Why Flipkart Needs More Than SoftBank to Take on Amazon

(Photo: Reuters)

Online retailer Flipkart Online Services Pvt. is said to be close to a merger with smaller rival Snapdeal as it looks to fend off Amazon.com Inc. Yet, that may not be enough in a battle with the deep-pocketed American giant that has caught up with the homegrown rival.

With a $400-billion market capitalisation, Amazon has no shortage of money and can match Flipkart discount for discount, said Mahesh Murthy, co-founder of Seedfund, an early-stage venture capital fund.

Battles online are not won on discounts and marketing spends, but on clearly differentiated offerings that consumers evangelise by word of mouth.

Mahesh Murthy

And that’s what Amazon has been up to.

While Flipkart and Snapdeal continue to push smartphones, appliances, and apparel, with a focus on the number of transactions, Amazon also entered daily needs grocery market and pushed entertainment with Amazon Prime.

Prime membership bundles all its offering under one roof through which Amazon is aiming to create a habit among its users.

Globally, 40 percent of Prime members spend more than $1,000 per year on Amazon as against 8 percent by non-Prime members, according to a survey by Morgan Stanley. And it’s gaining traction in India.

In a recent event, Amazon said its Prime members accounted for 35 percent of purchases.

Amazon Has Higher GMV, More Page Views

Amazon has committed to invest $5 billion in one of the world’s fastest growing online retail markets.

And the results are already showing. Barely four years after launching in India, it has now overtaken Flipkart in terms of average gross sales or merchandise value (GMV), two people familiar with the numbers told BloombergQuint requesting anonymity as the data is not public.

Flipkart’s GMV has been around Rs 2,000 crore a month over the past one year.

Amazon’s GMV surpassed that figure in recent months, while Snapdeal’s has come down by nearly a third to Rs 500 crore over the last one year, the people said.

GMV is the total value of merchandise sold, on which an online retailer earns fees and commissions.

While the data on the number of users who shop on either of the platforms is not available, Amazon’s monthly page views were 198 million last month compared to Flipkart’s 107 million and Snapdeal’s 28 million, according to digital market intelligence company SimilarWeb.

Amazon’s app was ranked No. 1 in the shopping category followed by Flipkart’s, which was the leader until last year.

Flipkart’s accumulated losses mounted five-fold to nearly Rs 10,000 crore over the three years to 2015-16, according to its filings to Singapore’s audit regulator.

Snapdeal's losses more than doubled to over Rs 3,000 crore in the year ended March 2016. Amazon India reported losses of Rs 3,572 crore during the period, according to its filing to the Registrar of Companies.

Flipkart and Snapdeal didn’t respond to BloombergQuint’s e-mails seeking comments. Amazon didn’t respond to queries on its losses.

Flipkart’s Bet

A merger with Snapdeal will help Flipkart bring on board Japan’s SoftBank Group Corp. Its founder Masayoshi Son financed a similar battle in China by backing Alibaba Group Holding Ltd. to first defeat eBay Inc. and then fend off Amazon.

He now looks to replicate it in the Indian market. In fact, it is Son who is driving the merger.

To me, clearly, Flipkart’s aim here is to get in Softbank, which is the global player funding the No. 2 businesses around the planet. Softbank-backed Ola and Didi against Uber, inMobi against Google, Hike against WhatsApp and will back Flipkart against Amazon.

Mahesh Murthy

Bengaluru-headquartered Flipkart also raised $1.4 billion from technology giants and even acquired eBay India recently.

Once a merger with Snapdeal is through, SoftBank is willing to infuse up to $1 billion in the e-commerce company in a deal with Tiger Global Management, the largest investor in Flipkart, according to a Bloomberg report quoting people familiar with the development.

While the billions of dollars may help, brand consultant Harish Bijoor of Harish Bijoor Consults Inc. said Flipkart needs to improve the front-end and service delivery aspects if it wants to win the battle.

What Amazon has done well is to use different services to tap customers and cross-sell, like with Prime, said Sanchit Vir Gogia, chief analyst at technology advisory GreyHound Research.

This has allowed Amazon to reduce its sales cost, and from that perspective, it is tough to beat Amazon based on just an acquisition.

Sanchit Vir Gogia

In India where consumers are not brand loyal and check multiple platforms before zeroing in on a product, Bijoor said the key lies in the ability of the platform to sustainably deliver the highest quality of standard. “Anyone who invests into the back-end is going to do better."

For Murthy, however, the verdict is already out. “All the mergers and monies that it (Flipkart) raises simply postpones the inevitable for Flipkart. I believe this is a war Amazon will win, sooner or later.”

(This article was originally published in BloombergQuint)