If not Flipkart, Amazon India’s losses should trigger a warning at Walmart

Photo: Reuters

If Walmart Inc. is perturbed by Flipkart Ltd’s high losses, it hasn’t shown any signs of it yet. Instead, it coolly told investors that Flipkart’s operating loss may expand to around $1.35 billion in FY20. This is far higher than the loss of $685 million (₹4,586 crore) the Indian e-commerce reported in FY17. Operating loss refers to its consolidated loss before interest and tax.

Brushing off Flipkart’s high losses is one thing, doing the same with Amazon.com Inc.’s Indian unit is quite another. In FY17, Amazon India reported a loss before interest and tax of around $750 million (₹5,015 crore). This is despite the fact that it has considerably lower outgoes than Flipkart in areas such as staff costs. This suggests that Amazon India has been spending far higher amounts on business promotion and logistics, evidently with the view of growing its market share. This should be a reason for big worry at Walmart’s headquarters.

Graphic: Mint

Walmart may have factored in higher losses going forward, but if the idea is to outspend Amazon, it’s a foolhardy strategy. “You cannot out-Amazon Amazon, by trying to sell below cost and wait patiently. Even if you are a company with deep pockets, Amazon can out-wait you, since it is not only how they do business, they (also) have investors who have accepted them on their terms,” Aswath Damodaran, a professor at New York University’s Stern School of Business, said in a blog post earlier this year.

Amazon is obsessed with market leadership, and no cost seems too high for it to get to this target in the markets it fancies. “We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position,” Jeff Bezos wrote to shareholders in the company’s 1997 annual report. Its shareholders have been willing partners in this strategy, and have funded losses and lived with suboptimal returns for years.

In contrast, the first reaction of Walmart’s investors when they heard of the Flipkart acquisition was one of anxiety. A strategy such as “market leadership at any cost” is anathema to their ears. It remains to be seen how long Walmart’s investors are willing to endure Flipkart’s losses.

Coming back to Flipkart and Amazon India’s financials, making a like-to-like comparison is a difficult task. Flipkart files consolidated accounts at Singapore which gives a fairly good picture of its operations. With Amazon India, one has to make do by adding up losses at its key Indian subsidiaries. Flipkart’s Singapore filing and Amazon’s Indian filings have both been sourced from paper.vc.

Since these are two different sets of accounts filed in dissimilar jurisdictions, comparing specific line items in the list of expenses doesn’t make sense. But for what it’s worth, Amazon India reported business promotion and advertising expenses of ₹1,960 crore in FY17, against Flipkart’s spend of ₹1,188 crore on this account. And Amazon India’s transportation and distribution costs stood at ₹2,459 crore, far higher than a similar cost item at Flipkart. The former’s staff costs are roughly half of Flipkart’s spend of ₹2,053 crore, seemingly because it is riding piggyback on its parent company in areas such as technology development.

Whether the reported expenses on these line items are exactly comparable on not, the bottom line is that Amazon India’s spends on growing its market share seem to be running ahead of Flipkart.

Damodaran says in his blog, “There is no scarier vision for a company than news that Amazon has entered its business.” Walmart certainly thinks otherwise. It has daringly jumped into a market where Amazon has already invested billions of dollars. For now, it looks more like bravado than bravery.

This article was first published on livemint.com