Amazon is doubling down on this multibillion-dollar opportunity

The e-commerce giant is taking steps to stay ahead of its rivals in a key market.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Amazon.com, Inc. (NASDAQ: AMZN) has been making solid inroads into India's fast-growing e-commerce market by expanding into smaller towns and cities by partnering with local stores to quickly expand its delivery network.

The strategy has paid off nicely for Amazon so far, with the company's Local Shops program growing more than tenfold in the space of less than a year to cover 50,000 sellers across 450 Indian cities. The e-commerce giant is now looking to use that impressive network of local stores to tap into another fast-growing niche -- the online grocery market in India's Tier 2 and Tier 3 cities. Let's see why that could be a big deal.

Amazon's sales in India's smaller cities are booming

Indian financial daily Mint reports that 65% of Amazon India's orders and over 85% of new customers in the past year came from Tier 2 and Tier 3 cities. This is good news for the company, as the contribution of these smaller cities to India's e-commerce pie has grown impressively of late. A report from management consulting firm Kearney points out that the e-commerce volume share of smaller towns and cities in India has increased from 32% at the end of 2019 to 46% at the end of 2020.

Additionally, smaller Indian cities held 43% of the e-commerce sales value in India in the fourth quarter of 2020 as compared to just 26% in the year-ago period. All of this tells us why Amazon is looking to make a bigger play for the online grocery market in small Indian cities.

In an interview with the Mint, an Amazon India executive said that the customer base of Amazon's grocery operations (Amazon Pantry and Amazon Fresh combined) has doubled in the past year. The report added that the number of first-time buyers on the grocery platforms has also doubled. The interesting thing to note here is that more than 60% of the new grocery customers came from nonmetro markets.

According to the Amazon executive, the company now plans to follow a two-pronged approach to tap into India's online grocery space. It will now expand its dry grocery offering (Amazon Pantry) into more markets to capture more first-time customers. At the same time, it plans to "double down" on the range of both dry and fresh groceries in its top 50 markets in India.

Amazon recently integrated its Pantry and Fresh grocery platforms in India in cities where both services were available. The company was operating the Amazon Fresh perishable grocery service across eight Indian cities last year as compared to Amazon Pantry's (the nonperishable grocery platform) presence in 300 cities. So, Amazon plans a significant expansion of its fresh grocery operations, targeting a sixfold increase in the number of cities currently covered by Amazon Fresh.

At the same time, it is likely that the number of cities covered by Amazon Pantry is going to witness a significant expansion as the company aims to bring more buyers from smaller cities into its fold. This two-pronged strategy of expanding its grocery operations in both smaller and bigger cities of India could give Amazon a big shot in the arm in the long run and substantially boost its revenue from India's burgeoning online grocery market.

Stealing a march over rivals

Amazon's strategy of expanding its grocery operations points toward the company's intent of staying ahead of its rivals in a lucrative market. Walmart-owned Flipkart, for instance, recently announced that it plans to scale its online grocery operations from 50 Indian cities to 70 cities over a six-month period. That's well behind Amazon's expansion efforts. And homegrown rival JioMart is also behind Amazon when it comes to a presence in online groceries.

In all, Amazon is positioning itself to make the most of the rapidly growing online grocery space in India that's expected to generate $29 billion in revenue by 2024, up from just $2 billion in 2020 as per Goldman Sachs analysts' estimates. More importantly, the market seems set to grow at a strong clip over the long haul, as online grocery sales are expected to make up just 5% of the country's total grocery sales by 2024.

In the end, it can be concluded that Amazon is doing the right thing by moving aggressively in this area. The company could add billions of dollars to its revenue total in the long run by grabbing a bigger share of India's online grocery space and becoming a top retail player in that country, which is why investors should keep a close eye on Amazon's moves there.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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