After reporting strong Q4 earnings, Amazon (NASDAQ:AMZN) shares surged on Thursday, gaining about 2% by the end of the day. That gain was more than wiped out in after hours trading, however. The company’s earnings call identified slowing Indian growth as a concern for 2019.
Bringing the issues to a head, that country’s new e-commerce rules kicked into place on February 1, causing disruption for Amazon. Thousands of products were yanked from Amazon’s India site starting Thursday night, and the company’s online grocery service for the country was shut down entirely.
As a result, Amazon stock is down 4.4% since yesterday’s close.
New Indian E-Commerce Rules Clobber Amazon Stock
Amazon — and its chief online rival Walmart (NYSE:WMT) — have been singled out by the Indian government as it seeks to protect local sellers. Last year, the government announced new rules to protect small shops and domestic sellers, and the two online giants had to comply with those by midnight on Thursday.
The new regulations prevent Amazon from negotiating for exclusive rights on products, and it also prevents the company from selling products made by a vendor the company holds an equity stake in. That turns out to be a killer combination for AMZN.
According to The New York Times, more than 400,000 items that account for nearly a third of the company’s $6 billion in annual sales in India will be pulled, at least temporarily. Adding insult to injury, this includes key Amazon products including Echo smart speakers, Kindle e-readers and Fire TV streamers. (Some Echo speakers showed up again shortly after Amazon’s move, being offered by third-party sellers). Many Amazon Basics items including batteries were also removed.
The bad news out of India continued, with Reuters reporting Amazon had also taken down its online grocery service late Thursday night.
As AMZN held its earnings call amid the chaos in India, Amazon stock was getting clobbered. It ended up down 4.5% from its Thursday close, but that was actually a 6.5% plunge from the spike AMZN hit in early after hours trading, while the elation over its record-setting Q4 was still in play.
What’s at Stake in India
The problem with India for Amazon (and for Walmart) is that the company is looking to the massive Indian market as a growth driver. AMZN has said it plans to spend $5.5 billion in India as it pushes to increase sales, but it’s been a tough slog and the Indian government isn’t making things easy.
The New York Times report notes that Amazon already made changes to its operations in order to comply with new rules the government introduced in 2016. Adding more regulations in 2018 that favor local vendors over the online giant further complicated Amazon’s prospects.
In that earnings call on Thursday evening, Amazon reported that international sales growth slowed to 15% in Q4, compared to the 29% rate it enjoyed the previous year, and the situation in India is a big part of that drop. With the latest rules kicking into effect on Thursday, the disruption to Amazon’s Indian business is hitting all new levels.
Amazon has reportedly asked for a four-month extension to fully comply — and figure out workarounds to minimize the disruption to its business. That includes new contracts to be negotiated with thousands of vendors (eliminating any exclusive deals) and stockpiled inventory to move. But with the Indian government under intense pressure from local merchants to strictly enforce the new e-commerce rules, AMZN may not get that.
According to Bloomberg, analysts are expecting it to take at least six to eight months for Amazon to have workarounds in place. In the meantime, the scramble to adhere to the new rules could “wipe out” up to half of the products that had been offered on Amazon’s India site.
No matter what happens, AMZN’s Indian growth prospects do not look good for 2019 and that’s not good news for Amazon stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
