Brazil marks the firm's latest foray into emerging markets after breaking into China in 2004 and India this year.Amazon.com Inc is expected to set up a digital bookstore in Brazil in the fourth quarter, as it seeks to get a piece of the fast-growing online retail market in the country that inspired its name.
The e-commerce powerhouse, named after Brazil's longest river, wants to elbow its way into Latin America's largest economy with the popular Kindle e-reader and a Portuguese-language catalogue of digital books, according to Brazilian publishers and industry sources.
The all-digital approach will allow Amazon to minimise the risks that a bigger retail launch would imply in a country with notorious infrastructure shortcomings and a complex, costly tax system.
The company would also have to ride out a downturn in Brazil's economy that threatens to cool consumer demand. "Brazil would be the first country Amazon enters only with digital (products) and that is because of the logistic and tax difficulties," sources said. "Having a full retail operation? That's the goal," sources added.
A Brazil-based operation would save the country's 200 million consumers from paying high import taxes on online orders shipped from overseas. Two local book publishers said they have had meetings and video conferences in recent months to negotiate contracts with Amazon's head of Kindle content, Pedro Huerta. "They told us the plan is to start between October and November," said one of the publishers.
The world's largest online retailer, Amazon is the latest US company looking to tap Brazil's $10.5 billion online retail market, which is expected to grow 25 per cent this year fueled by a swelling middle-class. Others include online movie service Netflix Inc and home-rental service AirBnB. It would be Amazon's latest foray into emerging markets after breaking into China in 2004 and India earlier this year.
But the move comes as Brazil's decade-long expansion in consumer growth hits the brakes. In 2012, Brazil's economy is expected to grow less than last year's 2.7 per cent expansion, raising questions about the timing of Amazon's entrance.
Pedro Guasti, director of the Sao Paulo-based research firm eBit, says Brazi''s online business has become big enough to pop up on Amazon's radar. "This year we should reach $12 billion in sales online, a level that justifies their entry. If they wait much longer, it would become very expensive," he said.
Kindle aims for supremacy
Amazon thinks it could quickly dominate Brazil's ebook market with the Kindle, boosting sales of electronic books to 15 per cent of the publishing market in the first year of operations from 0.5 per cent currently, sources said. Amazon hopes to grab 90 per cent of Brazil's ebook market, the source added, in part because many Brazilians already download content from its site using readers they bought abroad. Brazilians account for 1 per cent of the global traffic to Amazon's websites, according to the company's information firm Alexa.
That compares to 2.3 per cent in Britain or 1.3 per cent in Germany, where Amazon already has operations.
To gain market share quickly in Brazil, Amazon will likely sell its most basic Kindle model at a subsidised price of under 500 reais ($239), three times more expensive than in the US but still bellow rival products, the source said. That strategy - prioritising market share over profit - is one that Amazon has used elsewhere, prompting critics to question the company's ability to make money in the long run.
Amazon has already signed contracts with around 30 Brazilian publishers and is rushing to build a portfolio of some 10,000 electronic books ahead of the end-year shopping season, sources said. A publisher involved in the negotiations said Amazon is planning to price the ebooks at about 70 per cent of their cover price and earn a profit margin of 40-50 per cent.
"Revenues for us will be insignificant, but we see it as an important channel to promote our products and sell more physical books," the publisher said, who also asked not to be identified because negotiations with Amazon are ongoing.
Amazon's move could end up prompting other US competitors to expand their digital operations into on Brazil. One distributor said Barnes & Noble Inc has already approached some Brazilian publishers with its reader Nook. A spokeswoman with the US bookseller said they have plans to expand internationally but had no specific comments on Brazil. Despite relatively low Internet penetration, Brazil has recently overtaken India as Facebook's second-biggest user base and is one of the world's fastest growing markets for smartphones.
But publishers and online retailers warn that when Amazon expands its retail offerings, it will struggle to replicate its efficient business model in Brazil, where labour costs are high, taxes complex and less than 20 per cent of roads are paved.
Online retailers in Brazil complain about inter-state taxes and logistical bottlenecks in this vast country, which is roughly the size of the United States and where mail is sometimes delivered by canoe. Steep customs taxes and an endless chain of intermediaries make imported goods expensive. One likely strategy is a long-term approach.
"I think Amazon will take small steps at first, to learn the market, but then invest in growth," said Colin Sebastian, an equity research analyst. "They are going to face the same kind of problems we always had," said Sergio Herz, director of Livraria Cultura, one of Brazil's top bookstores. Until now they were in heaven and we were in hell. Come to hell with us, Amazon."