A Deal On The Flip Side

In a little over a year ago, the ­promoters of Flipkart and Snapdeal were engaged in a war of words over who will be a greater force in the fast growing Indian e-commerce market. One year and a lot of ‘Amazon-forced’ developments later, Flipkart is on the verge of ­devouring Snapdeal in a deal forced not by competition or orga­nic growth but by investors looking at justifying their investments in the e-commerce market.

In the last few weeks, the decks have been cleared for Flipkart’s takeover of arch rival and fellow e-commerce major Snapdeal which has been sinking over the last year or so with sales slumping and Gross Merchandise Value (GMV), the primary measuring tool of an e-commerce company’s success, going down significantly. Not only has it not been able to match Flipkart’s growth, it has also become difficult for the beleaguered company to raise any more funds from investors, who are now looking for ­returns on their investment. In April, it reduced office space by 60 per cent. A couple of months earlier, it resorted to a massive downsizing to reduce costs and has been a low hanging fruit for ­acquisition.

But is there any value that anyone can derive from Snapdeal’s acquisition? Will Flipkart gain anything tangible as a company by acquiring a sinking ship?

Apparently, not. Experts and analysts across the spectrum feel that ­unlike Flipkart’s other acquisitions, such as Myntra, which have added value or products to the company’s portfolio, the Snapdeal takeover may not add any value to Flipkart as a company. That is because both the companies were in similar lines of business and Snapdeal is unlikely to bring in any assets to ­Flipkart. “This is not one of those strategic business mergers,” says retail ­expert and Technopak CMD, Arvind Singhal. “This is a financial merger forced by investors to salvage their ­investment in Snapdeal,” he says.

The deal seems to have been forced primarily by Snapdeal’s key investor Softbank, with Flipkart’s investor Tiger Global also looking to play in. Softbank, which has reportedly put in over $900 million in Snapdeal, is looking to get some value from its investment.

Once the merger finally takes place, Softbank will become part of Flipkart’s investors and salvage some of its ­investment in Snapdeal by getting some equity from Flipkart as part of the deal which is certain to be part cash and part equity. In turn, Softbank can give Flipkart the $1 billion fund which it is desperately looking for to build up a long-term fight against Amazon. Obviously, the deal makes sense for the investors who, instead of having two bleeding ­investments, will now have one.

But it is certain that Flipkart itself will not gain anything out of this apart from investors and investment. Both Flipkart and Snapdeal are in the same line of business and offer almost the same products. Although they both claim to have between 25 and 35 million ­customers, considering the fact that the ­total number of people shopping online in India is about 40 million, there will be a lot of overlap.

On paper, Snapdeal has about 3,00,000 sellers on its website, while Flipkart reportedly has a little over 1,00,000. But even this will not help. K. Vaitheeswaran, India’s e-commerce pioneer and founder, Indiaplaza, says “How many of these Snapdeal sellers sell month–on-month and how many will bring products that Flipkart does not have will be insignificant. What is also important is that the number of Stock Keeping Units (SKUs), or the number of unique items a seller has, being brought onto Flipkart would be insignificant as well if not zero.”

There will be significant duplications at Flipkart though. It already has a logistics company, Ekart Logistics, which is not doing so well and Flipkart has restricted its operations and currently even outsources operations. Snapdeal’s logistics unit, Vulcan ­Express, may come with the deal.

Snapdeal also has a successful mobile wallet, Freecharge, which may also come with the deal if it’s not sold before the merger. There are rumours of Paytm ­and others looking to acquire Freecharge. Flipkart, on the other hand, launched its mobile wallet ‘Flipkart Money’ in March, 2016, over a year after shutting down its payments gateway ‘PayZippy’. In September 2015, it had acquired ‘FX Mart’ which is into payments services and in April 2016, it acquired ‘PhonePe’ wallet. In August 2016, it integrated Flipkart Money into PhonePe. In addition to this, Flipkart has also agreed to acquire eBay India. It will now have to think of how to deal with these duplications and reduce costs.

Vaitheeswaran adds, “For the next six months or so, there would be distractions for Flipkart as it will inherit ­people and businesses that it does not need. It is certain that in this period they will cut the flab and integrate the businesses. The problem is that with Amazon around and growing the way it is, Flipkart does not have those 6 months to spare.”

The management problems Flipkart has been having is another story. It is in serious need for money to strengthen its arsenal against Amazon, which is growing by leaps and bounds. In January, Tiger Global effectively took charge of the company and inserted its own man Kalyan Krishnamurthy as the company’s CEO. Since then, the company has been steadily losing top executives. In fact in the last six months, Flipkart has lost at least eight of its key executives.

Last month, Flipkart’s COO Nitin Seth left the company. Seth was app­ointed COO after Krishnamurthy took over as CEO in January. The same month, Ashish Agrawal and Hari Vasudev, both senior vice presidents, engineering, had quit. This was soon after Saikiran ­Krishnamurthy, who headed Ekart, ­senior vice president Sur­ojit ­Chatterjee, who headed products, and chief ­marketing officer Sam­ardeep Subandh quit. In December, Sharad ­Agarwal, vice president who headed data strategy and ­Rag­huram Talluri, head of ­cust­omer ­experience at Myntra, also left the ­company.

“The sheer quantum of management changes and top people losses does not give me much confidence about Flipkart and what they wish to do,” says Singhal.

One thing is certain. Flipkart needs investments to fight against Amazon’s financial and operational might and the Snapdeal acquisition will bring on board investors like Softbank and help it get the investments it needs.

Singhal adds, “From Flipkart’s point of view, it will require multiple billions of dollars in investment as the current $1.4-1.5 billion is good only for a year or so. It will require more capital and they are far away from a capital market ­listing. Snapdeal’s acquisition will bring in new investors for Flipkart. So, Flipkart is not actually acquiring a company, but investors.”

Also, the acquisition will reduce a competitor from the horizon for ­Flipkart. “This will take away a major competitor from the market. Now the focus of the business would be on how best they can engage with Amazon,” says Harish H.V., Partner, India Leadership Team, Grant Thornton LLP.

But it is not Amazon alone that Flipkart has to think about. Chinese e-commerce major Alibaba is also waiting to break in. It has already made an investment through Paytm. It is only a matter of time before Alibaba sets up shop in India independently. Also, with the homegrown Reliance Jio following a route similar to Amazon with payment gateways, wallets and having physical retail presence, it may also enter e-commerce with the entire bouquet of services in the near future. And all of them have deep pockets while Flipkart operates through borrowed money.

The next few months when Snapdeal integrates into Flipkart’s fabric will be crucial for Flipkart. It has to be careful to reduce costs and duplications to have enough arsenal not just to survive in the market but to fight the might of Amazon. As of now, it will have new investors to stand by it. But it has to perform even before they start asking questions and look for returns.