Bengaluru: India’s top e-commerce firms, Flipkart and Amazon India, are adopting divergent strategies to increase sales, reversing the roles each company has played so far in the country’s $14-15 billion online retail market.
Rather than spending cash and effort on increasing the absolute number of online shoppers, Flipkart is instead trying to sell more products in untapped categories to its existing users. Amazon, on the other hand, will lead the expansion of the e-commerce market as it adds all kinds of products and maintains its high levels of advertising spending, which is aimed partly at attracting new users.
Currently, online penetration—the percentage of shoppers who have bought a product online at least once—is highest in books, smartphones and electronics. The online reach of most other categories such as fashion and furniture is still abysmally low.
“The biggest lever of growth over the next couple of years will be: increasing the online penetration in the other categories (fashion, furniture, large appliances and groceries). And online penetration increases when you reach a certain tipping point where like in mobiles, you’re able to deliver quality products at a very different price point—some 20% to 40% lower than what you get offline,” Flipkart chief operating officer Nitin Seth said in an interview.
Spending by new users helped increase Amazon India’s unit sales by 124% in calendar year 2016, compared with the previous year, an Amazon India spokesperson said in an email.
“That (growth) came from a mix of increased share of wallet for existing customers as well as continually bringing in new customers. New customer acquisition grew by 60% in 2016 and over 65% of our active customer base in 2016 was new users we acquired, driven by growth from Tier 2 and Tier 3 cities. The trends we see is in line with the changing internet demographic, with these pockets powering internet user growth,” the spokesperson said.
Amazon is now by far the biggest spender on advertising among e-commerce firms.
“With our investments in mass marketing and new experiences, we are focused on building new/incremental reach,” the Amazon spokesperson said.
Until 2016, Flipkart, which started out in 2007, had led the expansion of the e-commerce market in India, spending hundreds of crores of rupees on discounts, advertising and logistics. Amazon entered India in June 2013 and applied its renowned technology and retail expertise to capitalize on the market that Flipkart had built by offering even higher discounts, a wider product assortment and faster deliveries.
The reversal of roles is driven partly by investor pressure on Flipkart, which has raised over $3.2 billion and is in talks to raise as much as $1.5 billion more, to return cash to investors via a public listing.
Since the beginning of 2016, Flipkart has slashed spending on advertising, among other things. The online retailer has identified high-value items such as mobile phones, large appliances and furniture as its most important products, while it is trying to lower the cost of delivering low-value products such as fashion and groceries.
Simply put, for a firm whose overarching objective now is to generate investor returns by going public, the stakes are too high for Flipkart to increase its losses by spending on bringing new shoppers online when existing users can be tapped in a far less cash-intensive manner.
Amazon, on the other hand, is eager to sell all kinds of products to customers, including books and groceries. “We aim to be the ‘everything’ store—where customers can find any and all products that they are looking for. Whether they are watching a movie, buying a mobile phone, their groceries, sports equipment or even something for their pets—they come and shop on our marketplace,” the Amazon India spokesperson said.
Another factor driving the shift in Flipkart’s strategy is the slowdown in the growth of the e-commerce market last year. Defying expectations of an unabated expansion for several years, India’s online market barely grew last year. Most of Amazon’s gains in 2016 came at the expense of Snapdeal and some from Flipkart, rather than from an expanding market. Investors and firms alike are belatedly rethinking their estimates of Indians’ spending power.
In the next fiscal year, Flipkart expects the e-commerce market to increase by 40-50% and the company has said its sales may jump by 50-60%, indicating it will gain market share from Amazon. Like Amazon, Flipkart too is targeting the so-called Middle India, but most of it’s efforts will be aimed at existing users over the next two years.
“In August-September we went through a bottoms-up strategy exercise where we looked at the market very deeply, both from a customer perspective and from a category perspective. The insights from there were validated by a lot of the intuition that Kalyan (Flipkart CEO Kalyan Krishnamurthy) brought. By November or so, a lot of this focus around increasing penetration and increasing our units and transaction per customer, deepening penetration in each of the categories, category-specific strategies became clear and over the last five months that’s reflected very clearly in our strategy, in the market moves we are making and also the various product capabilities that we are looking to build,” Seth said.