July 30, 2014, 11:45 AM

Amazon will invest $2 billion in India

Today’s announcement follows yesterday’s news of a $1 billion funding round for Indian e-marketplace Flipkart, and recent online investments in India by Wal-Mart and eBay. Though limited to providing an online sales platform for Indian merchants, Amazon is rapidly adding distribution centers in India.

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Amazon.com Inc. today announced plans to invest $2 billion in India, following a series of major moves by competitors in a large economy where e-commerce still represents a tiny fraction of retail sales.

“After our first year in business, the response from customers and small and medium-sized businesses in India has far surpassed our expectations,” Amazon founder and CEO Jeff Bezos said in a statement. “We see huge potential in the Indian economy and for the growth of e-commerce in India. At current scale and growth rates, India is on track to be our fastest country ever to a billion dollars in gross sales. A big ‘thank you’ to our customers in India—we’ve never seen anything like this."

Amazon is No. 1 in the 2014 Internet Retailer Top 500, and No. 4 in the Asia 500.

Amazon’s announcement comes one day after Indian online marketplace Flipkart disclosed it had raised $1 billion in additional funds. Wal-Mart Stores Inc. and eBay Inc. also have announced investments in e-commerce in India this year.

A big part of Amazon’s investment appears to be earmarked for expanding its distribution network. The company announced earlier this week plans to open five new distribution centers in India, up from two today and one as recently as April. With the new distribution centers, Amazon will have 500,000 square feet of storage capacity, enabling it to deliver goods on behalf of Indian merchants that sell 17 million items on Amazon.in. The new distribution centers will be in Dehli, Chennai, Jaipur, Ahmedabad and Tauru.

Amazon began offering next-day delivery to consumers in major Indian cities in December and guarantees next-day delivery on 300,000 items offered by merchants on Amazon’s Indian e-commerce site. Indian law prohibits foreign companies from selling their own products online directly to Indian consumers, but allows companies like Amazon and eBay to offer online shopping malls that sell Indian products. Amazon fulfills on behalf of participating Indian merchants through its Fulfilled by Amazon service, a program similar to Fulfillment by Amazon in the United States.

The investment announced today seems aimed at strengthening those services to marketplace sellers, says Colin Sebastian, an analyst at investment firm Robert W. Baird & Co. who follows Amazon. “Amazon seems to be pursuing a ‘services’ model in India, similar to the third-party marketplace and FBA model they have in other regions,” Sebastian says. “I assume Amazon’s investments are geared to support this marketplace growth.” He also notes that 500 of Amazon's 10,000 posted job openings are in India.

However, another analyst says she is puzzled by today’s news. “I'm somewhat baffled by the announcement, and not sure what it means, what it is intended to support or why they are targeting an underdeveloped, highly protectionist environment when they have struggled in China and they also have significant challenges in Brazil,” says Sucharita Mulpuru, an e-commerce analyst at Forrester Research Inc. “I think the number is subject to change and I'd suggest it's intended to scare Flipkart and their investors rather than to generate a catalyst for the market.”

India is far behind other major economies in terms of online retail sales. U.S. research firm eMarketer estimates online retail sales in India in 2014 will only amount to $5.30 billion, compared with $217.39 billion in China, $304.15 billion in the U.S. and $17.46 billion in Russia. EMarketer projects India’s online retail sales will grow to $17.52 billion in 2018. Forrester estimates India’s online retail sales will grow from $2 billion in 2013 to $16 billion in 2016.

A report last year by Indian consulting firm Technopak estimates that e-commerce accounted for only 0.1% of retail sales in India in 2012, compared with 5% in the U.S., 6% in China and 13% in the United Kingdom. But Technopak projected steady growth of e-retail sales driven by a young population that’s increasingly going online, and rapid urbanization and more women working driving consumers to the convenience of online shopping. Technopak says the median age of India’s population was 26 in 2012, and will increase only to 29 by 2020.

Other major Western players are positioning themselves to compete in India. In February, eBay announced it has led a $133.8 million funding round for Snapdeal, an Indian online marketplace that competes with Flipkart and Amazon. EBay, which also operates its own marketplace in India, previously had invested $50 million in Snapdeal.

Meanwhile, Wal-Mart, which, like Amazon is prohibited from selling online to consumers in India, announced this year that it would establish an e-commerce site where small merchants could make wholesale purchases. Wal-Mart also announced plans to open 50 more wholesale stores in India over the next five years, in addition to the 20 Best Price Modern Wholesale outlets it currently operates.

Baird analyst Sebastian says Amazon is in a strong position in India. "We believe that Amazon has several advantages as it seeks to gain a stronger foothold in India, most notably a global brand name, top of class web site, access to broad merchandise selection and a strong technology platform," he wrote today in a note to investors. "A key disadvantage is that Amazon (and all foreign entities) are not allowed to sell merchandise directly to India consumers, instead relying on third-party suppliers—similar to the company’s 3P Marketplace model in other regions." He says Amazon collects commissions of 8-15% on sales on its Indian site. That would be similar to the fees it collects in the United States.

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