India this year should help it to gain a lot more brand exposure.

The other important branding effort is the company is going to start selling Echo and Alexa this year in India, which, if successful, will represent the brand being used consistently on a daily basis by consumers. That will keep the brand in the minds of users, which will help it to solidify its position in the market.

Securing permission to sell food in India is a big win, coinciding with its plans to gain share in the grocery business.

Indian food business

Amazon already sells food in India with its Amazon Pantry business, being in a partnership with India-based Cloudtail. It also offers customers same-day delivery for those using the Amazon Now app. At this time, that is in conjunction with Hypercity, Star Bazaar and Big Bazaar.

It hasn’t been communicated yet concerning whether some of the existing partnerships will change now that Amazon can go it alone in the market. I would think the company would retain its better partners while it develops its own offering. If that is how it plays out, the point would be to further entrench its brand in the Indian market before ending relationships with its current partners.

Reuters reported a source aware of the matter asserted Amazon was going to boost another $500 million in the food segment, excluding the $5 billion it has already said it will invest in India.

Conclusion

Amazon is rapidly moving to lay the foundation in India, in order to scale out its business there in conjunction with economic growth and an increase in disposable income.

Why this has so much potential, in my view, is not only does the company have an extraordinary opportunity to take market share away from the smaller, individual retailers, growing by way of gaining market share, but as the Indian economy grows and Indian consumers and businesses have more money to spend, it will increase the pricing power of Amazon over the years.

Over time, it wouldn’t surprise me to see Amazon slowly get out of its partnerships with a number of Indian companies, but I also see it being benefited by them in cases where it needs to increase its fulfillment center infrastructure to match its growth ambitions. Companies in strategic geographic locations would help Amazon accelerate its growth trajectory.

Amazon has quietly managed to put the pieces in place to grow in conjunction with the Indian economy. I think this is going to be a good growth catalyst for many years, as it’s just getting going with the 1.3 billion potential customers in the giant market.

Disclosure: I/we LONG on Amazon