India is the world's fastest-growing e-commerce market, according to Forrester Research. The study estimates that India's e-commerce market could grow at an annual pace of over 31% over the next five years, hitting $64 billion in revenue by 2021. Not surprisingly, Amazon (NASDAQ: AMZN) has been aggressively pursuing this opportunity by moving into new categories, having already poured over $2 billion into this market.
But Amazon has run into stiff competition from domestic e-commerce company Flipkart, which has charted out a smart strategy to keep its growth on track despite the American giant's massive investment.
Image source: Amazon.
Flipkart is punching above its weight
Flipkart's total funding is way lower than Amazon's huge cash pile. The Indian e-commerce giant has raised a total of $7 billion over the past decade, including the recent $2.5 billion infusions by SoftBank . By comparison, Amazon is on track to invest $5 billion to make a dent in the Indian e-commerce industry.
But CEO Jeff Bezos has made it clear that the company will keep pumping more money into this market to keep pace with rivals such as Flipkart. This isn't surprising, as Flipkart's recent funding round could help it take the fight to Amazon and sustain the recent market-share gains.
For instance, Flipkart's June sales in India outpaced Amazon's turnover in the region by over 8%. Furthermore, Flipkart believes that it can accelerate its sales by 60% in the current financial year after recording around 40% growth in the previous one.
The secret sauce to Flipkart's success is the company's focus on boosting its network in Tier 2 and Tier 3 cities in the country. Last year, 65% of its new customers hailed from such cities. The trend could continue this year as the company has already added 50 new delivery hubs while servicing an additional 1,000 zip codes across India, most of which are in Tier 2 and Tier 3 cities.
This is a shrewd strategy given that 70% of the Indian population still resides in the secondary cities. Additionally, Flipkart has made a smart move by aggressively targeting the fastest-growing product line in these cities -- smartphones.
In fact, smartphone sales in India's Tier 2 and Tier 3 cities outpace the metros, according to an IDC survey. Therefore, Flipkart has been aggressively partnering with popular smartphone brands to improve product selection. Not surprisingly, smartphones account for around 60% of Flipkart's sales in certain months. Looking ahead, the category should continue to be a catalyst for Flipkart, as India's smartphone sales could double by 2020 as per Euromonitor International.
Amazon's strategy is delivering results, as well
Unlike Flipkart, Amazon has kept a balance between different product categories as it aspires to become the e-commerce platform of choice for Indian customers. The company has a more diversified sales mix, thanks to its focus on categories such as groceries, books, and other electronic items.
Additionally, Amazon has been trying to entice more customers into its fold through the Prime service, offering movies and shows through Prime Video at a very nominal rate. The strategy has reaped rich results for the American e-commerce company so far, with sales growing 85% during the first quarter of 2017, and Prime members accounting for a third of orders. Furthermore, the video platform has doubled the pace of Prime subscription growth, which will eventually bring more sales for Amazon.
Such moves helped Amazon command 44.6% of India's e-commerce market at the end of the first quarter of 2017 as compared to Flipkart's 35.7%, as per research firm KalaGato. This isn't surprising as Amazon has built a terrific network in India in a very short time, and has aggressively focused on bringing new services to the market.
In just four years, Amazon has covered 97% of India's zip codes and offers over 100 million products across a wide range of categories. Looking ahead, the company plans to move deeper into the lives of Indian consumers by introducing the Alexa Voice Service and Echo speakers. Additionally, Amazon is trying to succeed in areas where rival Flipkart has failed, such as groceries.
Estimates suggest that online grocery retailing in India could hit $25 billion in revenue by 2025, which is why Amazon has expanded its Amazon Pantry concept to almost 30 cities by now after a successful pilot in just one city last year. It's also rumored that Amazon could open physical grocery locations in the country, which will help it move closer to the consumer, and play a critical role in tapping the huge opportunity present in this space.
By comparison, Flipkart's first foray into selling groceries was a dud. It had to shut down the service within six months of launch due to supply chain issues, though it has now decided to get into this market once again. The company is currently testing grocery sales in the city of Bengaluru, with plans to expand into more cities, but Amazon is already ahead in this race.
The Foolish takeaway
It's evident that Amazon is following a more holistic approach to target the Indian e-commerce market. This could give it an advantage over Flipkart in the long run, which is mainly counting on smartphones for growth at present and handing Amazon the lead in lucrative segments such as groceries.
Additionally, Amazon can connect with the customer more efficiently given its ancillary services such as Prime and Alexa. Therefore, it won't be surprising if Amazon eventually overtakes Flipkart and dominates the Indian e-commerce market in the long run.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy .