Why is Amazon pumping money into India and other stories

Business strategist Rajesh Srivastava analyses some of the news that dominated headlines in February 2016: Alphabet vs. Apple, Amazon’s push in India and the entry of godmen in business

Rajesh Srivastava

[Image credits - Jeff Bezos by Steve Jurvetson under CC-2.0, Google Food by brionv under CC-By-SA and Lemon basil by Seksak Kerdkanno under CC-0 (cropped from original)]

Business strategist Rajesh Srivastava analyses some of the news that dominated headlines in February 2016: 

1. Will Amazon continue to invest in India?

2. Will Alphabet permanently displace Apple to become the world’s most valuable company?

3. Godmen are invading the FMCG market

 


1. Will Amazon continue to invest in India?

Since late December, Amazon has invested Rs 3,676 crore in the Indian market. Why is it investing so much? And will the investment continue? I think so and here’s why:

Amazon has already lost the battle in China. Alibaba, the local competitor, is so well entrenched that Amazon could barely manage to garner a lowly single-digit market share in the large Chinese e-commerce market.

China is poised to overtake the US to become the world’s largest economy by 2031, according to a study from the UK-based Centre for Economics and Business Research. India will become the third largest economy by then. A weak presence in this market is not good news for Amazon, which aspires to dominate the global e-commerce market.

What makes India the next battleground

Let us shift our discussion to India. In 2013, when Amazon finally entered India, local competition spearheaded by Flipkart and Snapdeal was well entrenched. Both these companies enjoyed top-of-mind recall among customers. (Ironically, Flipkart’s co-founders Sachin Bansal and Binny Bansal are ex-Amazon employees.) It seemed that the China story would repeat in India too—a prognosis that was unacceptable to Amazon’s founder and CEO Jeff Bezos. He saw India’s huge potential:

  • Large and growing population: India has over 1.25 billion people; in the next decade it is likely to overtake China and become the world’s most populous nation.
  • Large and rapidly growing market size: The Boston Consulting Group (BCG) estimated the size of the Indian e-commerce market at $16-17 billion in 2014; it is projected to touch $60-70 billion by 2019.
  • Growth of Indian economy: The International Monetary Fund estimates that the Indian economy will record a growth of 7.5% for 2015 and, more importantly, is poised to repeat its performance in 2016. This growth has to be viewed in the context of the anaemic growth in the rest of the world. No wonder India has been dubbed the “last BRIC standing”.
  • Young demography: The mean age in India is 27 years, making it one of the youngest nations in the world. It is a full 10 years younger than the US. Young people display more propensities to spend.
  • Ever improving connectivity: India has the second largest online population in the world, estimated to be 400 million plus. Of these, 280 million have access to the internet through mobile phones, laptops or desktops on a daily basis. Demand for smartphones will rise as their prices drop, connecting more young people to the internet.

The Indian government too is playing a critical role in making India an attractive destination for investments:

  • Make in India: This initiative is geared to attract investment into India. As investments flow in, they will create more jobs. The increased prosperity will lead to increase in disposable income.
  • The push for goods and services tax (GST): This will ensure that India becomes one homogenous country when it comes to the movement of goods and services—a critical requirement for e-commerce companies.
  • Building infrastructure—rail, roads, ports, airports.
  • Digital India: This initiative seeks to ensure internet connectivity reaches the remotest corners of India. As a result, e-commerce companies will have a channel to communicate with the people here.
  • Financial inclusion: The Prime Minister’s Jan Dhan Yojna seeks to ensure financial inclusion into the banking system, so that government subsidies reach the people directly, leading to a rise in prosperity and discretionary income.

These facts have not gone unnoticed by Jeff Bezos. In 2014, he promised to invest $2 billion to build the Indian market. Was this just a pronouncement or has money started flowing into India?

In the last couple of months Amazon has pumped in Rs 3,676 crore into India which is being deployed into four large areas: offering deep discounts to counter local competitors; advertising extensively to create awareness about the product and discount offering; logistics to ensure prompt fulfilment of the orders; and of course, technology to ensure that customers get an awesome experience when engaging with the brand.

How have the local boys reacted?

Sensing Amazon’s mood, Flipkart and Snapdeal have raised funds of  $700 million (July 2015) and $500 million (August 2015), respectively, to ensure they can match Amazon’s spending firepower.

Who are funding the local players? Existing investors and Alibaba.

Alibaba has already invested in Snapdeal and Paytm. It is exploring the possibility of investing in Flipkart and increasing its stake in Snapdeal.

What is holding Alibaba back? High valuation. Flipkart has been valued at $15 billion and Snapdeal at $4.8 billion. If these companies give a steep discount to Alibaba, the deal will go through. If and when that happens, the $17 billion cash sitting on Alibaba’s balance sheet could well find its way into the Indian market to fight a common enemy—Amazon.

If and when that happens, the battle promises to become meaner and bloodier.

Amazon’s game plan

Before that happens, Amazon wants to gain a strong foothold in India by investing in building infrastructure to fulfil orders and leveraging technology to deliver an enjoyable experience to its customer, thus becoming a trustworthy partner of Indian customers.

So, as Fortune reported, the question being asked inside Amazon is not, “When will we make money?” but “Are we investing enough?” because the leadership in Amazon believes that “the opportunity will be measured in trillions, not billions—trillions of dollars, this is, not rupees.” 

As long as such questions are being asked inside Amazon, it will keep investing in the Indian market. After all, it does not wish the Chinese nightmare to play out in India too.

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2. Will Alphabet permanently displace Apple to become the world’s most valuable company?

On February 1  Wall Street dethroned the reigning king, Apple, and coronated the new king, Alphabet (Google’s parent company), as the world’s most valuable publically-traded company. This coronation came about when Alphabet’s market capitalization topped $565 billion, while Apple’s trailed at $539 billion. With this, Alphabet became just the 12th company to take the title of S&P 500’s of most valuable company in the history of the index.

Though Apple regained the crown just three days later on February 4, when Alphabet’s share price declined, and its market capitalization dipped below $500 billion, its brief resurgence shows that it is a strong challenger.

What catapulted Alphabet forward?

In 2015, Google reorganized its business into a holding company—Alphabet—that has under its umbrella a collection of companies. This separates Google, the cash cow, from the other bets, internally called “moonshot” projects. Google has search, YouTube and other related businesses under its fold.  The moonshots include Fiber (high-speed internet), Nest (interconnected devices for homes), Life Sciences (glucose-sensing contact lens), Google X (self-driving cars, Google Glass, internet balloons), Calico (longevity), and of course Google Venture (the venture capital arm) and Google Capital (the investment arm that focuses on late-stage growth companies).

Through this reorganization, Alphabet has de-risked its business—failure of one company will not fatally impact other companies. For example, in the earlier scenario, if Google’s driverless car was hacked and caused it to run amok, the fallout had the potential to bring down the whole company. Now with driverless cars under Google X, the damage will be restricted to Google X.

After setting up Alphabet, the company decided to go in for additional financial disclosure, which resulted in greater transparency. Result: Wall Street got a good view into how individual companies are performing.

And what did it observe?

Google, the cash cow, is in robust financial health. Revenue rose 14%, while operating income rose 23%.

Other bets (the moonshot projects), which have a longer gestation period, are indeed losing money, as the disclosure clearly indicated, but they seem to hold a promise of transforming into blockbuster businesses in the years to come, provided they are nurtured and funded prudently. If and when that happens, it is sure to propel Alphabet into becoming the world’s first trillion-dollar company.

Ruth Porat’s appointment as chief financial officer (CFO) in May last year seems to be having a positive impact on the functioning of the company, more specifically, in the areas of financial discipline, control and capital allocation.

Porat, who was the CFO of Morgan Stanley before joining Alphabet, had a ringside view of the reasons and circumstances that led to the 2008 financial meltdown. She led the Morgan Stanley team that advised the US treasury department on restructuring housing lenders Fannie Mae and Freddie Mac and noticed that the lack of internal controls, systems and processed sowed the seeds of destruction for these companies. Hence, at Alphabet, she introduced stronger internal controls, systems and processes to ensure that the management has a good view into every aspect of business. This visibility will ensure that there are no unpleasant surprises.

Along with this, Porat took steps to rein in expenses while ensuring that Alphabet’s economies of scale (from computing power, talent pool, capital on its balance sheet) percolates to every business unit depending on its unique requirement.

So, while the company took some tough calls to reduce investment in less promising areas (the capital expenditure for the whole company dropped to $2.1 billion in the fourth quarter against $3.5 billion a year earlier), in the 2016 budgeting process, it focused on long-term capital allocation for the company’s collection of businesses. In a conference call with analysts on February 1, Porat reassured that Alphabet will continue to invest in the moonshot projects and in ongoing steady businesses.

It seems she is inspired by Peter Drucker’s maxim “Feed your strength and strangle your weakness” while allocating capital.

Why Apple needs to watch its back

Let’s move to Apple. Though it has regained its position as the most valuable company, it can’t rest on its laurels. Although its revenue and profit are 3x Alphabet’s, Wall Street gives more weightage to the future prospects of the company than to its past.

Apple’s product portfolio is ageing. Its last blockbuster product, iPhone (launched in 2007), is showing signs of slowing down. No new launches have shown promise of taking over the baton from iPhone. Though Apple Watch (launched 2015) did well, it did not match up to the precedent set by the success of previous Apple launches.

Other offerings from Apple in recent times too have not set the market on fire. At best they seem to be improved versions of existing products. Apple Pay (launched in 2014) is competing with Pay Pal and Android Pay. Apple Music (introduced 2015) is competing with music streaming companies like Spotify. Neither of these launches qualify as transformational products.

New product launches in the post-Steve Jobs era do not seem to be enhancing Apple’s reputation as an innovative company, fuelling speculation that the spirit of innovation seems to have died with Jobs.

Apple continues to be secretive about all aspects of its business. It has built opaque walls around its business that ensure that outsiders do not get a view into what’s happening inside. Result: A booming rumour and speculation market for what Apple is doing.

Unfortunately for Apple, what was visible to the outside world in the last few months, did not seem to inspire Wall Street’s confidence, at least in the short run.

Apple’s management, while pursuing its secretive strategy, wishes Wall Street to believe in it, that it is taking the right decisions. But for Wall Street to give it a thumb’s up, it will not rely on reassurances, but will arrive at its own conclusions based on realities inside Apple.

Apple would do well to adopt some of the strategies that are working for Alphabet:

  1. Greater transparency.
  2. Strong internal controls, and systems and processes to ensure no unpleasant shocks surprise the company.
  3. Check on expenses while ensuring economies of scale get distributed across the company, leading to expansion in margins.
  4. Judicious and prudent capital allocation to projects to ensure that they are nurtured to fructification.
  5. A balanced brand portfolio. If the BCG Matrix (a matrix to aid portfolio analysis developed by the Boston Consulting Group) were to be used as a reference, a company should have brands in at least three of the four quadrants—cash cows (high relative market share but growing slowly), stars (strong relative market share and growing rapidly with potential to become cash cow) and question marks (rapidly growing but have low market share, but with a potential to become stars). (The fourth quadrant, dogs, indicates low market share and low growth rate.) This will ensure that Alphabet continues to have an unending stream of new launches.

Postscript

By the way, have you noticed the strategic changes that Alphabet has been quietly embracing in its code of conduct and mission statement?

Take its code of conduct: when it was launched, Google advised employees “Don’t do evil.” Alphabet has quietly replaced it with “Do the right thing,” advising Googlers to do it by following the law, acting honourably and treating each other with respect.

Alphabet also seems to be tacitly acknowledging that the company’s mission statement, “To organize world’s knowledge and make it universally accessible and useful,” may have outlived its utility. Especially given the company’s intention to focus on other bets that will have a direct impact on quality of life.

Google CEO Sunder Pichai hinted at how Alphabet may be looking at the future when he said, “Google has scratched the surface of truly being there for users, anytime, anywhere, across all devices.”

When the new mission statement gets crafted and it guides Alphabet’s decision making, it is likely to give Apple a run for its money, if not permanently displace it from the No. 1 spot.

One thing in Alphabet’s favour, which Apple can never get back: Alphabet still has its founders at the helm to ensure that the spirit of entrepreneurship, which catapulted it to this position, is alive and kicking. In Apple’s case, it is lost forever. That may prove to be a crucial differentiator as Alphabet takes on Apple.

Who will occupy the exalted position of being labelled as the world’s most valuable company over the next few years?

Alphabet may have an upper hand given the strategies it is pursuing.

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3. Godmen are invading the FMCG market

On February 1, self-proclaimed godman Gurmeet Ram Rahim Singh Insaan threw his hat into the fiercely competitive fast-moving consumer goods (FMCG) market, by offering a range of “swadeshi and organic products” which include pulses, ghee, jam, rice, pickle, honey, mineral water and noodles, under the brand name MSG. MSG stands for Mastana ji, Satnaam ji and Gurmeet Ram Rahim Singh, the three heads of Dera Sacha Sauda.

With this he joined the band of godmen who have entered into business.

Yoga guru Baba Ramdev’s Patanjali Ayurveda range of products has met with resounding success. Patanjali is arguably the fastest growing FMCG company in India and is likely to double its revenues, touching Rs 5,000 crore by March 2016. Contrast this with multinational companies (MNCs) that are struggling to grow in single digits.

Patanjali boasts of having over 800 products in its diverse portfolio, which include food items, cosmetics, beauty and baby care products and medicinal products that claim to cure a range of ailments from the common cold to even serious medical ailments. What binds the diverse portfolio together is that they are made from herbs and the recipe is derived from ancient Indian knowledge.

Then there is spiritual guru Sri Sri Ravi Shankar’s Sri Sri Ayurveda, which was launched in 2003. It offers a range of Ayurvedic medicines infused with “effective herbs”, and a promise of ancient knowledge and wellness for the everyday life. It has also seen success, though not on par with Patanjali.

How are the godmen holding their own in the FMCG market?

There are several explanations: They have differentiated their offerings on relevant dimensions. While the MNCs’ products largely contain chemicals, they use herbal and other natural ingredients. Assisting them is an irrevocable trend of people preferring organic, natural and herbal products to chemical products.

This strategy enables them to create value.

When MNCs do introduce a “natural” range of products, they price them at a premium. In contrast, these gurus offer natural, organic and herbal products that are 20-30% cheaper. When customers review the two sets of offerings, they see enormous value in buying the lower cost natural products.

When the product reaches their homes and the family uses it, they find it familiar and feel comfortable with its smell and taste. Take Patanjali’s Dant Kanti toothpaste. Its colour—a muddy brown—and taste would remind many people of the dant manjan they may have used to clean their teeth when they were children. It generates nostalgia in them.

Also, each of these godmen is the face of their brand; they are their own brand ambassador, which saves their company a tonne of money.

Now let us get Peter Drucker into the discussion. He maintained that the job of business is to create customers. These godmen have readymade customers—their millions of loyal followers. They have faith in their guru. They buy these products and talk about their goodness at every available opportunity to any person who will lend them an ear. They become the brand advocates and create positive buzz about the brand.

Result: cost of advertising and sales promotion comes down because when real customers turn into brand advocates for the brand, the believability of message increases to 70%. When people you know say positive things, the believability jumps to 90%.

These brand advocates are in truth devotees of the godman for whom they display a cultish following. Through the Contagion Effect, the devotion to the godman rubs off on to their brands and in due course the brand also starts commanding cultish devotion. These brand devotees can put Apple’s brand devotees in the shade.

In addition to leveraging brand advocacy to generate business, godmen also leverage alternative media vehicles—i.e. public relations through press writings about them, events and digital media—to drum up awareness, interest, desire and action, and end up building their brand at a fraction of the cost MNCs incur.

MNCs use traditional media vehicles (TV, press, radio, outdoors hoardings and cinema) to build brands. These media vehicles are not only expensive but also extremely wasteful.

Result: Godmen spend less on building their brands, generating leads and acquiring customers.

They extend cost savings to other areas of business too. Here’s how Patanjali does it:

  • Talent: It hires local people (i.e. it does not hire MBAs from leading B-Schools) and pays them significantly lower salaries and perks.
  • Travel and staying expenses: While travelling for work to other towns, the employees use buses and trains and stay in clean but inexpensive hotels, if not with their relatives or friends. For local travel, they use their friend’s, relative’s or distributor’s scooters or motorcycles, instead of hiring taxis. They are reimbursed only for simple vegetarian food. Most importantly, they do not have an entertainment account. Contrast this with salespeople in MNCs, who travel by air, stay in a starred hotels, hire a taxi to work the market, entertain as required—of course to get business. As a result, expenses pile up.
  • Packaging strategy: Take the bottles for hair oil. It selects a bottle for which the manufacturer already has a mould. MNCs on the other hand, go in for unique shapes for which they have to get the moulds specially made, which requires investment.

Let us shift our focus to the metrics that measure customers loyalty:

  • Net promoter score, which measures customers’ loyalty to the brand.
  • Customer satisfaction score—a high score means high customer retention rate.
  • Customer retention rate: ability of businesses to retain customers.
  • Customer repeat business: ability of businesses to get customers to give them repeat business.

The fact that Patanjali is recording such robust growth would make us conclude that it must be scoring high on these crucial metrics.

Is this the first time that MNCs are facing the brunt of local competition?

Not really.

Nirma detergent powder, launched in 1969, had fired the first salvo against Surf, a Hindustan Unilever Ltd (HUL) product. It redefined the value equation. So intense was the competition that HUL had to introduce Wheel detergent powder to check its onslaught.

Later, Anchor introduced a toothpaste brand and positioned it as a vegetarian toothpaste, implying that other toothpastes used non-vegetarian ingredients. This caused seismic waves in the market, forcing MNCs to place the vegetarian symbol on their packs.

In most cases, the MNCs’ response has been reactive and continues to be so in the face of onslaught from the godmen.

Are there any risks to the godmen’s business?

There are at least two:

  • Reputation management: If any negative or adverse publicity gets attached to the spiritual leader, it will have a contagion effect on the brand, taking the brand and business down with them.
  • System and processes: The godmen’s expertise is in spirituality, not in doing business. Hence, the systems and processes required to run an enterprise may not be as robust as they should be.

In addition to these factors, it does appear that in businesses run by a godman,

  • The decision making is likely to be extremely centralized
  • There would be excessive dependence on one or two people
  • There is likely to be absence of diversity of views and thoughts
  • They may not yet have faced a survival issue

Since businesses run by godmen are likely to score high on these parameters, it makes their business fragile.

Let us assume that the godmen overcome all these obstacles. Does it still guarantee that their business will survive them? Since the business is built around them, the fate of the enterprise will hang in the balance when they leave the scene.

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About the author

Rajesh Srivastava
Rajesh Srivastava

Author and Visiting Faculty

IIM Indore

Rajesh Srivastava has 3 decades of corporate & academic experience. He has reenergised companies, including J K Helene Curtis Ltd., & nurtured brands like, Bagpiper whiskey, Royal Challenge whiskey, Blue Riband gin, Blue Riband Duet, Park Avenue range of deodorant & personal care products. He is part of the Visiting Faculty at IIM Indore. He is an alumnus of IIT Kanpur & IIM Bangalore. He is currently working on his first book.