How Flipkart-Snapdeal Deal May Unfold As SoftBank Plays Matchmaker

The e-commerce industry in India is on the verge of major consolidation.

Flipkart and Snapdeal are reportedly in buyout talks. (Photo: The Quint)

Flipkart Ltd just raised $1.4 billion from technology giants amid speculation over its merger with Snapdeal.

With cash in the kitty, why would India’s largest online retailer consider a merger with its smaller rival, especially when Snapdeal’s losses more than doubled to over Rs 3,000 crore in the year ended March 2016?

Flipkart’s own 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.

A potential deal will help Flipkart bring on board an investor in Japan’s Masayoshi Son-led SoftBank Group Corp that has committed to invest up to $10 billion in India over the next decade.

Son 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.

And the homegrown e-tailer will require all possible firepower to take on not only an aggressive American rival Amazon.com Inc that plans to invest $5 billion in India, but also China’s Alibaba Group Holding Ltd that has backed Paytm’s e-commerce arm.

SoftBank, which owns a third of Snapdeal’s parent Jasper Infotech Pvt, is pushing for a merger to avoid writing off its investment, two people aware of the development told BloombergQuint requesting anonymity as the talks are private.

While the companies have not confirmed merger talks, Snapdeal co-founder and chief executive officer Kunal Bahl admitted in a letter to employees that “our investors are driving the discussions around the way forward”.

If Son succeeds, Flipkart will add SoftBank to a clutch of investors including Microsoft Corp, Tencent Holdings Ltd and eBay Inc, which invested $1.4 billion in the latest funding round last week.

Flipkart, Snapdeal, SoftBank and Tiger Global didn’t reply to BloombergQuint’s emails seeking comments.

Beyond Fat Cheques

Flipkart had average gross sales or merchandise value (GMV) of Rs 2,000 crore a month over the past one year, people familiar with the numbers told BloombergQuint on the condition of anonymity as the data is not public.

Snapdeal’s GMV 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 all of Snapdeal’s business may not come to Flipkart, the e-tailer wouldn’t have to invest more on people or infrastructure if the two merge, said Arvind Singhal, chairman and managing director of retail consultancy Technopak Advisors.

A deal will give Flipkart additional supply chain infrastructure to take on Amazon, which is aggressively expanding its network across India, said Mrigank Gutgutia, engagement manager at RedSeer Consulting.

Earlier this month, Amazon announced that it has opened seven new warehouses to boost sales of high-priced products such as televisions, refrigerators and furniture.

Flipkart will be able to expand its supply chain reach quickly and inorganically by getting access to Snapdeal’s numerous small and big warehouses, especially in northern India. 

Mrigank Gutgutia, Engagement Manager, RedSeer Consulting

Fast deliveries and regional fulfilment of orders have become crucial for e-tailers to achieve both higher customer satisfaction and lower supply chain costs.

Flipkart will also get additional sellers. Snapdeal has three times the sellers compared to Flipkart’s 1 lakh. While a chunk of these could be common, the seller base of the combined entity would go up.

Unlikely To Be A Smooth Marriage

Flipkart’s earlier acquisitions like Myntra and Jabong now operate as independent business units. But its potential marriage with Snapdeal would not be smooth.

Flipkart runs a mix of marketplace and inventory-led model, while Snapdeal is a pure-play marketplace. Both are big companies and have an overlapping user base and market.

The foremost challenge Flipkart will face is how to reduce the burn rate. It is already battling to bring down its monthly cash burn of $40 million per month, while Snapdeal’s burn rate is nearly half its bigger rival’s, according to one of the two people cited above. The two e-tailers didn’t respond to queries on burn rates.

Will Flipkart be able to stop the rut inside Snapdeal. (Photo: Reuters)

Operational efficiency will take time and a lot of synergies need to be in place, in terms of logistics and business, said Swetabh Pareek, head of transaction advisory services at Aranca. Till then, cash burn of the combined entity will go up, he said.

Other issues like business structures, culture and practices will also pose a challenge like in any other big merger. Geographic disparity and how both the companies approach integration could pose hurdles.

“Both have captive logistics arms and a marketplace. Supply chain integration and back-end technology needs to be standardised to drive more efficiency in operations,” said Redseer’s Gutgutia.

The two rivals may take months to figure what to do with brands, and how to create a single entity.

No one is going to benefit from the merger in the short term, at least. The challenges of merging such companies in terms of products and human resources are unfathomable and it will take months, if they decide to form a single branded company.  

Harshad Lahoti, Chief Executive, ah! Ventures

It will be ideal to keep them separate at least for a while and potentially merge the two over a period, Lahoti said. However, Anand Lunia, co-founder of early-stage fund India Quotient, suggests that Flipkart should shut down Snapdeal immediately post the merger.

There is no sense in duplication of business and for Flipkart to invest in something which is of no use. Snapdeal is burning around $20 million monthly and no one would enjoy money going down the drain.

Anand Lunia, Co-Founder, India Quotient

Moreover, Snapdeal does not have a loyal customer base, he said.

What A Merger Will Mean For The Ecosystem

A potential merger between Flipkart and Snapdeal is important for Indian startups, says Kunal Khattar, partner at early-stage venture capital fund advantEdge Partners. “If someone like Tiger Global partially exits from Flipkart and comes back to investing and writing first cheques, the investment mood will revive,” he said.

Lahoti of ah! Ventures agrees that consolidation is required to take on a giant like Amazon.

There is room for not more than three players. If Snapdeal gets out of the picture, it is Amazon, Flipkart and Alibaba-backed Paytm and there is enough room for these three to exist.

Alibaba is back in a fix with Taobao in the US. (Photo: Reuters)

But there are others who believe that Flipkart would be better served by focusing on improving its services if it wishes to take on Amazon, instead of merging with Snapdeal.

Flipkart is becoming more like a financial game, and Amazon on the other hand has a clear focus on customer service and sellers, said Harminder Sahni, founder of retail consultancy Wazir Advisors.

Flipkart can do without these acquisitions, but it is the investors who want to salvage their investment, he said.

These acquisitions are not going to bring much value and will be just paper deals. Snapdeal is dead anyway if they do not raise funds in the next six months.

Harminder Sahni, founder, Wazir Advisors

(This article is published in an arrangement with BloombergQuint.)

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