BIGGER IS BETTER

What Flipkart stands to gain if it merges with Snapdeal

Obsession
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Quartz india
Obsession
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Quartz india

Two of India’s biggest e-commerce players are eyeing a merger.

Snapdeal, the third largest e-retailer in the country, is going through a rough patch: It has seen a slew of top-level exits and funding is tight. Snapdeal reportedly only has enough cash to last 10 to 12 months. The company’s valuation slid from $6.5 billion during its last funding round in February 2016 to just $1.5 billion. Earlier this year, Snapdeal fired more than 600 employees and founders Kunal Bahl and Rohit Bansal took a 100% pay cut.

Although Snapdeal has been denying all rumors of a sale, reports suggest that it is looking for a savior. With Paytm supposedly out of the running, it looks like Flipkart might come to the rescue. The Bengaluru-based market research firm RedSeer Consulting evaluated what benefits Flipkart can reap if the deal comes through.

Brands to grow by

Snapdeal isn’t alone in its struggles. The e-tailing sector as a whole seems to be nearing a standstill in India. Research by RedSeer shows that the industry size in Q4 in fiscal 2017 (January to March) amounted to $14.7 billion—a meager 5% uptick year-to-year. (RedSeer assumed an exchange rate of $1 being equivalent to Rs60.) Flipkart could use Snapdeal to stay afloat.

This deal gives 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,” RedSeer stated in its press release. While Flipkart and Snapdeal arguably cater to similar audiences, there are pockets of Snapdeal’s audience—particularly from its stronghold in the north—that Flipkart could add to its bank of 100 million users.

New Delhi-based Snapdeal boasts a series of exclusive partnerships with brands globally. Just this month, Snapdeal added 120 brands to its offerings, including Puma, Nautica, U.S. Polo Association and Steve Madden. Access to these brands “should especially help [Flipkart] in home and fashion categories portfolio diversification.”

The need to get battle-ready

Since Seattle-based behemoth Amazon has forayed into the Indian market, domestic e-retailers have been facing major headwinds.

Amazon’s total committed investment of $5 billion in India is higher than the total funds raised by Flipkart (around $3.2 billion) and Snapdeal (around $1.8 billion). Joining forces might be the only way for the domestic brands to get a leg up. “[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,” RedSeer notes.

A marquee investor, Japanese communications giant SoftBank, also comes in tow if Flipkart decides to take Snapdeal under its wing, giving Flipkart “additional funding firepower to sustain its bruising battle with Amazon for a longer period.”

Matching strides

So far, the narrative has been strikingly similar—and equally worrying—across both startups.

A Flipkart-Snapdeal merger might have the makings of an e-commerce powerhouse, but bringing the two companies together will pose its own set of challenges. Flipkart has more than 8,000 employees. Snapdeal’s workforce comprises over 1,500. “Extracting synergies and value from this acquisition would be a challenging task for Flipkart,” Anil Kumar, co-founder and chief executive officer of RedSeer Consulting, said, referring to the physical distances (Flipkart is headquartered in Bengaluru), differing strategies and differing company cultures,

“However, if the post-merger integration is executed successfully, the deal could play out similar to Ola/TFS (TaxiForSure) acquisition in online cabs space, which gave Ola significant funding and capability firepower to hold off Uber in India. Something which would help Flipkart fend off Amazon for much longer.”

If the Ola deal is anything to go by, Snapdeal’s post-acquisition future appears limited. After all, cab aggregator Ola did shutter smaller rival TFS within a year.

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