Amazon Spends Big to Crush the Competition

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Amazon Spends Big to Crush the Competition

In November 2013, I introduced you to the “Google of Russia” – internet search firm, Yandex (YNDX).

A few weeks ago, I wrote about the “Apple of China” – mobile provider, Xiaomi.

Today, I’d like you to meet the “Amazon of India.”

Just as Yandex and Xiaomi are outperforming their American competitors overseas, this company is dominating Amazon (AMZN) in the rapidly growing Indian e-commerce market.

Needless to say, a global superpower like Amazon hates this situation.

Especially since two of its former employees are the entrepreneurial geniuses behind this thriving Indian company.

Indeed, Amazon has retaliated by throwing gobs of cash into the Indian market to establish a dominant position of its own.

Here’s why its mission is doomed – and how you can turn a profit  . . .

From Mud Hut to Metropolis

As humble “rags to riches” stories go, it doesn’t get much more transformative than this . . .

Folklore has it that the Indian city of Bangalore was founded in 1537 when its ruler, Kempe Gowda, built a mud fort on the land.

Today, that humble hut has morphed into a thriving metropolis, making Bangalore the third-largest city in India.

But Bangalore has one other accolade that most people don’t know about…

It’s a huge technology hub.

In fact, Bangalore is known as the “Silicon Valley of India” – home to some of the country’s biggest companies.

One of them is e-commerce giant, Flipkart.

Like Bangalore itself, Flipkart had very humble beginnings. While companies like Amazon were ballooning into multi-billion-dollar behemoths, firing packages all over the world, Flipkart Co-Founders, Sachin Bansal and Binny Bansal (no relation), were hand delivering packages to their customers.

Yes . . .  you read that right.

Flipkart’s volumes were so low, its couriers would often refuse to provide service. So Sachin and Binny would hop on motorbikes and deliver packages themselves.

Imagine Amazon CEO Jeff Bezos showing up at your doorstep with the latest season of “Game of Thrones” on DVD.

Not gonna happen.

Today, however, Flipkart has reached a tipping point…

Venture Capital Throws in Another $1 Billion

In its latest round of funding last Tuesday, Flipkart raked in $1 billion from eight separate investors.

Some heavyweight investors, too – including the Government of Singapore Investment Corporation (GIC) and Morgan Stanley Expansion Capital.

In doing so, Flipkart has not only increased its funding and the number of investors involved, it’s also become one of the world’s most valuable venture-backed startups.

Pretty impressive, considering the two Co-Founders were often told to quit their venture and find real jobs.

Today, Sachin Bansal and Binny Bansal are India’s entrepreneurial poster boys. And these two pioneers are helping to revolutionize the emerging Indian e-commerce market.

India’s Booming E-Commerce Market

For a start, consider that as mobile technology expands across India, the number of internet users is projected to hit 300 million by the end of this year – year-over-year growth of 35%.

And as more players jump online, India’s “internet economy” is growing faster than any other nation.

In 2009, for example, India’s e-commerce market was worth roughly $2.5 billion. In 2011, that number jumped to $6.3 billion. And in 2012, it more than doubled to $14 billion.

Aside from the jump in web usage, there are other key drivers behind India’s e-commerce growth:

• Rising living standards and a flourishing middle class with larger disposable incomes.

• The evolution of the online marketplace, led by sites like eBay (EBAY). These outlets also offer lower prices compared to brick-and-mortar retail stores.

• Busier lifestyles and a growing population, which has resulted in more traffic congestion – and driving consumers to do more shopping online.

• Increased broadband connectivity and 3G penetration.

• More usage of online second-hand selling sites.

Breaking it down further, about 75% of India’s e-commerce revenue is travel related – airline and train tickets, hotel bookings, car rentals, etc.

The rest is online retail – an area growing at an estimated compound annual growth rate (CAGR) of 30%. That smashes the average global growth rate of between 8% and 10%.

No wonder, then, that India’s e-commerce market is projected to be worth $24 billion by 2015.

And Flipkart’s business is surging with it . . .

Want Growth? You Got It . . .

In 2013, Flipkart racked up $11 million in sales. But the growth rate is staggering . . .

Just seven months into 2014, the company is on pace to notch $100 million in revenue.

And in 2015, sales are forecast to surge 10-fold, hitting the $1-billion mark, led by its thriving HoN book product line, which accounts for 60% of annual revenue.

But danger lurks . . .

Watching India’s exponential e-commerce growth – and the roaring success of its two ex-employees – from the cozy confines of its Seattle headquarters is Amazon.

And needless to say, it wants a large slice of this growing pie . . .

Amazon Opens Its Check Book

Last week, Jeff Bezos announced that the company will dip into its $8-billion cash hoard by investing $2 billion to expand its presence in India’s wild e-commerce market.

“At current scale and growth rates, India is on track to be our fastest country ever to $1 billion in gross sales. We’ve never seen anything like this,” Bezos declared.

Amazon does have a division in India called Junglee.com, which enables customers to find products from third-party retailers in India. But as it stands, Indian regulations prohibit the company from selling goods directly to Indian consumers. As a result, Amazon will be adding five additional fulfillment centers to help develop its “same-day” delivery services.

The news comes on the heels of Flipkart’s $1-billion investment into expanding its mobile operations.

You see what’s brewing here?

Call it Bezos’ capitalist spirit, or Amazon’s competitive instincts if you want… but in the end, this is a good, old-fashioned game of Family Feud.

As former Amazon software engineers, Flipkart’s Founders knew exactly what they were doing when they targeted the Indian market – and exactly how to do it.

And the crucial advantage is that they started their Amazon-like clone before Amazon got there.

In the tech word, we call that “first-mover advantage.”

As such, they’re way ahead of Amazon already.

Amazon’s reply is typical of a deep-pocketed juggernaut, wanting to crush the competition and maximize shareholder value. Bezos is trying to slap his runaway children by doubling their investment.

But Amazon is well behind the curve here. And it smacks of a scatter-gun approach to appease shareholders, following the failure of the recent Amazon Fire phone, which has seen shares tumble over the last few weeks.

Its high-turnover, low-margin business has many investors questioning its valuation – and I agree . . .  Amazon is highly overvalued.

In fact, I ran the company through the “Cash” metric in my C.H.A.O.S. screener – and it points to a “head for the hills” verdict.

Amazon’s presence in India won’t do much for its eroding bottom line, either. Especially given the Indian regulations I mentioned earlier, plus the fact that it doesn’t have a well-developed “cash on delivery” model that caters to Indian society’s reluctance to use credit cards.

By contrast, Flipkart’s “home-field advantage” means it does incorporate this aspect. The company knows its country’s culture and the needs of its consumers. India has a vibrant cash economy, and 80% of its e-commerce today is cash on delivery.

So while Amazon certainly poses competition for Flipkart, it won’t impact the company’s emergence as India’s e-commerce leader.

If you want to play Amazon’s current share price woes, take a look at the September 2014 $280 put options. Open interest on the contracts jumped by 4,185 on Friday.

Your eyes in the Pipeline,

Marty Biancuzzo

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By Marty Biancuzzo