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COVID-19 compounds challenges for Amazon, Walmart in India

E-commerce companies in India are struggling to step up during the COVID-19 pandemic as the country's chaotic lockdown poses further challenges on their ability to operate, with market leaders Inc. and Walmart Inc.'s Flipkart India Private Ltd. expected to suffer significant losses in 2020.

Online retailers operating in India were forced to suspend operations hours after a 21-day nationwide stay-at-home order was announced March 24 due to a lack of clear guidelines and a mass exodus of employees in anticipation of lockdowns. Most of Amazon's more than 60 fulfillment centers across the country were reportedly shut for the first few days. In some states, delivery workers were not provided passes to make deliveries and some reportedly were even beaten by the local police for flouting the lockdown.

By the time the confusion eased toward the end of March, e-commerce companies were staring at a huge backlog of deliveries, particularly for the essential items most sought after by consumers during the present crisis.

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Recounting the challenges, Hari Menon, CEO of Alibaba Group Holding Ltd.-backed online grocery company BigBasket, tweeted April 21 that many of the migrant workers that comprise a large portion of its staff left for their villages just as demand surged.

"That was something we didn't anticipate, and which meant we couldn't pick orders and deliver them in sufficient numbers to satisfy the 3-6x increase in demand," Menon said.

Amazon, Flipkart hit hardest

Forrester Research estimated that the lockdown has resulted in a $1 billion loss in online sales in India as of April 14, in stark contrast to China and the U.S., where e-commerce has grown during the shutdowns. An extension by another three weeks prompted the company to slash its full-year outlook for the growth in the Indian e-commerce market to flat from its earlier projection of 5%.

Chief among e-commerce companies' woes is a ban on the sale of high-margin nonessential goods, including electronic items key for work and study from home, which has been extended in step with the lockdown. Nonessential items account for about 90% of sales for Amazon India and Flipkart, and electronic items accounted for nearly half of all online sales in the country in 2019.

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Amazon and others have reportedly called on the government to expand the list of essential items to include electronic goods, saying that the continuous shutdown of online sales could hurt consumers and small businesses operating on the platform.

There were fewer than 1,000 active sellers left on Amazon India as of March 26 out of nearly 600,000 marketplace sellers on the platform after the company halted orders for nonessential items, according to e-commerce intelligence service Marketplace Pulse.

Amazon-backed Cloudtail India, one of the largest sellers on Amazon's India marketplace, reportedly has delayed payments to brands and suppliers.

"It's difficult to fulfill the loss in smartphones and fashion ... and too early talk about pent-up demand with the impact from job losses," said Satish Meena, senior forecast analyst at Forrester Research.

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Amazon and Walmart have bet big on India, whose e-commerce market grew at a compound annual rate of 36% from 2017 to 2019, the fastest rate among all major world economies in the past three years, and is estimated to have reached $40 billion in 2019.

Their Indian operations, however, have come under intense regulatory scrutiny over alleged anti-competitive practices like deep discounting and selling their own inventory, which is prohibited under the country's foreign investment rules. New Delhi in February 2019 updated rules to exempt food and groceries from the prohibition.

The two behemoths are now faced with the challenge of significantly scaling up their grocery delivery services. So far, India's hyperlocal online grocery sector has marginal penetration of online retail, but the segment grew 106% year over year in the first quarter of 2019, according to consultancy RedSeer. BigBasket and Grofers India Pvt. Ltd. accounted for 80% of the market, and Amazon and Flipkart just 5%.

This has fueled talks of consolidation and investment in niche grocery delivery platforms. Restaurant delivery service Zomato reportedly is interested in acquiring the SoftBank Corp.-backed Grofers in a deal that would value the company at about $750 million. Alibaba invested another $50 million in BigBasket in April.

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Local stores thrive

By mid-April, Indian consumers were still facing difficulties in ordering groceries online, although the situation had improved, according to a survey by online social community platform LocalCirlces. But, by then, they had already turned to the neighborhood mom-and-pop shops, also known as kirana stores. These are often just a phone call away and have been far more effective in fulfilling customers' requirements.

According to Euromonitor, India has 12.8 million traditional stores, compared to over 7,000 modern stores, of which domestic conglomerate Reliance Industries Ltd.-owned Reliance Retail Ltd. operates 736 stores across the country.

"India has a very large number of small retailers. Those small retailers actually end up providing the kind of convenience that e-commerce can provide. It is probably faster and it is personalized," said Abheek Singhi, managing director and senior partner at Boston Consulting Group.

Bottlenecks in deliveries have led to e-commerce and FMCG companies exploring several avenues, including kirana stores, as a means of reaching out to consumers, but these initiatives have had their share of challenges.

Amazon tried to tap into kirana stores with its grocery delivery app Prime Now to help with order fulfillment. But due to a lack of adequate access to inventory, the project failed and Amazon India folded Prime Now into its main services during the lockdown.

On April 22, Reliance Retail agreed to link its e-commerce platform JioMart, which is working to bring the country's millions of stores online, with Facebook Inc.-owned WhatsApp as part of a $5.66 billion deal with Reliance's internet unit Jio Platforms Ltd. The tie-up will allow consumers to buy goods from local stores using the messaging platform and is expected to embolden the Indian conglomerate's ambition to take on Amazon and Flipkart.

ITC Foods Ltd. has partnered with pizza delivery chain Domino's Pizza Inc., while Marico Ltd. partnered with food delivery platforms Swiggy and Zomato to deliver their food and grocery products. But the push has largely suffered due to a lack of delivery personnel and fears after a delivery rider tested positive for COVID-19.

Flipkart has tied up with Tata Consumer Products Ltd., Spencer's Retail Ltd. and Uber Technologies Inc. for grocery delivery during the lockdown. Still, analysts believe that the sector needs significant investment to ensure fast-moving consumer goods, or FMCG, reach customers on time.

"Local kiranas have made a comeback. It is going to be an important channel going forward. People want to patronize local businesses when they come out of the situation. Localization is going to be a big rival of everything," said Soumya Mohanty, chief client officer for the South Asia insights division at Kantar. "The FMCGs will think through different alternate ways beyond the Amazons of the world to be able to reach consumers."

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