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A possible merger with Snapdeal could help cement Flipkart’s foothold in India’s e-commerce sector

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The consolidation phase in the Indian e-commerce industry is likely to continue this year and Flipkart clearly seems to be leading the race. On 10 April, Flipkart announced the landmark acquisition of the India business of eBay in which the latter has invested in and sold its business to the former in exchange for an equity stake. will continue to operate as an independent entity as a part of Flipkart. Flipkart and eBay have also signed an exclusive cross-border trade agreement as part of which Flipkart’s customers will gain access to the wide array of global inventory on eBay, while eBay’s customers will have access to more unique Indian inventory provided by Flipkart sellers. Thus, sellers on Flipkart will now have an opportunity to expand their sales globally.

“The combination of eBay’s position as a leading global e-commerce company and Flipkart’s market stature will allow us to accelerate and maximise the opportunity for both companies in India,” says Devin Wenig, President and CEO of eBay Inc.

Commenting on the acquisition, Sandy Shen, Research Director at Gartner says, “This is good news for Flipkart as it solidifies it as a market leader at least in the short term, keeping competition especially Amazon at bay.” She adds that the market is seeing signs of consolidation, as scale is a key success factor in the business. “Flipkart has been and will continue to make acquisitions to increase scale, and the next challenge is to strategise the path to a sustainable business model within a set time frame…”

The consolidation is a result of the limited growth in the industry. Research by RedSeer Consulting shows that the industry’s size in Q4 FY17 (January-March) reached $14.7 billion, barely 5 per cent higher than $14 billion seen in Q4 FY16. Overall, FY17 has been a challenging year for the e-tailing sector, with multiple regulatory challenges and slow demand growth. Snapdeal has been one of the worst hit companies and could be a potential target for acquisition.

In fact, the news of a possible acquisition of Snapdeal by Flipkart has been doing the rounds in the industry for quite some time now and is likely to take place anytime. According to RedSeer, if and when this happens, Flipkart will stand to benefit in more ways than one. The deal will give Flipkart a way to expand its supply chain reach quickly and inorganically by getting access to Snapdeal’s numerous small and big warehouses, especially in Northern India.

“Fast deliveries and regional fulfilment of orders have become crucial for e-tailers to achieve both higher customer satisfaction and lower supply chain costs. And this move by Flipkart would be a significant boost in its quest for supply chain leadership over Amazon, which is aggressively expanding its supply chain network,” reports RedSeer.

With Softbank expected to buy into Flipkart with this deal, this should give Flipkart additional funding firepower to sustain its bruising battle with Amazon for a longer period. While admittedly there is a significant overlap between Flipkart and Snapdeal customer bases, there is a small set of Snapdeal customers from Northern India who can be added to Flipkart’s kitty with this deal.

Finally, if this deal goes through, it would mean that Flipkart can take advantage of Snapdeal’s many exclusive tie-ups with brands globally, which should especially help it in home and fashion categories portfolio diversification, RedSeer said.

Media reports also suggest that Softbank is planning to sell FreeCharge, the digital wallet arm of Snapdeal, which has been struggling due to lack of funding and low profits. Softbank, which is a major investor in Snapdeal, is reportedly considering to sell FreeCharge for as low as $150 million-200 million and Alibaba-owned Paytm is said to be one of the front-runner buyers of the digital wallet.

Funding Funnel Still Not Dry
Despite concerns about investors losing interest and funding getting dried up, Flipkart just managed to raise a total of $1.4 billion from Tencent, eBay and Microsoft, indicating that there is still money flowing in for companies that can demonstrate high potential. “If you have a good story, if you are actually adding a lot of value for the Indian customer, you will be able to raise money,” Kalyan Krishnamurthy, CEO, Flipkart told BW Businessworld. This investment adds to an existing group of marquee investors that include Tiger Global Management, Naspers Group, Accel Partners and DST Global.

The latest funding is the largest in Flipkart’s 10-year history as well as in the Indian Internet sector and values Flipkart at $11.6 billion. Flipkart will be using the funds to drive the next phase of e-commerce growth in India as it battles with global e-commerce giant Amazon.

“This is a landmark deal for Flipkart and for India as it endorses our tech prowess, our innovative mindset and the potential we have to disrupt traditional markets. It is a resounding acknowledgement that the homegrown tech ecosystem is indeed thriving and succeeding in solving genuine problems in people’s daily lives across all of India,” Sachin Bansal and Binny Bansal, founders of Flipkart said in a statement while announcing the eBay deal.

Tencent joins as a strategic investor, bringing experience in linking social networking and e-commerce. As a leading provider of Internet value-added services in China, Tencent has been at the centre of innovation in social, payments and other areas. In leading this funding round, Tencent will lend significant expertise to Flipkart as it furthers its leadership position across the e-commerce market in India.

“Flipkart is a leader in e-commerce in India, with strong operational expertise and a deep understanding of user behaviour. This strategic partnership enables Tencent to participate in the exciting opportunities in e-commerce and payments in India. We look forward to helping Flipkart to deliver compelling experiences to users throughout India, and to contribute to the development of the Internet ecosystem there,” said Martin Lau, Tencent President.

Referring to the technology investors, Garner’s Shen says, “It is interesting to note that this round sees the investment from strategic investors that will bring technology and market expertise that Flipkart earnestly needs, in contrast to the previous round of mostly financial investors.”

Since starting up in a two-bedroom Bengaluru apartment as an online bookstore, Flipkart has come a long way to become the e-commerce leader of India. The cult Bollywood dialogue “Picture abhi baaki hain, mere dost” perhaps summarises the current state of Flipkart and Indian e-commerce, signalling that the story is not over yet. There is more consolidation in the pipeline and much more action to look forward to.

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flipkart magazine 01 May 2017 snapdeal e-commerce