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Can Amazon.com Conquer China With Prime?

By Markets Fool.com


Image source: Amazon.com.

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It's been more than a decade since Amazon.com (NASDAQ: AMZN) entered China, and it still owns less than 3% of the market. Despite the rapid growth of e-commerce in China, Amazon faces stiff competition from local companies such as JD.com (NASDAQ: JD).

At the end of last month, Amazon launched Prime in China, hoping to replicate the success it's had with the service in the United States and other Prime markets. Prime is one of the three pillars of Amazon's growth, and it's kept its sales outpacing overall e-commerce growth in the United States for years to come. Amazon is hoping its program can have similar results in China.

A few key differences

Unlike the Prime you're probably familiar with, Prime in China will be drastically different. It costs 388 yuan ($57) per year and offers free shipping on orders over 200 yuan ($29.50). But that free shipping isn't nearly as fast as Prime's typical two-day promise. It'll take five to nine days for shipments to reach its destination. That's because most shipments will be coming from one of Amazon's fulfillment centers in the United States or Europe.

What's more, Chinese Prime members won't have access to Prime Video, Music, or the Kindle Lending Library. Those are features that add a ton of value to Prime and keep members renewing their subscriptions year after year. CFO Brian Olsavsky told analysts on Amazon's second-quarter earnings call that members who use Prime Video have higher renewal rates than those that don't.

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Amazon isn't the only e-retailer with a membership program. JD.com's JD Plus includes free access to e-books and five free deliveries per month for just 149 yuan ($22) per year. JD recently acquired Wal-Mart's (NYSE: WMT) online operations in China. The deal gave JD access to fresh foods and imported goods, giving it even broader appeal. Amazon may still have an edge on imported goods -- and Prime in China is designed to highlight that advantage -- but JD is working to catch up quickly.

Big investments in Prime

China is just the latest market for Amazon to launch Prime. During its third-quarter earnings call, Olsavsky pointed to expansion of Prime -- specifically in India -- as a big cost driver, which led to lower-than-expected earnings results. Now, launching in another massive market, Amazon could face another huge increase in expenses as it rolls out the logistics network necessary to fulfill Prime shipments.

Operating loss on Amazon's international segment grew 160% last quarter as it upped its investments in Prime. Even so, sales grew only marginally faster than they did in the United States.

On the other hand, the continued strength of the United States points to the value of a good membership program like Prime. While the upfront costs are significant, the payoff is continual revenue growth for years to come.

Prime in China is targeted toward members of China's growing middle class who have spent some time abroad and desire more imported goods. Cross-border e-commerce is one of the fastest growing segments of online sales in China, growing at upwards of 50%, according to the McKinsey Institute. And it already accounts for about 6% of online sales.

If Amazon establishes a foothold in cross-border shipments, it could finally start to show considerable strength in China. From the pessimist's viewpoint, it will take a lot of investment to establish Prime in China. But Amazon has the cash necessary to fund the program. From the optimist's viewpoint, Amazon's current share of the gigantic Chinese e-commerce market is minuscule, so the upside potential in sales is massive.

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Adam Levy owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.