Why Amazon India is the reason behind Flipkart-Snapdeal merger

This would be India's biggest merger - $10 billion (Rs 6,500 crore) - in the e-commerce sector.

 |  3-minute read |   10-04-2017
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Hectic negotiations are reportedly on, exploring a merger between the two home-bred e-retail giants, Flipkart and Snapdeal. The initiator of the talks is Softbank Corp, the Japanese investor in Snapdeal, who wants US-based Tiger Global, the biggest investor in Flipkart, to consider a merger.

If this merger materialises, it would be the biggest in India’s $10 billion (Rs 6,500 crore) e-commerce sector. Some of the reasons for the proposed merger are obvious. Snapdeal has been in trouble lately, laying off hundreds of its staff to “drive efficiency across all parts of (its) business” as the company puts it.

Its founders, Kunal Bahl and Rohit Bansal, had even foregone their salaries since this February, and Bahl has written an emotional letter to the company’s staff, that reads more like an admission of excessive splurge and lack of a sharp focus in the business.

“Over the last 2-3 years, with all the capital coming into this market, our entire industry, including ourselves, started making mistakes,” Bahl wrote. “We started growing our business much before the right economic model and market fit was figured out.”

He also blamed diversifying and starting new projects without perfecting the first or made it profitable, and building abnormal team and capabilities as other factors that pushed firms such as his into the red.

am_041017091021.jpg Most investors did not anticipate the stupendous growth of Amazon in the country.

Snapdeal, which has over a million customers on its site daily, has been struggling for the past 15 months, and posted losses of Rs 2,960 crore in 2015-16, double that of the previous year.

How did this lapse happen, despite Snapdeal having several illustrious businessmen to turn to for advice, including Ratan Tata, who has invested in Snapdeal in his personal capacity, as he has done in 20 other such start-ups?

Flipkart, on the other hand, which has over 100 million customers, has had its share of troubles too, with US mutual fund giant Fidelity slashing the valuation of its holdings in the etailer to around $5.58 billion (Rs 36,000 crore), one third the firm’s peak valuation.

The Sachin Bansal and Binny Bansal founded company’s losses too doubled in 2015-16 to Rs 2,306 crore, and it lost its numero uno position to newcomer Amazon India, a subsidiary of the US etail giant last year.

While Flipkart hasn’t admitted to any faulty business decisions or extravaganza as Snapdeal has, that does not mean there weren’t any. The markdowns at Flipkart came at a time when there was an exodus of talent form the company, especially at the senior levels.

What is perhaps becoming increasingly clear is that most investors did not anticipate the stupendous growth of Amazon in the country, driven by its better business model.

That model hinges on maintaining a low cost of operations for its online sellers, thus lowering the selling price. The key to Amazon’s business success in India is its attention to the three universal core principles of online shopping: providing a massive selection for the shoppers, maintaining low prices, and creating a great shopping experience.

For this, it created the largest fulfilment infrastructure for any e-commerce firm, and at present has 34 such centres across 10 states, covering a total area of over 3 million square feet with a storage capacity close to 10 million cubic feet.

Now, that’s commendable. Herein lies the lessons that a new combine of Flipkart and Snapdeal can emulate, to make their venture successful.

The customer has always been king in retail, but in the online space, the customer is so fickle that she cares for nothing but low prices, plus a great shopping experience. While helping her do so, the company should also ensure profitability.

Ten years, as in Flipkart’s case, is a long time for investors to wait in the expectation of profits. The time to turnaround is now, and the merger could be the first step in doing so.

(Courtesy of Mail Today.)

Also read: I was duped by Amazon India. This is my story


MG Arun MG Arun @mgarun1

The writer is Deputy Editor, India Today.

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