tiprankstipranks
Amazon’s Global Expansion Plans Challenged by Local Hurdles
Stock Analysis & Ideas

Amazon’s Global Expansion Plans Challenged by Local Hurdles

After capturing the hearts and minds of Americans, Amazon.com (AMZN) is pursuing strategic moves to expand its dominance in other countries. In one such move, Amazon had invested $200 million in the world’s second most populated country, India.

In 2019, Amazon bet its horses on the nation’s second-largest retailer, Future Retail Ltd., a part of Future Group. The company hosts several banners under its retail outlets in India, spanning from fashion and lifestyle to furniture and fast-moving consumer goods (FMCG).

Future Retail ranks second to the Indian behemoth Reliance Industries in the retail sector. Seeing its growth story, Jeff Bezos thought it would be a good bet to invest in the retailer and slowly inch towards its dominance in one of the fastest-growing retail markets in the world.

However, Amazon has locked horns with Reliance Industries. Reliance has started usurping Future Group’s retail assets as the “tenant” was unable to pay several of its obligations, Amazon has a noncompete agreement with Future Group, which prohibits it from selling any of its retail assets to competitors.

However, in 2021, India’s competitive regulator disavowed the noncompete agreement, after Future Group contested that the agreement threatened the standing of India’s 2018 foreign investment law.

In 2020, Amazon dragged Future Group to arbitration at the Singapore International Arbitration Center (SIAC), which put a hold on Future Retail’s merger deal with Reliance for a whopping $3.4 billion.

The war doesn’t end here, and all eyes are on the e-commerce giant’s next steps at abating the situation. Meanwhile, due to the absence of a the judge, the hearing of Amazon’s interim plea to preserve Future Retail’s assets was not heard by the Supreme Court of India on Tuesday.

The Chief Justice of India, N V Ramana has said that the SC will hear Amazon’s plea “as early as possible.”

India Inc. Growth Story

Amazon has been investing in India for almost a decade now, with billions of dollars invested across its marketplace, payments and wholesale business units in India to strengthen its position in the country’s rapidly growing e-commerce market.

Second, to China, India’s retail sales are expected to grow to a whopping $1.3 trillion in 2024 (from $883 billion in 2020) according to Forrester Research. While Amazon has captured the e-commerce shopping space in India, alongside Walmart-backed Flipkart, the joy of shopping in retail stores remains a tradition for several Indians. It is this physical retail segment that has caught the American giant’s attention, which it hoped to capture through the Future Group deal.

The Indian retail sector is highly fragmented, with almost 75% of it captured by several unorganized single/family-owned businesses. The smaller businesses remain an important vote bank for the government. Meanwhile, Indian regulations do not allow foreign direct investments in the retail sector, limiting ownership to below 51% of shares.

Amazon has constantly noted the risks involved with expanding in other geographies, especially in India and China. “There are substantial uncertainties regarding the interpretation of The People’s Republic of China (PRC) and Indian laws and regulations, and it is possible that these governments will ultimately take a view contrary to ours,” the company stated in its annual report.

Amazon’s Global Footprint & Deterrents to Growth

Graph Created by Author

Looking at Amazon’s growth over various geographies clearly shows the burgeoning growth expected in the “Rest of World” category, of which India and China form a major part.

Over the last five years, U.S. sales show a compound annual growth rate (CAGR) of 21.1% and the Rest of World sales CAGR stands at 29.9%. Meanwhile, out of the other three, only U.K. has a CAGR of 22.9%, which is higher than that of the U.S.

Notably, Germany, the U.K., Japan, and even China have very structured and organized retail sectors. Each country has their own “Amazons” catering to their masses.

In China, Alibaba (BABA), undoubtedly, has the largest share of the retail segment, followed by JD.com (JD) and Pinduoduo (PDD). Amazon’s AWS segment also competes in the cloud segment with Alibaba Cloud in China.

In India, although the industries are fragmented, it is difficult to create one’s stronghold, competing with the likes of Indian powerhouses, Ambani and Tata, who have a big share in every pie.

Over the years, every nation is becoming “self-sufficient”, barring outsiders from gaining a chunk of its market. Rising nationalism, intense local competition, consumerism, and enhanced regulatory barriers to entry have become major deterrents for companies seeking to establish their global footprint. Even for the e-commerce behemoth Amazon, there is no simpler way to increase its presence globally or boost market penetration.

Concluding Views

Having discussed the above points, there is no doubt that Amazon will continue to dominate the online retail segment and its growing cloud services segment for years to come, considering decades of hard work and unmatched offerings.

The accelerated pace of digital transformation and shifting consumer preferences to online makes Amazon a success story and a leader in the space. With cross-border commerce and growing third-party seller possibilities, Amazon still has a wide scope to penetrate online retail markets across the globe.

Notably, with the recently announced 20-for-1 stock split and increased share buyback program, the company has surely won investors’ favor.  Moreover, currently, the AMZN stock trades at a Price/Sales (P/S) multiple of 3.48x, below its five-year average of 3.81x, giving it enough scope of future growth.

33 Wall Street analysts have a unanimous “Buy” view on the AMZN stock resonating a Strong Buy consensus rating. The average Amazon price target of $4,194.97 implies 27.2% upside potential to current levels. Its shares have gained 5.1% over the past year vis-à-vis losing 3.2% year-to-date amid the broader market sell-off.

Download the TipRanks mobile app now

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Read full Disclaimer & Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles