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Amazon India looks to cut costs, discounts to achieve profit by 2019

LiveMint logoLiveMint 05-09-2017 Mihir Dalal

Bengaluru: The Indian unit of Amazon.com Inc. may soon face the same problem that has dogged Internet start-ups in the country over the past 18 months: how to cut losses without sacrificing sales growth.

Amazon India (Amazon Seller Service Pvt. Ltd), which until recently had been spending freely to win market share, has been quietly trying to reduce losses to reach its target of getting on to a path to profitability by 2019, four people familiar with the matter said on condition of anonymity.

Amazon came up with this cost-cutting initiative called “Get Fit” around the time that chief executive Jeff Bezos committed an additional $3 billion towards expanding the India business in June 2016. This came on top of the $2 billion investment Bezos had announced in July 2014.

The initiative involves cutting packaging costs, introducing more automation in warehouses and delivering products more efficiently. Amazon has also started reducing marketing spending and discounting from 2016 levels, the people cited earlier said, adding that these costs will continue to fall over the next two years.

Get Fit is one of the two biggest initiatives at Amazon India—the other one is called “Get Big”, which is about making the company the largest online retailer in the country, the people said.

A central piece of both the large initiatives at Amazon India is Prime, its annual membership programme that offers customers fast product deliveries, additional discounts, video streaming and other benefits. The firm launched Prime in July 2016 at a 50% discounted annual price of Rs499. Since then, millions of customers have signed up for Prime, which has become a key differentiator for Amazon in its fight with arch-rival Flipkart Ltd, reports have shown.

Prime subscribers spend more than the average customer, they order more frequently, spend less on rival platforms and have higher satisfaction levels, research shows. All of this helps Amazon sell more and bring prices down as economies of scale kick in and it doesn’t have to rely only on discounts to sell products.

Since its launch in June 2013, Amazon India has spent more than $2 billion to rapidly expand in the last big unconquered Internet market in the world. Amazon has been running neck-and-neck with Flipkart for more than a year but at the same time, its unprecedented spending spree has been questioned by analysts.

Amazon India’s loss soared to Rs3,572 crore in the year ended 31 March 2016 from Rs1,724 crore in the previous year. During the same period, Amazon reported revenue of Rs2,275 crore, compared with Rs1,022 crore in the previous year. In 2014-15, Amazon had reported a sixfold jump in sales to Rs1,022 crore even as losses soared to Rs1,723.6 crore.

In the past two quarters, the India business has been specifically called out as one of the biggest loss drivers in Amazon.com Inc.’s international business.

“There’s always been a struggle between Get Fit and Get Big. This being Amazon, the Get Big programme will always tend to have the upper hand,” one of the people cited above said. “When the $3 billion was committed, the US headquarters had sent a clear message to the India team that it has to show the path to profitability within three years. It cannot always be spending unlimited money to win here. But it’s true that if Flipkart starts becoming more aggressive, Amazon will match it.”

Despite the Get Fit initiative, Amazon India may be forced to increase its spending over the next year given that Flipkart has raised nearly $3 billion from investors since April. With the fresh capital, the e-commerce firm is expected to enter new categories such as groceries and expand categories such as furniture and large appliances.

“India is strategic for us and we are committed to invest for long period of time with the vision of transforming how India buys and sells,” an Amazon India spokesperson said in response to questions sent to the company.

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