Armed with the government’s approval to retail food products in India, American e-commerce giant Amazon can now potentially invest in building out a full-fledged food retail business and sell food products through its wholly owned subsidiary in India. This will provide a serious challenge to existing online grocery stores such as BigBasket and Grofers, according to two executives with direct knowledge of the matter.

The approval also potentially allows Amazon to launch its own private label category for the food business, the executives said, asking not to be identified. On Monday, PTI had reported that the Department of Industrial Policy and promotion (DIPP) had approved Amazon’s proposal to invest about USD 500 million to build out a food retail business.

An Amazon India spokeswoman confirmed that the company has received government approval to build out a supply chain for food retail. “Yes, we have received the government approval for food retail... We are excited by the government’s continued efforts to encourage FDI (foreign direct investment) in India for a stronger food supply chain,” said an Amazon India spokeswoman.

Amazon did not comment on whether it would launch a private label in the food business once the approval comes through. According to one of the executives mentioned above, Amazon can potentially control every aspect of the supply chain of the food business and not be dependent on third-party sellers on its marketplace once the approval comes through.

“Currently, Amazon provides a marketplace for sellers to sell their products. Once this approval comes through, it will allow Amazon to control the supply chain end-to-end and will allow Amazon to invest in every part of the supply chain,” the executive said.

With the licence to retail food through its own subsidiary, Amazon will be in a position to gain a significant edge over arch-rival Flipkart, which is preparing to launch the grocery category over the next few weeks. The fact that Amazon is armed with deeper pockets gives it a significant edge over BigBasket, which currently is looking to raise at least USD 75 million in fresh funds. Over the past year, BigBasket has even held talks with Amazon India for a potential sale, although those talks have not materialized in a deal yet.

For now, Flipkart has no option but to play catch-up in a category where it has already attempted a failed venture in the past through an app called Nearby that it shut down in February last year. This time, Flipkart is planning to launch its own private label in the grocery segment and has re-hired former company executives Manish Kumar and Nitin Rajput as part of the effort.

In February last year, Amazon entered the grocery space by launching deliveries through a separate app called Amazon Now. Since then, Amazon has grown the category rapidly and challenged the status quo of established incumbents such as BigBasket and Grofers, which are struggling to prove that their businesses are sustainable in the long run.

The government currently allows 100 per cent FDI in the food retail business. According to a PTI report on Monday, the government had received investment proposals worth USD 695 million from three companies -- Amazon, BigBasket and Grofers.

“Grocery and food are both very tricky categories and hard to crack. Most large supermarket chains have struggled to build out proper supply chains and create sustainable businesses. Having said that, of all e-commerce companies, Amazon is probably the best placed to succeed in this category. They have deep pockets and they’ve already made inroads through Amazon Now and programmes such as Prime,” Harminder Sahni, founder and managing director at Wazir Advisors, said.

Source: http://www.indiatvnews.com/business/india-government-clears-amazon-s-rs-3200-crore-fdi-proposal-in-food-retail-390560