The Pros and Cons of Amazon’s and Walmart- Flipkart Long Game in Indian eCommerce

The Race to the Bottom and the Game of Attrition in the Indian eCommerce Sector

Much like the broader Indian Economy, which at the moment is the fastest growing major economy in the world, the Indian eCommerce sector is on a roll.

While initially, Flipkart and a few other eCommerce firms ruled the roost, the entry of Amazon a decade ago was the game changer as far as FDI or Foreign Direct Investment into the Indian Economy and the eCommerce sector was concerned.

With its deep pockets and premium brand equity and burnished by its global reputation, Amazon, triggered the massive discounting and price wars which are now the hallmark of the Indian eCommerce sector.

Not to be left behind, the other eCommerce firms followed suit leading to a “game of attrition” and a “race to the bottom” in this sector.

While the reasoning behind such discounts and price wars is that it is ostensibly for the purpose of acquiring customers in the hope that once they sign up and become a loyal and dedicated consumer segment that would then be able to absorb the inevitable “reality based pricing”, there are some experts who believe that this situation of massive discounts ranging up to 80% is untenable in the longer term.

Marketing Theory and the Long Game

However, as marketing theory states, the cost of acquiring new customers is double the cost of retaining them and a returning customer is more valuable when such costs are calculated. Indeed, this is the logic behind both Amazon’s and Walmart which acquired Flipkart recently as they battle for market share in the world’s fastest growing eCommerce sector.

On the other hand, basic financial theory states that sooner or later, the cash flows and the profitability matter and despite record revenues, neither Amazon nor Flipkart seem to be able to translate them to healthy revenues.

Indeed, the present situation is being encouraged by Jeff Bezos’s dream of making Amazon the world’s largest one stop store both in the virtual as well as the physical spaces.

Further, as far as Flipkart and other Unicorns (those startups that are valued at more than a Billion Dollars) are concerned, they are afloat mainly due to the periodical pumping of money by global investors who are themselves sitting on humungous funds to invest, thanks to the prevailing and previous easy money regimes and policies of the world’s central banks.

Consumer Behavior and When the Music Stops

Thus, given these aspects, it can be said that once the music stops and the money runs out, the Indian eCommerce sector might be in for a rude awakening.

What lends credence to this view is that both Amazon and Flipkart are not single brand retailers meaning that they stock multiple brands on their portals and warehouses and hence, customer loyalty can be fickle especially when these firms start to price their products at true value instead of “throwing money and virtually subsidizing the consumers”.

Indeed, marketing experts believe that both Amazon and Walmart need to follow the same business model that they the latter has perfected in the United States wherein it allows for massive discounting due to its sheer size and power in almost coercing suppliers as well as cutting staff costs.

Of course, this is something that has not been attempted so far in the virtual world since there is much difference between the physical and the virtual and therefore, the discounting strategy is as good as anybody’s guess about where it is headed. The answer to this as the title indicates is that both Amazon and Flipkart and by extension, Walmart are Playing the Long Game in India.

Will Amazon and Walmart Do in India what Alibaba did in China?

This longer term game is indeed worth the risk since the Indian eCommerce sector is still nascent and growing both in absolute as well as real terms.

Indeed, given the fact that Alibaba in China which was the brainchild of legendary businessperson, Jack Ma, catapulted itself as one of the world’s leading eCommerce firms, primarily due to its ability to stay the course, there are some pros of this strategy that is now being replicated in India.

Moreover, if and when the Indian government allows FDI in Multi-Brand Retail in the Physical Domain, both Amazon and Walmart (and especially the latter) can benefit from synergies between their online and physical stores.

Already both have an extensive warehouse network which can prove to be an asset (both in real and notional terms). In addition, with the introduction of GST or the Goods and Services Tax, there is now the possibility of a genuine Pan India market forming and this is where the logistics aspect of these firms can benefit.

With logistics being the backbone of the eCommerce sector, it is a safe bet that both Amazon and Walmart would be trying to actualize efficiencies from simplification topping the synergies mentioned earlier and wrapping it up with the economies of scale.

Bezos’s Bet, Walton’s Waltz

Therefore, there are both pros and cons of the Long Game and it remains to be seen as to the trajectory that these firms take in the next few years.

Another key point to note is that these firms have Indian-zed themselves to a large extent following the Glocalization strategy that is recommended by marketing experts in the emerging economies.

This is yet another reason for them to believe that if they “stay the course”; they would be able to reap rich dividends. To conclude, Bezos’s Bet and Walton’s Waltz need to be keenly watched.