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Why Amazon’s Acquisition of More is a Masterstroke

Last week, Amazon-Samaara acquired troubled retail chain More for INR 4,200 Cr (~$600MM).

Amazon India, started in late 2012 with discovery engine Interestingly, was started by VC firm Helion’s founder Ashish Gupta (also an angel in Flipkart), which shut down after partners left (like KPCB). Since 2012, Amazon has grown rapidly to become a leading online player in India, leapfrogging Flipkart to become the market leader. The company has committed to investing heavily in India, pumping in upwards of $5Bn – hoping to dominate the next big consumer market after China. Quietly, though, Amazon has been doing a lot of offline focused acquisitions and investments. The company picked up 5% in Shopper’s Stop, tied up with Dabur and acquired Westland books. Nothing, though, has been as big as the More acquisition. How does this massive offline acquisition gel with an e-commerce giant’s strategy? 

Amazon’s mission is to be the “World’s most customer-centric company“. If you notice, nowhere in this mission is there a mention of the word “online”, and that can start helping with understanding this acquisition. India’s e-commerce market is pegged at ~$30Bn, while the organized retail market is estimated to be ~$80Bn – with these being only a percentage of the overall $670Bn retail market. Additionally, offline retail tends to have better margins than e-commerce (hence the need for scale in e-commerce). India clearly represents a big opportunity for consumption, and it is evident Amazon is seeking to build exposure through the organized retail market. While it is established that the offline strategy is clearly an important segue for Amazon, we need to dig deeper into why now and why, specifically, More. 

Amazon and Flipkart set out the road for internet e-commerce in India, and they did increasingly well for non-perishable products like books and electronics. They began to win and corner virtually all sales for these kinds of products in Indian e-commerce. The consumer basket, though, is not limited to non-perishable products. Swiggy demonstrated really well that it is unit profitable to deliver food to consumers, and BigBasket is doing increasingly better in groceries. In June, Swiggy acquired SuprDaily – signalling strong intent to do more than “just delivering food”. In my earlier piece, I had elucidated the battle for your doorstep – with Swiggy/BigBasket approaching the customer from the perishable side and Amazon/Flipkart from the non-perishable side. So why is Amazon acquiring More, now that we know this? You are already thinking correctly – and the answer is groceries.

The Indian grocery market is gigantic to put it plainly. The market is pegged at $566Bn (yes, it is almost 80% of retail). The grocery market is highly disorganised, but the companies that have figured out how to do this at scale are none other than the unheralded “offline” retailers. The top 4 offline retailers in India are Future Retail, Reliance, D-Mart and More (yes). Over time, these companies have understood the nuances of purchasing, logistics and demand for Indian groceries. More importantly, they have understood how to do this in a sustainable manner. In India’s still improving infrastructure – this know-how is incredibly important. For a company trying to enter groceries (like Amazon), it might even make sense to buy v/s build. Amazon already piloted through Amazon Now, but in a market that needs speed – buy is maybe a better strategy. Does Amazon have precedent in doing a build v/s buy? The example is none other than the $13.5Bn acquisition of Whole Foods, which, you guessed it right, is a grocery chain (doesn’t More suddenly make even more sense?).

Whole Foods was an incredibly clever acquisition by Amazon (that spooked the living daylights of other retailers) – and Amazon has infused Amazon-ness into Whole Foods. Amazon has built a huge recurring customer base, delivery logistics and customer service infrastructure in the US – just like it is doing in India. Groceries, due to their perishable nature, are a natural subscription business (you keep ordering groceries). Amazon’s customer pillar today (remember, customer centricity?) is the subscription product Prime – and no wonder Whole Foods made so much sense. More is nothing but Amazon India’s version of Whole Foods (albeit less premium). Given the lower level of penetration of e-commerce in India, apart from the logistics for perishables, More also gives access to customers that may haven’t even heard of Amazon (or e-commerce). Now, given that the deal makes strategic sense for Amazon, how good is the deal? 

While I believed that the Walmart paid a huge premium for Flipkart (offline to online), I think Amazon (online to offline) has done exactly the opposite. It’s interesting to see how Flipkart is valued at 25x of More, despite having only 6x the revenue but 20x the losses! We can argue that the premium is for growth, but profitability is profitability. For a revenue of INR 4,200 Crore ($600MM), More is valued at 1x revenue, while providing access to more than 575 physical stores across the company. Amazon may have even acquired the company entirely, but the FDI rules limit foreign ownership to 49% (which is why Samaara has likely come in). While I find little synergy between Walmart and Flipkart (what can Walmart provide to Flipkart except know how?), Amazon could power More through its customer base and infrastructure – while leveraging food and groceries. Assuming an average Amazon has 2x as many as customers as Prime subscribers (20MM), the $4Bn of sales implies a $200 purchase per customer. Indians spent INR 2,000 in 2011 on foodstuffs per month, which could have likely increased to INR 3,000 today – implying INR 36,000 per year ($500). If Amazon could add even $300 of grocery spend to it’s Prime subscribers and $100 to its More customers – it more than doubles Amazon’s revenue. This would also likely happen at a better margin. More could power Amazon in a way that makes it even more valuable than it is.

Amazon’s acquisition of More could be masterstroke for its Indian retail journey.