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Biplab Chakraborty

Biplab Chakraborty is group manager of M&A at Tech Mahindra. He has more than 17 years of diverse experience in mergers and acquisitions (M&A), investments, technology consulting and business development.

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Battle Royale: Amazon Vs. Flipkart. Can Snapdeal Survive? (Part 2/4)

As reports circulate that Snapdeal’s losses increase, here’s a narrative of what happened in Indian ecommerce, and what lies ahead for the industry. Disclaimer: All views and opinions aired belong to the author of this piece.


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Snapdeal: A "me too" story

Snapdeal, once No. 2 behind Flipkart has now been relegated to a distant third position by Amazon. One can argue that both Flipkart and Amazon possess strong brand recall, good user experience and strong value proposition. But what does Snapdeal stand for? The answer is not clear. With no clear differentiation strategy, Snapdeal will find it extremely difficult to compete with the ‘Big’ two. A look at the Chinese market here is most instructive.

Suning, a Chinese B2C ecommerce platform, the third placed player possesses strong online as well as offline presence in the form of 1600 outlets across China not to mention a strong logistics operation that penetrates underdeveloped regions in China. Vipshop, the fourth placed player has carved out a niche for itself as China’s leading online store for branded apparel and cosmetics. It sells its products at a steep discount to the retail price using a “flash sales” model.

Thus both third and fourth placed players in the Chinese e-commerce market have a clear differentiation strategy. Despite that, Suning and Vipshop each owns less than 5 percent of the Chinese market (Alibaba and together command more than three-fourth market share). Is this a sign of things to come for Snapdeal? With no clear differentiation strategy, Snapdeal is at serious risk of getting marginalized.

Added to that Snapdeal, appears to have got its priorities all mixed up. It is spending an astonishing 200 crores in a brand makeover with a new logo and tagline ‘Unbox Zindagi’. Snapdeal appears to have developed a habit of coming up with a new tagline every year. It was ‘Dil Ki Deal’(a deal that tugs at your heartstrings) in 2015 while in 2014 the tagline was ‘Bachaate Raho’ (keep saving). Was the re-branding exercise the best use of its rapidly shrinking war chest? Unlikely.

Let's look at another example. After Snapdeal lost out to Flipkart in the race to acquire fashion portal Jabong, Snapdeal announced that it will now spend the money saved (around 100 million dollars) to build its fashion business. Granted fashion is a lucrative market category with healthy margins, the segment however already has strong competition in the form of Flipkart and its two subsidiaries – Myntra and Jabong (together they command 70 percent of the online market). Not to mention Amazon which has made fashion its focus area.

Also, building a business ground up is never easy - if it was many others would have done that by now. Finally another example of Snapdeal's misplaced priorities: it recently announced that it will be delivering cash to customers as a “goodwill gesture” for a token amount of one rupee for each delivery. There is no obligation on part of the customer to order any Snapdeal products whatsoever. Does Snapdeal seriously believe this is a good usage of its resources at this challenging point in time?

Flipkart: Challenging times

Though not as challenging as [it was at] Snapdeal, the last year and a half have been fairly interesting at Flipkart. It hit its peak valuation of 15.2 billion dollars in July 2015 and became one of the highest valued unicorns in the world. Then for some reason, Flipkart decided to go app-only. The move turned out to a total failure and had to be reversed. Sachin Bansal then was replaced as CEO by his cofounder Binny Bansal.

This was followed by an exodus of senior management. Flipkart's most high profile recruit - Punit Soni - quit in early 2016 along with CTO Peeyush Ranjan. Myntra cofounder Mukesh Bansal who stayed on as head of commerce platform after Flipkart acquired his company and was widely tipped to be the next CEO too moved out along with chief business officer Ankit Nagori.

Sensing trouble, Flipkart’s largest investor Tiger Global Management decided to depute Kalyan Krishnamurthy to Flipkart. He was put in charge of the most critical functions at Flipkart - retail, business development, advertising, and products. The move seems to have paid off with Flipkart registering a successful Big Billion Day (BBD) sale in October. In between, Amazon managed to beat Flipkart for two successive months in July and August to emerge as the largest e-tailer in the country.

But the biggest talking point has been the periodic valuation downgrades that have hit Flipkart. Morgan Stanley has been the most bearish pegging the valuation of Flipkart at 5.5 billion dollars post its latest downgrade. But what was the reason behind Flipkart's peak valuation achieved in 2015 and the precipitous drop in valuation since? It appears the former was largely a result of Flipkart management's grossly optimistic view of future GMV and the latter was largely an outcome of those projections not coming true.

Back in 2015, Flipkart provided a guidance that it will hit a GMV of 10 billion dollars for the year ending Mar’16 (FY16). This was significantly higher than the 4 billion dollar GMV that it had achieved for FY15 (150 percent growth y-o-y). Naturally investors were super-excited and rewarded Flipkart with a handsome valuation (~1.5x GMV after factoring in private company discount).

However, by all accounts, GMV of Flipkart failed to reach anywhere close to the 10 billion dollar number and was reportedly flat at 4 billion dollars. So even if we assume that Flipkart will do very well and grow its GMV by 25 percent in FY17 to 5 billion dollars, the best case valuation comes to 7.5 billion dollars (Note: One can always argue that since Flipkart did not succeed in scaling up its business, it does not deserve the 1.5x GMV multiple).

Interestingly, this back of the envelope valuation is not far removed from the mark-to-market valuations ascribed by its investors. Flipkart has argued that valuation is a theoretical exercise (when is it not the case?) and hence the downgrades do not matter. However, Flipkart should know that when reputed asset managers (read: Morgan Stanley, Vanguard and Fidelity) form an opinion on valuation, other investors tend to listen.

The valuation downgrades could not have come at a worse time for Flipkart. Only a very brave investor will be willing to fund Flipkart (or for that matter Snapdeal) at this point in time with Amazon hammering away at one end and Alibaba's entry looming large at the other end.

So what are the options open for the Indian e-tailers?

In the next part the author weighs options for Indian e-tailers to salvage the situation:

“Indian e-commerce too appears ripe for mergers and acquisitions. Walmart has shown willingness to consider inorganic route to compete effectively with Amazon…What about Alibaba?...”

Read more, here.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house

Tags assigned to this article:
flipkart snapdeal alibaba amazon india Suning morgan stanley

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