Hi everybody, Reliance and Amazon have officially entered into one of the biggest business wars in Indian history. We are looking at two of the most powerful companies locking horns to capture the 200 billion dollars Indian e-commerce market. While on one side, We’ve got Amazon a trillion-dollar company, with a stellar record of destroying its competition in every sector and every country. On the other side, we have the mighty Reliance, which is by far the most powerful company in India, with a reputation for Disruption. – And we all saw that with the Jio Revolution – that redefined India forever.
And now that both these giants are going to be fighting the billion-dollar business war in India. The obvious question is: What exactly is their strategy? How are they planning to destroy their competition And, most importantly, as students of business? What are the business lessons that we need to learn from this iconic business war?
The story of Amazon’s dominance in India started way back in 2013 and, as we saw in the previous episode, they are creating a very, very powerful ecosystem. Using the sun cost strategy of Amazon Prime Video. And because of their 60+ Warehouses, spread across 15 states. Amazon has the highest penetration in India, along with Flipkart, which enables it to deliver products with up to 15000 PIN codes. And these PIN codes include all types of cities, starting from tier 1 cities to tier 4 cities. In addition to that, Amazon has a huge amount of data about what each customer wants and what they don’t want. Apart from that, they’ve also got the best customer support in the world. So now the question is: Amazon has spent eight long years mastering this art of e-commerce in India to build a robust supply chain and customer loyalty.
2. Reliance vs Amazon - Resources
How is Reliance even planning to compete with Amazon in the first place? The answer to that lies in the most important asset of any e-commerce company, and that is the supply chain. Now, if you compare the supply chain of both these companies, while Amazon has around 60 giant warehouses in 15 states, Reliance has more than 12000 micro warehouses in 7000 Cities spread all across the country, and these warehouses exist in the form of Reliance retail stores. Now this distribution chain, ladies and gentlemen, gives Reliance three incredible superpowers over Amazon. Amazon can give you a one-day delivery. Reliance can give you a two-hour delivery. For example-. Both Reliance and Amazon have data that says that Chitale, Bakarwadi, or Sparx sandals sell very well in Pune. But Amazon can bring it only up to the nearest warehouse that is hundreds of kilometers away from your house. Reliance can bring it to your closest reliance store, which is just a few kilometers away. Because of this, it can give you a two-hour delivery, whereas Amazon will take at least a day or two to come. And, of course, the products that are not available in the Reliance retail store. They will take a day or two to come, which is the same as Prime delivery.
3. Reliance has an edge over Amazon in India
Secondly, because of the data accuracy, Reliance has been able to build such a robust supply chain that, while Amazon e-commerce marketplaces reported a loss of 5849 crores Reliance, Retail has been extremely profitable. With 9842 crores in profit and not just that, they also had a footfall of 640 million in their Reliance retail store. And thirdly, because of these two factors, there is a very big disadvantage that Amazon has over Reliance, and that is customer returns because this is what Amazon returns look like-. I'm scared to think about how much stuff is going back to landfills because it’s just endless amounts of this stuff. Everyday. Returns are the largest challenge to e-commerce, for both retailers and manufacturers. So slightly more than a hundred billion dollars in returns. In e-commerce, its twenty or thirty percent get returned. Seventy-Nine percent of consumers want free returns. Shipping. Five billion pounds of waste gets thrown away as a result of these returns that can’t be resold. So long story short, the point to be noted in this sequence is that More than seventy percent of the customers look for the return policy, which makes it an essential feature of any e-commerce platform.
4. Reverse Supply Chain or Return Shipment
If you ask your customers to pay for the return shipment, there is no way you’re going to retain them. Therefore, the seller has to pay for the return shipment. And lastly, because a large chunk of the Amazon products is sold by Amazon itself. It comes at an exorbitant cost, with 100 billion dollars worth of returns in America alone. So practically the reverse supply chain of the return shipment is a billion-dollar loss venture for Amazon, but not so much for Reliance. The question is: why is this only a loss venture for Amazon and not for Reliance? Well, that is because here’s what the reverse supply chain of a conventional e-commerce return shipment looks like-. When you place a return order, it first gets picked up by delivery. Boy. Then it gets transported to the hub. Over there. It gets packed and then it is either sent to a local warehouse or back to the seller.
Over there, It sits in the inventory either to be destroyed or until someone else places the order. This means a total waste of transportation, labor, and packaging for both delivery to the customer and back to the warehouse. And this is not applicable for Reliance because, as far as Reliance is concerned, the delivery boy from the Reliance store could just collect it and keep it At the nearest Reliance store. And because the Is so close by most of the products wouldn’t even need to be packed, saving them tons of packaging material, millions of dollars in packaging costs, and millions of dollars in the labor that is needed for packaging.
5. Selling Returned Inventory At a Discount, an advantage for Reliance
On top of that, after the product goes to the store, if it is faulty, it would go back to the seller or it would be thrown away. But if it is fairly usable, it could either end up back online or it could be featured in something called the refurbished section at the Reliance retail store, such that all these return products could be available at a discount for the customers who are visiting the Store. And these products could be made available at a dirt-cheap price.
In business terms, It’s called the throwaway price, which is a prising that is specifically meant to move the product out of the inventory during the return shipment process. And you know what I also see a possibility where Reliance will tell you that, if you shop for 500 Rupees at the store, you can access the refurbished section wherein you can get JBL speakers and clothes at a 50 % discount. And this is attractive enough to get people to spend more, which will rapidly move out Inventory. This is the superpower of integrating a high-traffic online platform with a high-traffic offline platform like the brick and the mortar store. But fortunately, or unfortunately, this luxury is available only for Reliance and not for Amazon. Now, this begs the question: When a billion-dollar company like Reliance, can build 12000+ brick-and-mortar stores. Why can’t a trillion-dollar company like Amazon? Do it? I mean they’ve got so much cash to burn. They could just build one Amazon retail store right next to every Reliance retail store right. Well, not really. This is what brings me to the third segment of the episode, and that is government regulation. And, as it turns out from 2018 onwards, the government regulations on foreign direct investments have become more and more strict. And now international companies are not allowed to own more than 51 % of the local brick-and-mortar supermarket chains.
Therefore, it is extremely difficult for Amazon to build a supply chain as big or as profitable as Reliance. Apart from that, one of the most profitable wings of Amazon is on the verge of being destroyed. And if this happens, there is also a possibility that Amazon might be forced to quit the Indian markets.
6. Inventory Model of Amazon over Marketplace Model
If you look at Amazon’s operations in India, they operate with two models. The first is a Marketplace model and the second is the Inventory model. The Marketplace model is a model wherein there are independent buyers and independent sellers and Amazon merely acts as a platform to connect. The buyers from the sellers, whereas in the Inventory model Amazon, is going to place a bulk order with the seller, eventually having the bargaining advantage to place the order at a dirt-cheap price, and then Amazon will markup the price and then sell it to the consumers. By keeping the inventory to itself, For example, if a bookseller makes a book at 150 rupees and sells it on the e-commerce site at 450 rupees. In this case, if the e-commerce company acts as a platform, it will generate a revenue of 112-150 Rupees. But this includes the packaging cost and the transportation cost for national delivery, which eventually reduces the scope for commissions. But if the e-commerce company operates with the inventory model, the platform will buy 10000 books from the bookseller at once and will use its bargaining power of a bulk order to buy the book at just 200 rupees per piece. After that, all these books will be kept in the warehouse and then they will be listed on the e-commerce site at 450 Rupees. So if you see this gives them 250 rupees in revenue as compared to 150 rupees in the previous case. Now, although this includes the inventory cost, it gives them a wider scope of profit. In this case, is the 100 rupees, wherein there is a scope of profit for the e-commerce site. Now, when it comes to books, it’s just 100 Rupees. But when it comes to products that cost 10,000 and 20,000 Rupees the difference in revenue that can be generated between both these models skyrockets by a billion dollars. Therefore, the inventory model is a billion dollars more profitable. For Amazon as compared to a Marketplace model. This is the reason why Amazon entered into a strategic partnership to establish giant sellers like Cloudtail in 2014 and apparel Retail in 2017. And using these sellers Amazon has deployed the inventory model to generate a major chunk of its Revenue. And according to a Reuters investigation report in 2016, Cloudtail's share of sales on Amazon was around 47 % of the total Amazon sales.
7. FDI Rules of Government of India, Disadvantage for Amazon
But that month Amazon got some bad news because the Indian government announced new foreign investment rules wherein it capped the online marketplace. Sales from a single seller at 25 % of the total sales, because of which they had to bring down Cloudtail’s share of sales on the Amazon platform to less than 25 %. Now, from here onwards, there is certain sensitive information that I cannot directly convey to you. While the government of India allows 100 % foreign direct investment in the Marketplace model of e-commerce, it has not allowed FDI in the Inventory driven models of e-commerce. And the competition commission of India has also placed strict restrictions on Amazon selling its products in the form Of Amazon Basics. Therefore, three of the potentially most profitable channels of Amazon have been restricted to a large extent. So as of now on the outside, it seems as though Amazon cannot match the number of brick-and-mortar stores as Reliance. Amazon cannot use the Inventory model as they planned. And lastly, they cannot sell their products as much as they planned. This is the state of the biggest business war in Indian history.
8. Major Factors Affecting an E-Commerce Company
Seven major variables will determine the success or the failure of any e-commerce company. From the consumer standpoint variable cost, delivery, and variety. And from the business standpoint, the three variables are customer retention, supply chain, and profits. And lastly, the most crucial variable of all is nothing but government regulations. So as students of business, you need to keep an eye on these seven variables, because ultimately, this is going to be the scorecard of this billion-dollar retail War. Just like Reliance even Tata and DMart, have a huge advantage over Amazon and Flipkart because they Are Indian companies. So keep an eye on their retail ventures, because they’ve got some powerful strategies that can again lead to a retail disruption.
Thank you so much for reading.