Over the last week, Amazon India has announced its exit from three businesses in India – wholesale distribution (Amazon Distribution), food delivery (Amazon Food), and its ed-tech business (Amazon Academy).
The food delivery business was started in May 2020, during the nationwide lockdown, while the ed-tech business was launched in 2021. However, wholesale distribution was established before the pandemic during Jeff Bezos' visit to India.
Amazon's Cost-Cutting Drive
The shutdown of these fledgling businesses appears to be a part of Amazon's larger strategy of dealing with the current slowdown in demand.
The retail behemoth has offered guidance that fourth-quarter revenue would be anywhere between $140 billion and $148 billion. The estimate was much lower than the $155 billion analysts were expecting, indicating the extent of the slowdown.
The e-commerce giant's shares are already down by 40 per cent in the current year, with investors raising concerns about loss-making divisions like Alexa voice assistant – which alone is expected to have losses of $ 10 billion.
The current crisis is a trial by fire for Andy Jassy, Amazon's new CEO, who ran the cloud business earlier. Within a few months of his accession, he faces angry shareholders, disgruntled employees, negative press, layoffs, rising costs, and several other troubles.
According to reports, Amazon has been reviewing all its loss-making units to find areas where costs can be cut. Capex too, would see a cut in segments like logistics, where capex would be $10 billion lower than the capex in 2021.
Amazon is also looking to cut 10,000 jobs in its workforce to reduce employee costs in loss-making units – reducing its workforce headcount by three per cent.
Is Amazon Looking to Avoid Unnecessary Cash Burn?
Amazon's strategy has been to create a complete ecosystem for users – right from shopping to movies, music, e-books, wearables, devices, payments, grocery etc.
Usually, it starts a business, funds the new unit's losses for profitable units, and checks user response – if things don't work out, the business is shut down, and the company looks for other opportunities. It is likely that a lukewarm response to its new offerings, along with a long gestation period to turn profitable, turned Amazon away from these businesses.
All three businesses – wholesale distribution, food delivery and ed-tech- have well-funded solid competitors.
The food delivery space already has Swiggy and Zomato. Beating the duopoly would require burning cash to offer deep discounts to users to pull them away from Swiggy or Zomato.
Ed-tech is still quite a competitive market with players like Byju's, Unacademy and others.
Amazon likely wanted to avoid distractions and unneeded cash burn in the Indian market and focus on its core businesses.
The shutdown of the wholesale distribution business is surprising since distribution is one of Amazon's core strengths. Perhaps distribution to kiranas is not the company's priority currently. The wholesale distribution business competes with Mukesh Ambani's Reliance Retail which has been aggressively growing its footprint.
Amazon has already been thwarted by Reliance once during a face-off in the retail segment when Reliance took over Future Group's stores. Attracting Kirana shop owners to buy from Amazon would require offering similar discounts as Reliance, which could mean losing money for a while.
Reliance might even have an advantage in sourcing since it buys massive volumes of goods for its own retail stores. Amazon, being a platform, is not allowed to sell as a merchant on its own platform, lowering the chances of having a strong sourcing advantage like Reliance. However, profitable divisions like Amazon Web Services are still bullish in India. AWS recently announced that it will invest 4.4 billion in India by 2030 to build its Hyderabad business centre.
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