High costs, labour crunch will test Amazon Singapore: Analysts

SINGAPORE — While it comes with a big reputation, Amazon may struggle to fully replicate in Singapore a business model that has brought the company much success in various parts of the world, experts say.

The United States-based e-commerce giant has gained market share in its home base rapidly, thanks in part to a well-oiled delivery infrastructure, and its ability to keep its business costs low by operating at scale.

While it has adapted its business model to suit different markets — it depends on third-party delivery providers in Japan, for instance — Amazon has stuck to its key strategy of what experts describe as “gaining market share at all costs”.

Similar to other heavyweights in e-commerce and disruptive services, its deep pockets allow it to incur huge costs in the short term in order to grab a bigger slice of the market. But the Singapore market could be harder for Amazon to crack, given the Republic’s high-cost business environment and manpower crunch.

Known for its customer service and speedy delivery, Amazon has already been plagued by delivery woes and has drawn flak from consumers here, following last week’s launch of its Prime Now service in Singapore.

The service promises two-hour free delivery for household items, including groceries. However, some shoppers were unable to place orders for days, while others had to wait several hours before they were given a delivery time slot. TODAY had also reported that, due to the overwhelming demand, Amazon had to resort to booking taxis, on top of tapping freelance drivers, to make deliveries.

With the Land Transport Authority making it clear on Tuesday (Aug 1) that taxis and private-hire cars cannot be used solely for the delivery of goods, Amazon could be in for a bumpier ride.

In the US, Amazon has created a huge network of delivery and fulfilment centres where orders are processed. In recent years, it has also started building up its own delivery fleets in the US to support same-day delivery.

“Amazon will need to adapt their strategy. What works in the US may not necessarily work in Singapore because of high rental and labour costs,” said Associate Professor Thompson Teo of the National University of Singapore (NUS) Business School. He felt that Amazon had probably underestimated the demand, given Singapore’s small population.

“Logistics or delivery has a certain capacity which cannot be expanded rapidly and is rather costly unless there is some assurance of continued demand,” said Assoc Prof Teo, who noted that manpower in Singapore is not so easily found on demand. Amazon would require time and incur additional cost to look for more people to carry out deliveries, he added.

Economist Walter Theseira from the Singapore University of Social Sciences felt that the bigger challenge for Amazon is the business cost in Singapore because of the lack of scale.

“(Singapore) is a valuable market, but not extremely large. If Amazon can serve both Johor and Singapore with the same logistics system, then it can bring costs down. But it can’t because of the international border, which will raise costs because it has to have two separate infrastructure systems,” said Dr Theseira. He added: “So now they have to ask, do I want to set up major infrastructure just to serve a medium-sized city?”

While Amazon’s launch in Singapore is widely seen as an entry point into South-east Asia, a 2016 report by Internet giant Google and Singapore investment company Temasek Holdings found that the region’s island geography will probably increase delivery costs at the last mile, amid high sea freight costs.

Amazon’s earnings from its global operations in the second quarter of this year has declined significantly, due to increased spending on infrastructure, growth initiatives and price cuts. Overall, the company’s operating income was down 51 per cent to US$628 million (S$852 million), compared with the same period in 2016. Its international business has continued to bleed, with an operating loss of US$724 million. The company has operations across Europe, Japan, Ireland, China and India, among other countries.

In India, for instance, it has used its deep pockets to push out its competitors. It attracted sellers by cutting commissions by one percentage point to 7 per cent while others raised their rates. It also rewarded customers with 200-rupee (S$4.30) gift cards when it overtook closest competitor Flipkart.

Launching its popular Prime Video service globally in 200 territories including Singapore in 2016, Amazon offers steep discounts for new customers, slashing the subscription fee by half to US$2.99 or €2.99 (S$4.80) per month.

The battle for customers in Singapore is only just beginning, analysts noted, as it comes up against established e-commerce players here.

These include online grocer RedMart, and e-commerce company Lazada, which in July received a huge cash injection of US$1 billion from Chinese e-commerce giant Alibaba. Alibaba now holds an 83 per cent stake in Lazada, which recently acquired RedMart.

According to mobile app analytics firm App Annie, Amazon’s Prime Now app has been downloaded more than 88,000 times in Singapore on iOS and Google Play as of July 31.

Already, Prime Now has shaken things up in Singapore’s e-commerce scene. Apart from offering cheaper prices than RedMart and homegrown grocery delivery service HonestBee, it has also prompted its competitors to raise their game.

In response to TODAY’s queries, RedMart and Lazada pointed to their competitive advantage of knowing the Singapore market well, and having established partnerships in the industry.

RedMart said it is banking on its own delivery fleet to be able to offer customers a two-hour delivery slot. RedMart president Vikram Rupani said: “Our fleet is made up of our own full-time hires, as well as those from our team of long-serving logistics partners. Over the six years that we’ve operated in Singapore, we’ve honed our understanding and management of our fleet capabilities, sales demand and customer support.”

He also stressed that RedMart will remain nimble in responding to price changes. “We always monitor the prices of major retailers (both online and offline) closely to ensure the most competitive pricing — and highest savings — for our customers. This is one of our key business priorities. In fact, we believe our pricing in general is better than our competitors.”

Lazada noted there is still room for competition in Singapore’s nascent e-commerce scene. Sales from online shopping make up only 5 per cent of total retail here, based on data by market research provider Euromonitor.

Citing the company’s wide array of goods available for consumers, Mr Alexis Lanternier, CEO for Lazada Singapore, pointed out that the company is expanding its network of sellers and other partners.

Still, Dr Theseira warned that Amazon could overwhelm some of its competitors, including brick-and-mortar retailers.

“The biggest question is: How efficient are our local retailers at operating at the same efficiency? Do they work towards the lowest costs by sourcing correctly? Do they use predictive analytics to minimise wastage? They are battling a retailer that understands how to do this business,” Dr Theseira said.

Experts expect a full-on price war in the short term, which would benefit consumers. However, small e-commerce players could be hit as a result.

Euromonitor research analyst Yu Xian Lim said: “Competitive discounts will continue as long as there is no clear winner in the market. Traditionally, e-commerce players take relatively low margins. They subsidise costs greatly and are prepared to make losses for initial years. The price war will continue since it’s the key driver for online sales.”