Amazon gets cold shoulder in India: What does this spell for its future?

Amazon is facing resistance against its India expansion plans.

During founder and CEO Jeff Bezos' recent visit to the country—in which he announced an additional US$1 billion investment in the market (bringing the company's total investment to date to $6.5 billion) with plans to support thousands of local kirana stores and create a million jobs by 2025—he was greeted with protests, ministerial snubbing and an antitrust investigation.

Bezos may have met with Bollywood stars and local entrepreneurs, but prime minister Narendra Modi reportedly refused an audience, and trade minister Piyush Goyal said the company's fresh investment was "not a big favor to the nation", a remark he quickly retracted.

Clarifying his stance, Goyal said while the country welcomes foreign investment, "it should not create unfair competition for small traders and retail businessmen in India." This issue is at the heart of the antitrust investigation involving Amazon and rival Flipkart. India's antitrust regulator is investigating allegations that the two ecommerce giants are illegally undercutting local businesses by giving preferential treatment to certain sellers which they control or have a stake in. Both companies deny the claims.

The Seattle-based company is no stranger to antitrust investigations—it is currently being investigated by the US Department of Justice, the Federal Trade Commission and the European commission over its alleged anti-competitive practices—but India’s is one of the most high-profile probes originating from Asia-Pacific. The retail giant has faced several investigations by Japan’s antitrust watchdog over the past few years—which included a 2016 raid of its Tokyo office—but none as broad and public as India’s.

As with many ‘big tech’ investigations, it comes down to politics, explains Josh Gallagher, chief product officer for APAC at Mediacom.

“The root of the claims stem from issues of predatory pricing, exclusivity deals and preferential treatment to sellers affiliated to the retail giant, which are hitting categories like mobile phones and electronics,” Gallagher says.

“Amazon and other online retailers' increased control of this market is hitting many small and medium businesses across the country who are also facing the ongoing pressures related to demonetisation and GST compliance. Likely a related issue, is that a sizable supporter base of the ruling party are smaller Indian traders who do not benefit from Amazon coming into the market.”

Essentially, Amazon is “adding to the pain of an already slowing economy,” Gallagher surmises. India’s economy grew at its slowest pace in more than six years in the July-to-September period last year, down to 4.5% from 7.0% in 2018. It is expected to have a GDP growth rate of 5% for the financial year ending on March 31. Economic downturns put pressure on politicians to find solutions, with big tech the easiest, most obvious villain.

Ashish Bhasin, APAC CEO at Dentsu Aegis Network, explains: “The government is encouraging to foreign investment but it also recognises that there is a pot of gold for which foreign investors are coming. Even at the worst year for GDP growth we are still growing at 5%, so disposable incomes are rising and are predicted to keep rising. Therefore consumer spending will continue to rise. Over the next five to 10 years there is huge headroom for growth within the ecommerce sector, and the government recognises that these players are not coming for the welfare of India, so it wants things to be done in a fair manner and on its own terms.”

India is also uniquely dominated by ‘unorganised retail’—mom-and-pop stores, locally called kirana shops, that are threatened by the growth of the ‘organised’ sector, which ecommerce falls under. The latter currently represents just 12% of the country’s total retail market, but is expected to grow its share to between 22% and 25% by 2021, according to a Deloitte report.

“There are millions of kirana stores in India and they employ millions of people, directly and indirectly, so the social impact of that has to be managed,” Bhasin explains. Kirana stores are becoming key to the ecommerce battle in India—something we will discuss in more detail in an upcoming article.

Another factor that explains India’s cold reception to Amazon is its digital sophistication. The Indian government has built the country into a strong tech hub, launching a government-mandated programme called Digital India four years ago to improve the country’s online infrastructure and increase its internet connectivity. It has now begun taking learnings from this programme to other countries. Along the way, it has been a leading voice at calling for greater oversight and regulation of the online world, to protect the digital economy it has grown.

“While our level of development may not be that high in many other areas, in the digital regulation area we are pretty evolved—for example, we're also in the process of coming up with our own data privacy laws similar to Europe’s GDPR,” says Bhasin.

The regulatory environment, and heavy dominance of the ‘unorganised’ retail sector, has the potential to slow down the uptake of ecommerce in the market, but there’s a big prize for those that persevere. 

“You have to have much more patience in this market than you might have to have in China, for example,” explains Bhasin. “India is like an elephant, when it moves it moves slowly but nothing can stop it from moving. It is a tough, value-conscious market, but if you get it right, there is a big pot of gold to be won.”

India is home to the second largest internet user base in the world after China, and still has huge headroom for growth—internet penetration currently stands at 475 million, equivalent to about 40% of the population, and is expected to increase to 627 million by 2020. In parallel, the cost of smartphones and data has been rapidly reducing over the past few years—two factors that will be critical in converting shoppers to ecommerce.

“This is a country, like many in the developing world, where a change in behaviour to ecommerce has significant benefit for consumers. Ecommerce can offer convenience, value but more importantly access to services and products that were previously difficult to obtain. And it is happening at scale,” says Gallagher.

Ultimately, both Bhasin and Gallagher believe the value and convenience promised by ecommerce giants like Amazon will outshine their potential risks to the ‘unorganised’ economy. And it is consumers that have the voting power, in the end.

“I don’t think it really matters to the consumer whether they are buying from a local or global firm, frankly today it is hard to find out the difference because so many Indian firms have foreign investment. What is most important to the consumer is convenience. If you look at FMCG companies, the ones who have the best distribution are the ones who have done well. Unilever has been a leader for 100 years because they have the deepest distribution among any company,” says Bhasin.

“Today, ecommerce allows you to distribute in a relatively short period of time, so getting the logistics right will be key, but this is challenging in India. Fortunately because of GST the taxation has been simplified, so as these obstacles and bottlenecks go, and logistics get better and better, the potential for growth is huge.”

Gallagher agrees: “In the current environment, consumers will ultimately vote for convenience and more importantly better value pricing over supporting local businesses.”

And here's an extra little nugget for you, on the potential role that India's national railway system played in driving the growth of ecommerce in the country:

Bhasin:

When I look back philosophically I think India Railways was one of the triggers that familiarised consumers with ecommerce. They were one of the first significant organisations that set up online purchases of railway tickets, and almost every Indian travels this way.