No CEO Is Special Forever

Their customers might love them, but shareholders not so much.

By 

HOLMAN W. JENKINS, JR.

July 29, 2014 7:06 p.m. ET

Why didn't the board get rid of Dov Charney, CEO of the American Apparel fashion chain, long ago when it was first confronted with his lewd proclivities that attracted bad press and harassment lawsuits? The archetypal incident, which no column can fail to mention, was his masturbation in front of a reporter for now-defunct Jane magazine.

Because he was the largest individual stockholder. Because he was the marketing magician who conjured exorbitant prices from basic T-shirts and tennis dresses made in high-cost, Los Angeles factories, using a unique combination of "buy America" jingo and sex-sells puffery.

If the board decided last month that he no longer has the magic, chances are nobody does. His strange indulgences became a liability without offsetting benefit. The company says it will continue to make its clothes state-side, hoping to summon profits from unpromising economics. So far, the stock price is not a testament to confidence.

Which brings us to a CEO ouster that has roiled the Boston media for weeks.

As the press tells it, the Demoulas family-owned Market Basket grocery chain is re-enacting the movie plot from "It's a Wonderful Life." A beloved leader is pushed out by a conniving board. Politicians endorse a consumer boycott. Massachusetts Attorney General Martha Coakley calls employee-orchestrated protests "truly inspiring."

Enlarge Image

Market Basket employees and supporters rally on July 25 to back ousted former CEO Arthur T. Demoulas. Associated Press

In the kind of sentence that has driven the narrative, the Boston Globe reports: "The disruptions have caused many customers to shop at competitors because of Market Basket's empty shelves or anger over the decisions of its management."

Uh huh. If the public feels such solidarity with workers, why must workers resort to refusing to restock shelves to enforce a boycott?

The Demoulas chain is known for paying its nonunionized work force well, its workers are highly motivated, and the chain has grown steadily through a combination of low prices and excellent customer service—a high-wire act in a supermarket industry typically brutalized by narrow margins.

News accounts romanticize the company's eschewal of debt as a proof of merit. They suggest the chain is wonderfully profitable, but the company is private; it doesn't publish its results. And it appears that some of the proceeds of its business model have been captured by the CEO and his immediate family through outside real-estate dealings.

The board is divvied between two branches of a warring family, and has been since the recently ousted CEO's father was successfully sued in the 1990s for trying to steal the company from heirs of his brother and late partner. These battles continue today. Newsies delight in the fact that leaders of both factions are named Arthur after a common grandfather, but the real story may be a board finally taking its legal obligations seriously.

Last year, to force a vote on a proposal to distribute $300 million in excess cash to shareholders, dissident board members complained in a lawsuit that the now ex-CEO's tenure was "littered with related-party transactions between [the company] and entities owned by Arthur T. or his family members."

Three of the company's new store projects—in Waltham, Revere and Plymouth—have been suspended while a newly appointed management team investigates the underlying real-estate deals. Fired or quitting in a huff were a bunch of senior executives whose tenure at the company was improbably long—48, 55, even 70 years in one case.

Now it's true that a more conventional, hair-splitting approach to corporate governance might lead to the chain being run more like other supermarkets—for the benefit of shareholders as shareholders. Workers and customers may feel demoted by the new priorities. Happily, a solution has been proposed by Arthur T. Demoulas—the Arthur who was ousted—with his offer last week to buy out his relatives so he can run the company however he wants, sacrificing whatever efficiencies he cares to sacrifice to benefit other interests.

This would seem a just and judicious outcome, and better than anyone going to jail. A realistic price would be one that lets family members aligned with the other Arthur— Arthur S. Demoulas —finally realize their share of the business while rewarding them for ending their acrimonious association with the company.

What's the larger lesson of these corporate melodramas? Businesses invite customers to anthropomorphize them, emotionalize them, become engaged with their products and images—and it works when it works. But where the economic dynamics are unforgivingly competitive if not fundamentally commodity-like, it pays to doubt any charismatic leader's ability to beat the spread over the long term. It also pays to look under the hood, which some of the Boston media might have bothered to do before turning the Demoulas battle into a good guy vs. bad guy corporate morality tale.

The cultural transformation of the American breakfast

2014-07-30

Occasion-based business strategy is nothing new in the food business. But the current frenzy of breakfast strategizing is certainly one of the more intense episodes in an industry struggling for organic volume growth. It is our belief that the cultural transformation of breakfast is unleashing new business opportunities behind the headlines. 

Widespread success began, more or less, with the popularity of Jimmy Dean frozen breakfast sandwiches and bowls about a decade ago. Sara Lee also set off a competitive surge of launches in the frozen convenience breakfast space, many of which continue to do well. 

In retrospect, it is surprising that no manufacturer had thought to freeze the American sausage-and-egg combination earlier. Certainly there was no manufacturing or R&D barrier to doing so (and we’ve all had microwaves for quite a while). Most of these products take a version of the iconic McDonald’s Egg McMuffin and transform it into contemporary forms for all sorts of dietary preferences. 

Consider this for a moment longer: Multiple major food companies launch big product lines for an underdeveloped occasion in a declining sector, frozen foods, and virtually everyone is succeeding. This is not a common tale in contemporary packaged foods. It is even more remarkable than Greek yogurt, because the latter was at least birthed into a long-term growth category in American food culture. 

And therein lies an ironic coincidence. Both Greek yogurt and frozen breakfast bowls and sandwiches have reinvented the breakfast marketplace due to longer-term structural changes in the meaning and practice of morning eating. Cookies may be next.

Before we jump to our explanation, though, it will be easier to explain changes in breakfast demand from a historical perspective. 

In the 19^th century, most Americans worked either in the agricultural or manufacturing sectors. They engaged in heavy to light manual labor all day long and burned a large amount of calories as a result. The men, especially, had more or less no time for lunch. American farmers wanted to stay in the fields, not trek back to the farmhouse. And factory workers did not always have lunch breaks in a pre-union age. In an era often romanticized by foodies and organic-food advocates, breakfast was just not the ‘proactive health and wellness occasion’ we view it as today. It was a mundane fuel occasion designed to onboard lots of calories to burn throughout the day. And cheap access to eggs and meat for many Americans made this possible in ways their counterparts in other parts of the world would have envied. 

At the turn of the 20^th century, Dr. Kellogg, Dr. Post and others appeared on the scene to challenge American breakfast traditions just as the middle class began to grow. They and others helped redefine breakfast as a health and wellness occasion, a nutritional moment, for a middle class of clerks and bureaucrats who had time to eat lunch (at work or at home) and generally did. For this group, breakfast was less important not only because their middle-class existence allowed time for lunch but primarily because they didn’t perform manual labor all day long and did not need what many now term a ‘heavy’ or ‘weekend’ breakfast. 

The morning meal was transformed into a light bowl of grains and milk for this emerging middle class, a social group increasingly focused on the emerging American ideals of self-improvement that we all take for granted today. 

During the 20^th century, cereal especially helped redefine breakfast as a health and wellness moment. Breakfast beverages also arose to give us a heavy dose of scientific nutrition to start our day. “Starting our day right” became a cultural mantra echoed in interviews across America to this day. In essence, breakfast transformed from an energy/satiety occasion to an eating occasion focused on emerging notions of targeted nutrition. 

Fast forward to 2014: What we’re seeing today in the field is actually an ironic, even mystifying, partial return to the demand drivers of the 19^th-century farmer, even though today’s consumers don’t require as many calories. The difference is in the cultural rationale and context behind the change. 

Modern middle-class workers are willing to sabotage daily eating routines in favor of ‘an important meeting,’ ‘a Facebook post that is outrageous and must be answered,’ ‘a nagging email or SMS message’ or ‘simple daydreaming.’ This de-ritualization of eating creates real, palpable uncertainty as the day starts, uncertainty about ‘when I can eat and what I’ll have time to eat.’Although behavioral data suggest most consumers eat four or five times a day,  anxiety over energy remains powerful. It is really an anxiety about underperformance in an increasingly competitive era. 

While many marketers are obsessed with protein gram count as the driver of the new wave of breakfast foods, the real driver is not nutrition. It is the spread of a renovated American ideology of energy, one based on 21^st-century ideals of increased performance and productivity combined with a desire for a morning insurance policy against an uncertain day ahead. 

The new American weekday breakfast is moving from light, grain-based breakfast foods tied to old notions of nutrition to higher-satiety foods that consumers believe will give them sustained energy to cope with an unpredictable schedule. Traditional categories need to focus on making consumers feel full like the modern disruptors are doing so well: Greek yogurt, nutrient-dense bars and breakfast sandwiches. 

Finally, an upmarket twist also has emerged: the nutrient-dense breakfast sandwich. Panera’s spinach power sandwich is slowly making the rounds in many an office park, allowing those who believe breakfast should be full of nutritious goodness the ability to fill up for an uncertain day ahead as well. 

Why Amazon Needs Drones To Win The Next Major E-Commerce Fight

• JILLIAN D'ONFRO
 
•  

• JUL. 30, 2014, 4:23 

Reuters/Gus Ruelas / Amazon

Amazon CEO Jeff Bezos is known for his laser-sharp focus on a few things: speedy delivery, the lowest prices, and a willingness to forgo profits in the short-term to ensure them both.

This combo has proved brutal for competitors. 

"We won't invest in a company unless they can tell us why they won't get steamrolled by Amazon," Andreessen Horowitz investor Jeff Jordan told Fast Company.

Look at what just happened this week. Flipkart, an e-commerce site based out of India, announced it had raised $1 billion in funding. The next day Jeff Bezos announced plans to invest $2 billion to expand Amazon in India.

So when Bezos announced plans to invest in drones that could plop packages on customer doorsteps in 30 minutes or less late last year, it seemed like he was once again trying to intimidate the competition.

But there's more to Amazon's drone plans than just intimidation.

What many people missed last year has become increasingly obvious this year. Amazon needs drones because same-day delivery is quickly becoming a competitive advantage for Amazon's rivals. If Amazon really plans to achieve the holy grail of same-day delivery, it might have no choice but to try something crazy-innovative like drones.

We decided to ask around about drones to see why they might actually be one of the best ways for Amazon to truly tackle the last-mile problem to the degree that it wants to.

The hyper-fast delivery space is already crowded. Google recently launched Shopping Express for same-day deliveries in New York and Los Angeles. eBay Now started making local deliveries nearly two years ago. Walmart To Go will deliver your groceries right to your door. Smaller startups — like Instacart, Postmates, and WunWun — give customers the option of getting anything instantly.

Amazon offers more than 500,000 different items for same-day delivery in 12 metropolitan areas. Amazon Fresh, its grocery-delivery program, serves only California and Seattle. Ideally, it would be able to offer rush delivery for almost everything to almost anywhere.

The logistics required to make a same-day delivery model sustainable are complicated (just ask Kozmo or Webvan, two flame-outs from the dot-com boom). Bezos tested Amazon Fresh in Seattle for five years before daring to expand the program to L.A. 

Amazon has already been taking the delivery process more into its own hands by investing in a delivery fleet more spread-out fulfillment warehouses, and 16 new "sortation centers" to make shipping more efficient. But while Fed-Ex or UPS may be too slow for Amazon's tastes, deploying big trucks to every address for every customer order on almost no notice would be unfathomably expensive. That's why Amazon needs drones.

Amazon

"They are leveraging logistics," Adrian Gonzalez, president of supply-chain and logistics company Adelante, told Business Insider. "Drones are another piece of the puzzle. It's not going to be the right solution for every scenario, but for certain scenarios. The whole idea here really is the ability not to lose a sale because you can't get something to the customer when they want it."

Right now, Amazon charges $8.99 per delivery, plus 99 cents for each item shipped (or $3.99 with a gift card) for its same-day delivery service. But even with this premium it's still expensive.

When Bezos introduced the drone-delivery concept, the subtext was that it would make sense only if it saved the company money. In 2013, shipping cost Amazon $6.63 billion. Over the past three years combined, the net cost of shipping has been about $8.8 billion. That's a lot of money.

Would drones give Amazon a cheaper delivery alternative? It's difficult to say right now because drone technology is still new and there is no precedent for a retail company with deep pockets like Amazon investing in drones for delivery. 

However, RobotEconomic's Colin Lewis did some back-of-the-napkin math to figure out whether drones could save Amazon some cash. His conclusion: yes. He believes Amazon's average shipping cost is $2 to $8. With drones, if Amazon prices it right, the cost could be as low as $2 a shipment.

(Not to mention the reduced carbon emissions from delivering via drone instead of truck. "It’s very green," Bezos said during the announcement. "It’s better than driving trucks around.")

To make the complicated, costly logistics of same-day delivery worth it, Amazon needs to know that its huge investment will lead to increased sales.

Drones definitely play a role here. Right off the bat, the novel nature of getting a package delivered in 30 minutes or less by a futuristic-looking drone would likely reel in some curious consumers. They might buy a product offered by Prime Air just for the experience.

"This is another arrow in Amazon's bow to set themselves apart from the rest of the retail industry," Gonzalez says. 

But it goes deeper than thrill seeking. In a 2013 study, Amazon proved that speedier shipping leads to more purchases. In a test with Prime customers, the company found that even just displaying an icon promising same-day availability increased the likelihood of purchase by between 20% and 25%. (Interestingly, though, most ended up choosing next-day delivery instead of same-day.)

If that trend carries, Amazon could see an even greater increase in purchases if it can an offer Prime Air shipping on a bunch of products.

Of course, there are a bunch of ways that Amazon could deploy its drones. In Bezos' original demo video, he showed one zooming off from an Amazon warehouse. Gonzalez theorizes, however, that Amazon could also reach more diverse areas farther away from its fulfillment centers by packing 30 to 50 loaded drones on a truck, driving them to a central location, and then deploying from there.

Right now, Amazon is testing the eighth and ninth generation versions of its drones in its research and development lab in Seattle. Unfortunately for the company, commercial drone use is currently illegal. Federal Aviation Administration rules dictate that only hobbyists can fly small unmanned aircraft systems (sUAS) outdoors, while all commercial experimentation needs to take place inside. On July 9, Amazon filed an exemption request with the FAA asking for permission to test its drones outside.

The administration has to come up with a plan for “safe integration” of commercial drones by Sept. 30, 2015, though it plans to release proposed rules for small drones under 55 pounds later this year. Once it comes up with that set of rules, they'll be submitted for public comment, and then reviewed again before they're finally enacted. Even then, Amazon and others might have to keep waiting. "Safe integration will be incremental," the FAA writes

To its credit, the FAA isn't trying to be the bad guy.

"You have to appreciate the magnitude of what it is we are trying to do," FAA media representative Les Dorr, told Business Insider. "We're writing rules that will apply to the most complex, busy airspace in the world. We're trying to meet our overriding goal of avoiding safety hazards but at the same time we don't want to put an undue regulatory burden on an emerging industry."

For its part, Amazon argues that it should be allowed to start testing outside so that it can be completely ready to implement its drones once the FAA makes commercial flight legal. 

"Amazon always try to be one step ahead of the competition with everything they do," Gonzalez says. "This is them pushing the envelope, for providing another way to deliver packages in a very short time period."

SUPPLIER RISK IS CHANGING THE ROLE OF THE CHIEF PROCUREMENT OFFICER

Posted by Edith Simchi-Levi on Tue, Jul 29, 2014 @ 07:20 AM

 

The article, "Companies are looking more towards their Chief Procurement Officers for a supply chain revolution" caught my attention as it summarizes succinctly what is now becoming a more important role and significant transformation in the way companies are managing their suppliers and their supply chain.

Traditionally, the role of the Chief Procurement Officer (CPO) has been a secondary one compared to others in top management. It was mostly limited to negotiating good deals and tracking supplier performance. Increasingly, however, the role is being seen as more valuable and central within many companies. In particular, the CPO is now accountable for supplier risk not only on the first tier but often on the second and third tiers. In particular, large multinationals are rethinking the way they manage and rationalize their supply chains and the way they can manage risk more centrally and strategically.

Some of the many reasons for this trend:

• Global expansion and far flung supply chains have added complexity to the supply chain and to supplier management. 
• Customer demand for faster service across many channels means turnaround time for every part of the supply chain including suppliers is higher.
• An extended supply chain has drawn the attention to ongoing operations risk such as transportation delays, port closures and quality problems.
• Growing awaremness of reputation and brand issues related to supplier sustainability and labor practices.
• The impact of supply chain disruptions due to natural disasters, war zones and other unexpected events have brought attention to underlying risks with suppliers and the need for more preparation and planning.

These challenges on the CPO require a whole new set of skills. Foremost is the ability to collaborate both externally with a diverse supplier base that is required to perform at a higher level and internally with other supply chain stakeholders who may hold the keys to resolving some of the risk issues and improving overall performance.
While risk is often manifested in supplier problems and can sometimes be resolved by lining up alternative suppliers this is not always a feasible or best solution. In order to address supplier risks you need to understand the role of inventory in the supply chain. This in turn requires an understanding of what drives inventory and what is the best way to manage it which entails an end to end view of the supply chain.
The first step that we recommned to address these issues is to use data and analytics to increase understanding of the drivers of the supply chain. There can be several approaches to this and the direction chosen depends on the company’s specific challenges, structure and its industry characteristics.

1. Start from the demand profile and gain understanding of customer segmentation - this was the approach taken by Dell in their transformation project several years ago. The project was driven by problems creating a retail channel. One aspect of the project was reducing the number of configurations by 99% which of course simplifies the entire supply chain back to manufacturing and sourcing. And indeed, manufacturing costs went down by 30%. The technology used here ismachine learning and optimization. 
2. Start from looking at end to end inventory optimization. This will reveal what are the true drivers of inventory in the supply chain and where there are opportunities. Locating inventory efficiently across the supply chain, taking advantage of risk pooling  through postponement and similar strategies can help simplify processes and reduce risks. It will also help determine the impact of long lead times and variability in lead time as we found in our work with PepsiCo.
3. Start from supplier network analysis to reveal the Risk Exposure Index™ (REI) and look at performance impact versus spend. Then focus on the truly problematic suppliers that need immediate attention. Many companies take an exhaustive approach by treating all suppliers alike for risk management. The REI analysis can save time and cost by honing in on the risky suppliers that truly need to be hedged in case of a disaster. Ford successfully used this approach to reduce the number of tier 1 suppliers that needed to be addressed from four thousand to about one hundred or so where the impact would be greatest. 
4. In some cases, in particular when merger and acquisition activity is involved, it may make sense to start from network design. The supply chain network analysis can help determine sourcing that is most efficient from a transportation and lead time perspective. 

Of course, the CPO has many other options to improve performance and minimize risk such as collaboration with suppliers and others in their industry, improved supplier management, supplier assurance, supplier monitoring control tower and many others. But we believe that a true revolution will come when leading with an end to end supply chain approach and analytics that are harnessed to help make more informed decisions.

'Ask Zappos' raises customer service bar, again

By George Anderson

JULY 29, 2014

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Zappos, a company known for exceptional customer service, has just upped its game again with a personal assistant who can help you track down shoes or other clothing — even if the e-tailer doesn't sell it.

The free service, Ask Zappos, provides customers with a personal shopping assistant who uses images provided by the shopper to hunt for the item online, reports CNET. Zappos then returns information about the item along with some alternative options.

According to CNET, Zappos began testing the service back in June and began promoting it on the homepage of its mobile site last week. Shoppers can send images to a personal shopper at Zappos in a variety of ways, including posting a photo on Instagram with the hashtag #AskZappos or attaching an image to an email or text message. Within 24 hours of receiving photos, "real, live people" from Zappos' customer loyalty team will respond with results.

In the future, Zappos plans to add image recognition to the service to automate some functions, but for now the technology doesn't work as well the stylists trained by the company. Will Young of Zappos Labs told CNET, the idea behind the service is to personalize the shopping experience and "wow the customer."

Several years ago, Aaron Magness, the former senior director of brand marketing for Zappos, told Fast Company that the aim is to "communicate with your customers, don't market to them." Ask Zappos is another in a long line of examples demonstrating the company's mission to not only talk the talk but walk the walk as well.

US supermarkets losing ground

By Christine Blank, SeafoodSource contributing editor

Published on 30 July, 2014

The good news is consumers are buying more fresh, frozen and prepared seafood. The bad news is supermarkets — traditionally the largest retailers of fresh and frozen fish — are losing market share to other formats.

In its recent “Future of Food Retailing” report, retail research and consulting firm Willard Bishop found traditional grocery channel sales increased 1 percent to USD 522.8 billion (EUR 388.9 billion) in 2013, and the category’s overall market share declined slightly to 46 percent. To make matters worse, the market share for traditional grocery formats will drop 1.2 percentage points to 44.8 percent by 2018, according to the report.

“Traditional supermarkets are having trouble because of increased competition. Drug stores, dollar stores and others have taken away some of supermarket perishables’ shoppers,” said Brian Todd, president of the Food Institute, which recently cohosted a webinar on the Future of Food Retailing with Willard Bishop.

Warehouses and club stores are also snaring some of the fresh and frozen seafood business from supermarkets. Some Costco stores, for example, regularly feature fresh seafood with events such as “Friday Fish Day” and demos of seafood spreads.

In addition, fresh format sales grew a whopping 10.4 percent to USD 14 billion (EUR 10.4 billion) in 2013 and are projected to grow at a rate of 12 percent annually over the next five years. In fact, The Fresh Market, Whole Foods Market and Sprouts Farmers Market all boasted double-digit sales growth in 2013, according to Willard Bishop. Fresh format stores, including Whole Foods and Trader Joe’s, are performing well because U.S. consumers are seeking fresher, healthful foods.

While fresh formats continue to grow, they are still a small segment of the overall market, Todd said. Plus, traditional supermarkets sport many advantages that consultants say will cement their place at the fresh seafood table.

“Fresh departments, including seafood, are still strengths for traditional supermarkets, so there is likely to be less erosion there,” said Jim Hertel, managing partner of Willard Bishop. “Smart retailers are realizing they can establish their own reputation for fresh, even within the traditional supermarket format.”

For example, Rochester, N.Y.-based Wegmans goes out of its way to cater to foodies looking for fresh seafood and other perishables. The retailer operates its own restaurants and provides gourmet meals to go. It sets itself apart from most traditional grocers in the region, which typically do not have the same focus on fresh, sustainable seafood,; in-store cafes and a heavy emphasis on gourmet and fresh foods. In fact, the traditional supermarket chain recently received the highest consumer rating in the Northeast United States based on a Harris Poll.

Likewise, Dayton, Ohio-based Dorothy Lane Market (DLM) sets itself apart from other grocery competitors with its fresh and gourmet food focus, cooking classes and fresh seafood demos and events. Every Memorial Day weekend, the retailer holds a “Lobstermania” sale, previewed the night before by a cooking and lobster educational class with lobstermen. A few times a year, DLM hosts its Sidewalk Salmon Sale, cooking fresh Alaska salmon sandwiches to order for its customers.

The retailer also educates its shoppers about how to prepare seafood and the sustainability of its products via a very educated staff, point-of-purchase materials and signage. The education component is key, in order for traditional supermarkets to set themselves apart from all the newer types of retailers selling seafood, according to Hertel.

“Success starts with quality and freshness and, in the perimeter departments like seafood, knowledgeable and engaging service department personnel,” Hertel said. “Staff should be able to explain differences between farm-raised and wild-caught, how to prepare a delicate fish like sole, and so on. Extreme value operators can’t compete with that level of service.”

Some traditional supermarket chains are also faring well with fresh and frozen seafood sales simply because the price gap between seafood and other proteins has narrowed. “When beef is hitting USD 6 (EUR 4.46) a pound, suddenly seafood at USD 12 or 13 (EUR 8.93 to 9.67) a pound is not as much as a stretch as it would typically be. It looks more favorable to consumers,” Todd said.

While seafood costs have risen in recent years, they have not risen more than other proteins and prices have not turned shoppers off, according to Jack Gridley, meat and seafood director at DLM. “I think people understand [rising seafood prices]. They see that fuel prices are up and the amount of fuel it takes to put a boat on the water. Some of the biggest price increases have been on the farm-raised side, because of the feed.”

Even though fresh and frozen seafood is now being sold via a variety of channels — including dollar stores and online retailers such as AmazonFresh — many traditional grocery stores are stepping up their perishables game. By differentiating their seafood departments with high quality seafood and meals, educated staff and events, traditional grocers can continue to grow their fresh and frozen seafood sales.

Amazon will invest $2 billion in India

 BY DON DAVIS Editor in Chief

Today’s announcement follows yesterday’s news of a $1 billion funding round for Indian e-marketplace Flipkart, and recent online investments in India by Wal-Mart and eBay. Though limited to providing an online sales platform for Indian merchants, Amazon is rapidly adding distribution centers in India.

Amazon.com Inc. today announced plans to invest $2 billion in India, following a series of major moves by competitors in a large economy where e-commerce still represents a tiny fraction of retail sales.

“After our first year in business, the response from customers and small and medium-sized businesses in India has far surpassed our expectations,” Amazon founder and CEO Jeff Bezos said in a statement. “We see huge potential in the Indian economy and for the growth of e-commerce in India. At current scale and growth rates, India is on track to be our fastest country ever to a billion dollars in gross sales. A big ‘thank you’ to our customers in India—we’ve never seen anything like this."

Amazon is No. 1 in the 2014 Internet Retailer Top 500, and No. 4 in the Asia 500.

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Amazon’s announcement comes one day afterIndian online marketplace Flipkart disclosed it had raised $1 billion in additional funds. Wal-Mart Stores Inc. and eBay Inc. also have announced investments in e-commerce in India this year.

A big part of Amazon’s investment appears to be earmarked for expanding its distribution network. The company announced earlier this week plans to open five new distribution centers in India, up from two today and one as recently as April. With the new distribution centers, Amazon will have 500,000 square feet of storage capacity, enabling it to deliver goods on behalf of Indian merchants that sell 17 million items on Amazon.in. The new distribution centers will be in Dehli, Chennai, Jaipur, Ahmedabad and Tauru.

Amazon began offering next-day delivery to consumers in major Indian cities in December and guarantees next-day delivery on 300,000 items offered by merchants on Amazon’s Indian e-commerce site. Indian law prohibits foreign companies from selling their own products online directly to Indian consumers, but allows companies like Amazon and eBay to offer online shopping malls that sell Indian products. Amazon fulfills on behalf of participating Indian merchants through its Fulfilled by Amazon service, a program similar to Fulfillment by Amazon in the United States.

The investment announced today seems aimed at strengthening those services to marketplace sellers, says Colin Sebastian, an analyst at investment firm Robert W. Baird & Co. who follows Amazon. “Amazon seems to be pursuing a ‘services’ model in India, similar to the third-party marketplace and FBA model they have in other regions,” Sebastian says. “I assume Amazon’s investments are geared to support this marketplace growth.” He also notes that 500 of Amazon's 10,000 posted job openings are in India.

However, another analyst says she is puzzled by today’s news. “I'm somewhat baffled by the announcement, and not sure what it means, what it is intended to support or why they are targeting an underdeveloped, highly protectionist environment when they have struggled in China and they also have significant challenges in Brazil,” says Sucharita Mulpuru, an e-commerce analyst at Forrester Research Inc. “I think the number is subject to change and I'd suggest it's intended to scare Flipkart and their investors rather than to generate a catalyst for the market.”

India is far behind other major economies in terms of online retail sales. U.S. research firm eMarketer estimates online retail sales in India in 2014 will only amount to $5.30 billion, compared with $217.39 billion in China, $304.15 billion in the U.S. and $17.46 billion in Russia. EMarketer projects India’s online retail sales will grow to $17.52 billion in 2018. Forrester estimates India’s online retail sales will grow from $2 billion in 2013 to $16 billion in 2016.

A report last year by Indian consulting firm Technopak estimates that e-commerce accounted for only 0.1% of retail sales in India in 2012, compared with 5% in the U.S., 6% in China and 13% in the United Kingdom. But Technopak projected steady growth of e-retail sales driven by a young population that’s increasingly going online, and rapid urbanization and more women working driving consumers to the convenience of online shopping. Technopak says the median age of India’s population was 26 in 2012, and will increase only to 29 by 2020.

Other major Western players are positioning themselves to compete in India. In February, eBay announced it has led a $133.8 million funding round for Snapdeal, an Indian online marketplace that competes with Flipkart and Amazon. EBay, which also operates its own marketplace in India, previously had invested $50 million in Snapdeal.

Meanwhile, Wal-Mart, which, like Amazon is prohibited from selling online to consumers in India, announced this year that it would establish an e-commerce site where small merchants could make wholesale purchases. Wal-Mart also announced plans to open 50 more wholesale stores in India over the next five years, in addition to the 20 Best Price Modern Wholesale outlets it currently operates.

Baird analyst Sebastian says Amazon is in a strong position in India. "We believe that Amazon has several advantages as it seeks to gain a stronger foothold in India, most notably a global brand name, top of class web site, access to broad merchandise selection and a strong technology platform," he wrote today in a note to investors. "A key disadvantage is that Amazon (and all foreign entities) are not allowed to sell merchandise directly to India consumers, instead relying on third-party suppliers—similar to the company’s 3P Marketplace model in other regions." He says Amazon collects commissions of 8-15% on sales on its Indian site. That would be similar to the fees it collects in the United States.