Amazon's Strategic Expansion in India: A $10 Billion Vision by 2025 and Financial Insights

Introduction

Amazon’s CEO, Jeff Bezos, believes that by 2025, Indian goods that will be exported yearly by Amazon will amount to $10 billion. As per these rates and calculations, Amazon’s revenue will increase by $2 billion yearly. By the end of 2020, the revenue of Amazon India will be $2 billion and by the end of 2021, the revenue of Amazon India would be $4 billion. By the end of 2021, the revenue would increase to $6 billion, and by 2023, the revenue would increase to $8 billion. In 2024, Amazon India will gross $10 billion just as Bezos predicted.

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In 2025, the revenue would increase to $12 billion and in 2026, the revenue would increase to $14 billion. The initial investment cost for expanding in India requires $1 billion, meaning that within 6 months, Amazon will be able to recoup all the investment money. The cash flow of a company measures the outgoing cash (cash outflows) versus the incoming cash (cash inflows). Amazon should therefore develop an annual cash flow that will be used in conducting a comparison between the current and previous years' cash flows. The cash flow will help Amazon forecast and predict the financial performance of future years.

Incremental cash flow can be defined as the decrease or increase of the cash flow of a company after investing in a project. When a project’s cash flow is positive, it means that the project is profitable and so forth and vice-versa. Amazon should, therefore, strive to achieve a positive cash flow. According to Shadunsky (2018), a company can measure the success of its project through cumulative cash flow (and it is calculated through the addition of all the different cash flows from the beginning of a project or a company).

Amazon has a strategy through which it maximizes its free cash flow. Amazon has designed its payment cycles in such a way that customers pay for an item before Amazon pays the company producing that item. Such a system ensures that Amazon’s cash flow is continuous. Amazon has also grown exponentially because it uses all the profits it gets to expand even further. Therefore, as soon as the $1 billion investment cash has been retrieved, Amazon will have a positive cash flow and the profits can be reinvested back in the business.

Financing

According to Times of India (2017), a global capital market can be defined as the joining or interconnection of different investment exchanges throughout the globe that lets people and companies sell and purchase financial securities internationally. The main advantage of this is that a company gets financing through equity financing, commercial papers, bonds, and loans among others. Through such financing methods, a company can raise the finances required for an investment. These different options have advantages and disadvantages and it is up to the management to decide the best option for expanding in India.

A loan is received from banks and other financial institutions and is used in covering the expenses of the business and those incurred in the investment process. A loan has to be paid after some time and it has to be paid with interest. The main advantage of loans is that they retain their equity and for a large company such as Amazon, they can easily get a loan. The main disadvantage of a loan is that it incurs huge interest and if a company does not show its creditworthiness, it will not be given the loan.

Bonds are financial instruments through which investors loan money to companies that issue bonds. The bond life may take several years and throughout all that time, the investor will get an interest rate. The main drawback of bonds is that interest accrues on that bond. The main benefit of bonds is that a company retains its equity stake and it is an alternative in case a loan is not approved.

Equity financing is a financial instrument where a company sells a percentage of itself to investors through shares. Investors buy the shares of the company and the company ends up having money. The main advantage of equity financing is that it is not like a loan that needs to be repaid. However, its main drawback is that the company gives up its control or equity to investors.

Another type of financial instrument is known as commercial paper. According to Chen (2020), commercial paper can be defined as a short-term and unsecured debt that companies are given and is mostly used in financing and paying for inventories, short-term liabilities, accounts payable, and payroll expenses.

One of the main benefits of commercial papers is that it does not need to be registered with the securities and exchange commission. Its main drawback is that it has higher risks because it is unsecured. According to Chen (2020), the financial crisis that occurred in 2007 was partly caused by the commercial paper industry. When investors started doubting the liquidity and financial health of companies such as the Lehman Brothers, the use of commercial papers was affected adversely and companies could not access commercial papers (previously they were easily accessible and affordable).

Statistics indicate that Amazon’s growth and financial performance have been successful over the years. Therefore, if Amazon applied for a loan, chances are that it would be given. Nonetheless, if banks refused to give loans to Amazon, then Amazon would issue bonds.

Although Amazon would still need to pay back the money to investors (just like a loan), these bonds would be issued to investors thus allowing Amazon to get the $1 billion needed to expand in India without going through the long process of acquiring a loan. When Amazon was acquiring Whole Foods, the money used to finance the project was gotten through bonds. According to Linnane (2017), Amazon received a $16 billion bond and they used the money to acquired Whole Foods for $13.7 billion.

One way through which companies expand and grow is through acquisitions. According to Bragg (2020), an acquisition occurs when the control of another business is obtained by another bigger business. Through acquisitions, companies can grow in size and stature instead of expanding from scratch.

One of the main benefits of acquisitions is that a company grows quickly and in a sustainable manner. According to Hakutizwi (2017), mergers or acquisitions grow faster and can achieve sustainable growth rapidly if done correctly, and compared to organic growth that is slow and takes time, mergers and acquisitions are better options. However, acquisitions have one main drawback, and it is that managerial disagreements can develop after a merger occurs. When two organizations merge, there may be conflicting cultures that may affect the company.

One of the best ways through which Amazon can expand in India is through mergers and acquisitions. Throughout the years, Amazon has used mergers and acquisitions to grow exponentially. Some of the companies that Amazon has acquired over the years include Twitch, Zappos, and Whole Foods. Even in India, Amazon has also tried acquisitions as a means of expanding and penetrating the Indian market.

According to Dumont (2019), Amazon acquired a small stake in Future Retail. Future Retail is a company owned by Indians and has more than 1,500 stores distributed through India and also owns a chain of supermarkets in India. Amazon’s merger with Future Retail will play a significant role in enabling Amazon to penetrate India.

Track Record

As stated before, the final performance and growth record of Amazon are plausible. The company has also diversified its products and services and this has enabled the company to remain financially strong even when the company is not getting any profits. According to Unglesbee (2020), the credit rating of Amazon was upgraded from A3 to A2, and this shows how financially strong the company is. Unglesbee (2020) added that in the coming years, Amazon will maintain its strong liquidity and its positive cash flow.

As can be observed from the income statement shown below, from 2016 to 2019, the revenue and gross profit of Amazon has continued to rise over the years.

Table 1

Amazon’s company income statement from 2016 to 2019 (Yahoo Finance, 2020)

According to Wei (2020), the sales growth rate of Amazon company in 2018 was 31%. Amazon’s annual report also showed that in 2018, the sales of Amazon Web services increased by 47%. As can be noted from Table 2, Amazon has reduced its liabilities over the four years. In 2016, the total liabilities amounted to 52.54%, in 2017 it reduced to 44.08%, in 2018 it reduced to 42.05%, and in 2019, it reduced to 38.89%. Amazon has managed to increased its sales and revenues over the years while reducing the total liabilities and this is hugely beneficial for the company.

Table 2

Amazon’s balance sheet from 2010 to 2019 (Morningstar Financials, 2020)

As can be observed from table 2 above, Amazon has strong creditworthiness and financial performance. The chances of Amazon defaulting on a bank loan are very minimal and it would easily access loans.

Other than its strong financial performance, Amazon also has a reputation for having ethical and legal financial behavior. It does not involve itself in any malpractices and it has, therefore, been able to build its reputation as a trustworthy company, not only to investors and companies but also to different regulatory bodies.

One of the main goals of Amazon is ensuring that consumers can purchase goods and services at the lowest price and get their products delivered to them safely and as quickly as possible. Amazon also treats and pays its employees well. One example is through its minimum wage of $15 per hour, doubling the minimum wage stipulated by the federal government.

According to Chappell and Wamsley (2018), Amazon listened to the complaints of their employees and their critics and decided to increase the minimum wage of all its employees. While launching the new pay system, Jeff Bezos, Amazon’s CEO, stated that the company was excited about the plan and encouraged their competitors and other competitors to do the same.

Throughout all countries where Amazon has established itself, it has not only created many employment opportunities but has also boosted the local economies. Moreover, it pays taxes amounting to millions of dollars thus boosting the national economy. According to Willow (2019), Amazon creates many job opportunities and boosts the local economy. It is for these reasons that many countries encourage Amazon to set up their businesses and provide it (Amazon) with tax incentives. Willow (2019) states that over the years, Amazon tax incentives have amounted to more than $1.6 billion. All these statistics show that Amazon is an ethical company, not just financially, but also socially.

References

Bragg, S. (20 January 2020). Business combination. Accounting Tools. https://www.accountingtools.com/articles/2017/5/10/business-combination

Chappell, B., & Wamsley, L. (2 October 2018). Amazon sets a $15 minimum wage for U.S. employees, including temps. NPR Organization. https://www.npr.org/2018/10/02/653597466/amazon-sets-15-minimum-wage-for-u-s-employees-including-temps

Chen, J. (17 March 2020). Commercial paper definition. Investopedia. https://www.investopedia.com/terms/c/commercialpaper.asp

Dumont, J. (23 August 2019). Amazon acquires a stake in Indian grocer. Grocery Drive. https://www.grocerydive.com/news/amazon-acquires-stake-in-indian-grocer/561572/

Hakutizwi, B. (28 February 2017). Organic business growth vs. growth through acquisitions. Business Articles. https://www.business.com/articles/growth-through-acquisition/

Linnane, C. (17 August 2017). Why Amazon's seven-part bond deal is a bargain. Market Watch. https://www.marketwatch.com/story/amazon-to-issue-up-to-16-billion-in-debt-to-fund-whole-foods-acquisition-2017-08-14