Can Flipkart retain its lead as it goes shopping for Snapdeal?

Published on 26 Apr, 2017

Flipkart’s decade-long journey has been a story of ups and downs that, more often than not, dots the leadership landscape. It has been the Mahendra Singh Dhoni of the e-commerce business – it rose up the value chain to lead from the front, growing exponentially, before facing the all too common question: Is it past its prime? And, how long can it pull it through, given that the second in the race, global online giant Inc., is breathing down its neck?

In response, the company has so far not only managed to keep its critics at bay, but has also shown confidence in its own ability through acquisitions of rivals such as, Jabong and Myntra.

The naysayers may still be wary of the road ahead, but the very fact that it still enjoys investor confidence and has been steadily increasing its customer base, show that we cannot write it off just yet.

And this is where our story begins.

The long and short of it

There is absolutely no doubt that Flipkart has created immense value for the short term – for its employees, for the market and for the Indian consumer, who is undoubtedly central to the online marketplace boom in India.

In fact, the rags to riches story is commonplace in the company. Take the case of Ambur Ayyappa. The Bangalore-based delivery manager was hired by Flipkart in 2007, when it was still a fledgling startup that sold books online. Today, less than a decade later, he is reportedly a multi-millionaire.

And, he is only one among the 400-plus Flipkart employees who have hit the jackpot and become crorepatis, thanks to the company’s employee stock option scheme.

It has also contributed immensely to a booming market – facilitating traders to sell their wares on its platform and linking them to the growing tribe of online shoppers.

But that is not why the Flipkart story is important, more so, as we have been witness to several startups across the tech world creating value in the short term, and then slowly withering away.

The homegrown e-commerce major, on the contrary, seems to be in the race for the long term, despite facing some serious concerns – something that could have led to the shutting down of lesser players.

In fact, some recent developments would give a greater insight into all that may be right, or perhaps not, with Flipkart.  

Test of nerve

In August 2015, Snapdeal chief Kunal Bahl had made a rather audacious claim that the company would pip rival Flipkart to become India’s largest e-commerce player in terms of gross merchandise value by the end of 2015-16.

Gross merchandise value, or the value of total goods sold, is a metric that most online retailers sweared by at the time.

Bahl had told The Economic Times that Snapdeal had achieved $4 billion (Rs 26,000 crore) in gross merchandise value – up from just $1 billion in the previous year – and was well on its way to become the market leader.

“The one thing I am very, very clear about right now is that I think we are going to be No. 1 (in terms of sales) by March 2016,” Bahl had emphatically told the newspaper. “I think we are going to beat Flipkart by then.”

Cut to 2017, and Bahl, who, in the past, has had no love lostfor Flipkart’s Sachin Bansal, is having to eat humble pie.

Flipkart is reportedly set to buy Snapdeal out at a bargain. In fact, Snapdeal’s reported gross merchandise value has dropped to just about Rs 500 crore a month, against Flipkart, which clocks sales to the tune of Rs 2,000 crore every month.

Several analysts who spoke to VCCircle, said that Flipkart could lap Snapdeal up in an all-stock deal for about $1 billion, effectively making the latter’s Japanese investor, SoftBank Group Corp, a shareholder in Flipkart.

While Flipkart and Snapdeal did not respond to email queries, a SoftBank spokesperson said that the company will not comment “on this at this moment”.

Shopping spree

Acquiring companies is not new to Flipkart. Figures collated by VCCircle’s data research arm, VCCEdge, show that Snapdeal will be its 14th acquisition, should the deal finally go through.

Flipkart had started shopping for companies with book recommendations portal weRead in 2010, and followed it with Chakpak, an entertainment site, in 2011. Subsequently, it added FX Mart, a payment solutions company with a prepaid wallet license, and ad-tech firm AdiQuity, to its portfolio.


However, Flipkart’s biggest buys came in the past three years.

In May 2014, Flipkart bought fashion e-tailer Myntra, which had clocked a shade over Rs 441 crore in annual revenue for 2013-14, according to filings with the Registrar of Companies, for a little under $300 million (Rs 1,800 crore).

Interestingly, when Flipkart acquired the fashion retailer’s rival Jabong in July 2016, it paid far less – less than a quarter of the Myntra deal – despite the company recording double the revenue at Rs 918 crore in 2015-16. Clearly, Myntra was bought at a premium, while Jabong was a bargain deal.

Earlier this month, it bought out the Indian business of eBay Inc, while the Pierre Omidyar-promoted online retailer pumped in $200 million into Flipkart in an all-stock deal, as part of a three-way $1.4 billion transaction that also saw US software major Microsoft and China’s Tencent participate.

Effectively, therefore, say analysts, Flipkart has become a consolidator for several e-commerce companies in the race to nudge ahead of Amazon India. But we will discuss more of it, in a bit.

For all its worth

The question that has haunted Flipkart time and again is whether these acquisitions made real business sense for a company that continues to lose as much as $40 million a month.

Not really, says Harminder Sahni, founder and managing director at Wazir Advisors, a Gurgaon-based consulting firm. “The thesis on the basis of which these guys have been burning so much money, is that there is place only for one – the last man standing. So, if Flipkart thinks that it is going to keep eBay India and Snapdeal alive, just as it has done with Myntra and Jabong, it goes against this very thesis.”

In fact, according to filings with the Registrar of Companies by Snapdeal parent Jasper Infotech Pvt. Ltd, keeping the marketplace alive could be a costly proposition.

While in 2014-15 Snapdeal lost just under Rs 1,325 crore, the following year its losses swelled to nearly Rs 3,300 crore. The increase in its total revenues was also much lower.

Likewise, although eBay India saw its topline numbers nearly double to a little under Rs 400 crore in 2015-16 over the previous fiscal year, it also saw its losses shoot up by as much as 57% in the same period.

Arvind Singhal, chairman and managing director at consulting firm Technopak, agrees: “Over the past few years, Flipkart has been rather cavalier or reckless when it comes to some of their investments. While they have made acquisitions for the sake of building several lines of businesses, none of that has actually shown any tangible results, so far.”

“The only sensible acquisition was perhaps Myntra, which could otherwise have been acquired not just by Amazon, but perhaps by the Tatas, Birlas or Reliance,” Singhal adds. 


But, what exactly does Flipkart plan to do with Snapdeal? Will there be job cuts? And what are gains from such a deal?

“Essentially, they might go the Jabong way – retaining the brand but letting go of a lot of people who were involved. They had acquired the customers from Jabong and integrated them into Myntra,” says Singhal.

“This is an oft-played tactic that financial investors use,” says Sahni. “Rather than immediately shutting something down, they will show that it is being merged. If these were publicly-listed companies, none of these mergers would ever even have come up for discussion.” 

And there are more instances for supporting this theory. In May 2012, Flipkart had pulled the plug on e-tailer Letsbuy, just three months after acquiring it. 

Analysts feel Snapdeal employees from at least three key verticals – backend technology, partnership management and logistics, may be fired. “Mergers are never a one-plus-one affair and there will be overlaps,” says Swetabh Pareek, head, transaction advisory services, Aranca, a research and analytics firm.

Singhal is more direct. “Flipkart does not need Snapdeal’s IT platform, nor does it require its logistics infrastructure. Besides, there is hardly any differentiation when it comes to the two portals.”

Flipkart could however gain by acquiring Snapdeal’s nearly 300,000 merchants – almost three times its existing count. 

“You will also not need the top management. Sadly and surprisingly, almost all e-commerce companies are so top-heavy that they can put companies like Reliance Industries, the Tata group and the Birlas to shame,” quips Singhal. 

Yet, Pareek and Singhal think that there will be no immediate shutdown, but Snapdeal’s operations will be scaled down over a three- to six-month period and people will be eased out quietly. “Letting go of people immediately will also mean giving everyone three months’ salary, besides severance for top-level executives, which will be at a substantial cost,” said Pareek.  

Read more