Amazon's entry into food retailing poses serious threat to organised players

A controlling giant

“Amazon can potentially control every aspect of the supply chain of the food business and not be dependent on third-party sellers on its marketplace once the approval comes through,” a source told Mint.

This will mean millions of dollar being pumped into the Indian market from the competing player. Amazon.in has already invested more than $2 billion in fighting the marketplace battle with the likes of Flipkart and Snapdeal in India.

Now that the company has announced its plans to be in the food retail business with complete control over the supply chain, it will require huge investments in the processing business as well as warehousing and cold storage.

Impact on existing online players

Amazon entered the grocery business in February 2016 when it launched a separate app called Amazon Now. Since then, it has been eating into the delivery business of other organised food retailers.

According to the research firm Tofler, BigBasket posted a loss of Rs 278 crore on revenue of Rs 580 crore in the year ended 31 March 2016, while Grofers in the same period posted a loss of Rs 225 crore on revenue of Rs 14.3 crore.

Unable to sustain the losses, there have been reports that the two online food retailer have been looking at merging their businesses, and focus on private labels more, but the entry to Amazon is likely to intensify the war of attrition as witnessed in the e-commerce market-place model.

Physical store business may also be threatened

A unique thing about Amazon world over has been that it does not only kill the competition in the online space but also demolishes businesses running on the brick and mortar store model.

In the US, Amazon was single-handedly responsible for the value erosion in the stock prices of Walmart Stores and Kroger Co among and many others food retailers after Amazon.Com Inc announced a merger with the Whole Foods Market Inc for a value of $13.7 billion.

In India, players like Big Bazaar Reliance Fresh and Easy Day have managed to create a market for themselves over the years despite fears of competition from the small kirana stores. But that reality is likely to change with the entry of Amazon in the segment.

“The biggest impact that Amazon's entry into the Food retailing business will have would be on the offline food retailers. Because kirana or the mom and pop stores have an edge over online delivery companies in terms of speed and the facility of offering credit. Non of the organised retailers can match that, but Amazon can certainly, through its faster delivery mechanism can make a dent in the business of organised retailers,” said Harish HV, Partner, India Leadership team, Grant Thornton India LLP. 

Given Amazon's record of destroying its competition, organized retailers need to get their act together - and the sooner, the better.