The impending high-profile acquisition between Flipkart and Snapdeal has once again put the focus back on Indian e-commerce and a change in the landscape that the sector is witnessing as a result of intense competition among players. The two giants recently moved a step closer to a buyout by signing a non-binding term sheet for a merger that, if completed, would mark the biggest acquisition in the Indian e-commerce space.
In its last round of funding in February last year, Kunal Bahl-led Snapdeal was valued at $6.5 billion. After the merger, say reports, Flipkart is likely to value Snapdeal at around $1 billion. There are also reports that Snapdeal’s mobile wallet service Freecharge will be sold separately, with players like Paytm and MobiKwik being in the fray.
Indian e-commerce companies have seen funding dry up over the past few months, as investors are focusing extensively on profitability and rationalisation of expenses. With intense competition from deep-pocketed global rivals like Amazon and Alibaba, homegrown companies like Flipkart and Snapdeal are facing a lot of heat in recent times.
Investors, who were earlier encouraging start-ups to acquire customers at any cost and prove their worth in gross merchandise value (GMV), seem to be getting wary too. SoftBank’s push to engineer the Flipkart-Snapdeal merger is a case in point. The Japanese telecommunications and Internet behemoth has poured about $1 billion into Snapdeal since 2014 when it arrived as the online marketplace’s single-biggest investor by leading a $627-million financing round. But in recent times, the Masayoshi Son-led SoftBank is said to be losing patience, as Snapdeal is outpaced by American rival Amazon, which has now become the second-largest online marketplace after Flipkart in India.
Besides Snapdeal, SoftBank is also close to finalising a cash infusion of more than $1 billion into Alibaba-backed digital payments firm Paytm—another leader in a highly competitive sector—giving it a more direct say in that group too, say reports. Some reports have also indicated a tie-up between leading Indian e-grocers Grofers and BigBasket that is being engineered by SoftBank.
Experts say all these developments don’t come as a surprise. In an industry where customer loyalty has been largely non-existent and the costs of acquiring and servicing customers have been consistently high, consolidation was inevitable, as per Sreedhar Prasad, partner, KPMG India. “The focus of all competing players historically was on customer retention and GMV growth, and not necessarily on elements of customer experience or service efficiency. Because of this, the growth has not been as profitable as was envisaged by the companies and their investors at the start of this e-commerce journey,” he says.
Mrigank Gutgutia, engagement manager at research and consulting firm RedSeer Consulting, adds, “Increased competition, which leads to growing pressure on prices and unit economics, is a frequent cause of consolidation. In the Indian e-tailing space, this pressure is exacerbated by the fact that the overall industry size is growing very slowly. In this scenario, growth opportunities for lesser-funded players become even more limited, thus pushing them towards mergers and acquisitions.”
Blood in the market
It’s an all-out war out there. In a bid to grab market share, there has been a lot of blood in the Indian e-commerce space. Once known as the next frontier for tech investments, India has seen many of its top start-ups, including high-profile unicorns, losing much of their sheen lately. In April, eBay closed the sale of its India unit to Flipkart, a deal which saw the US e-commerce giant investing $500 million for a minority stake in the Indian company.
eBay was among the first entrants into India’s e-commerce market in 2004 through the purchase of Bazee.com, but it failed to keep up with rivals such as Flipkart and Amazon. In November last year, the e-commerce company had laid off about 100 employees at its technology centre in Bengaluru. Snapdeal also laid off hundreds of employees in February this year as part of its attempts to turn profitable.
Market leader Flipkart, too, has had its fair share of troubles. After a restructuring effort early this year that saw co-founder Binny Bansal being elevated to group CEO, several key senior officials left the company. This was after Flipkart’s value was marked down by five of its own investors, mostly mutual funds based in the US, in 2016. These funds include those run by Morgan Stanley, Fidelity and Valic, and had valued the company anywhere between $5 billion and $10 billion.
Of late, however, Flipkart seems to have sprung back, as it attempts to take on Seattle-based Amazon, which has allocated $5 billion for the India market and has launched a series of offerings, ranging from the Prime subscription service to Prime Video. Recently, Flipkart announced that it has raised $1.4 billion in funding from Tencent, eBay and Microsoft in the biggest-ever start-up funding round that both boosts Flipkart’s ability to compete with arch rival Amazon India, as well as takes the company a step closer to presenting itself (to investors and customers) as the only option to the US firm’s Indian arm.
Then there is the Flipkart-Snapdeal merger. While it’s too early to say how this consolidation will play out or whether the combined forces will be able to beat Amazon, we must also look at Alibaba, the Chinese Internet giant, and its plans for India. As per unconfirmed reports, Alibaba is pumping $200 million into India’s mobile commerce and payments company Paytm on top of the $680 million it had invested along with its Ant Financial spin-off in 2015. Jack Ma-led Alibaba may have stayed back from entering the e-commerce arena in India directly, unlike Amazon, preferring to pick up stakes in Paytm and Snapdeal, but reports say it’s soon going to launch a new website called Paytm Mall as the Indian version of Alibaba’s popular Tmall e-marketplace in China.
The global edge
As per a report published by US research firm Forrester, the online retail market in India is poised to reach $64 billion by 2021, with a 31.2% compound annual growth rate over five years. Considering that mobile will be the predominant driver for online commerce, the future looks promising for the Indian market, where the number of mobile Internet users is expected to reach 650 million by 2020 and high-speed Internet users will be around 550 million. From these figures, it’s quite understandable why global giants are vying for a sizeable slice of the e-commerce pie.
Going by India’s e-commerce history, Amazon has been quite a late entrant, making its presence felt in the country only in 2013. However, it has been able to capitalise on the market created by homegrown players. “The early movers invested a fair amount of time, effort and cost into building consumers’ trust in the online channel. From a time when customers were hesitant to purchase low-value items online, these players ensured that the average Indian consumer bought a high-end phone paid for in advance online. This was a long and tedious process of permitting returns, offering cash on delivery, absorbing the cost of delivery and a host of other strategic initiatives. However, once a critical mass of consumers was actively buying online, the global players made their move and were rewarded with a large number of ‘already online’ customers moving to these platforms,” explains Prasad of KPMG India.
“We are proud to be run by a local team, innovating to serve and delight Indian customers and sellers, paying local taxes, building infrastructure and creating local jobs,” says an Amazon India spokesperson. “We enable Indian manufactures and brands to gain visibility in the global markets. In less than four years, we are not only the leader in things that matter most to customers, but are also leading the path for what e-commerce should be in India. We are making e-commerce an everyday habit for the Indian customer, where anyone should be able to find, discover and buy anything online.”
So can this be then called a fight between Indian and global e-commerce players? Not really, feels Adrian Lee, research director at American research and advisory firm Gartner. “Like in south-east Asia, the recent spate of consolidations and investments has been instrumental in creating more investor and consumer confidence in the region. The fight is not so much between Indian and global e-commerce players, but rather a clash between US and Chinese giants that is boiling over into different emerging territories, with Amazon and Alibaba going toe-to-toe against each other,” he adds.
Survival of the fittest?
Is India then looking at a future where only a few big players like Amazon and Alibaba will ultimately exist? Definitely not, says Lee of Gartner. “The future of e-commerce does not only belong to the big players. Scale is no guarantee for continued survival. While these big players are prominent due to scale, the future ultimately belongs to e-commerce providers that can provide the best-of-breed customer experience,” he explains.
Fundamentals such as great merchandising, friction-free payments, a robust and agile fulfillment and logistics network will be key in differentiating an average e-commerce provider from a great one. “E-commerce specialists in domains like fashion, health and beauty can still serve a consumer demand that isn’t being met by massive online marketplaces,” says Lee.
Agrees Gutgutia of RedSeer Consulting, “While we expect horizontals to definitely account for a large share of the e-tailing pie in the future, we also believe that smaller verticals will continue to thrive by focusing on smaller niche needs and offers,” he says.