India will eventually become the second largest e-commerce market in the world, overtaking US in the next 10 or so years. Rural India accounts for two-thirds of the country’s population, or 807 million people, and their migration to the internet will be a driving force behind the country’s e-commerce growth.
The past few years saw a lot of interest and high valuations for local players caused by big Tiger Global and SoftBank investments. Today it looks a bit overheated, and somewhat irrational. But we think India is exciting to watch because it is behind US and China in many areas, yet innovating at a pace way beyond both.
Demonetization in November 2016 caused 86% of the currency in circulation to become unusable. This started exponential growth for mobile wallets like Paytm. And while most of e-commerce deliveries were previously done using cash-on-delivery (CoD), people adjusted to using mobile payments. For a country as big as India it is impressive how quickly it adjusted and found ways to function.
Yet estimates show that during 2016 e-commerce in India has failed to grow, after a couple years of doubling growth. This slowdown made high-valuations of both Flipkart and Snapdeal hard to reason. India market had an unhealthy cycle of investor-backed e-commerce companies creating sales growth by deeply discounting products, and thus attracting new investments. This cycle falls flat once the market stops growing.
There are four players in the Indian market: Flipkart, Amazon, Snapdeal, and Paytm. However the market is shifting towards only three: Flipkart-Snapdeal, Amazon, and Alibaba-Paytm. Recent Alibaba investments into Paytm took its stake to over 50%. And Flipkart-Snapdeal merger seems to be just a matter of time.
With Alibaba and Amazon showing big interest in the market, the only chance local players have is to grow big fast. Thus combining Flipkart and Snapdeal into one makes sense. But mergers are never smooth and often take years, so this move could also cripple the new company for too long.
Flipkart launched in 2007 and Snapdeal in 2010, but it was eBay to first launch in India. In Tech In Asia article “Opinion: It’s curtains for India’s oldest ecommerce player, eBay” Sumit Chakraberty writes:
“Long before the arrival of Amazon and Alibaba, or even the launch of Flipkart and Snapdeal, it was eBay that made a foray into Indian ecommerce with the acquisition of Bazee for US$50 million in 2004.
eBay India’s revenue growth actually slowed down in the boom years of 2014 and 2015, even as the main ecommerce players had their revenues rocketing, along with mounting losses bankrolled by hedge funds.”
eBay was the first international company to see the potential of the Indian market, but when the market growth started to accelerate in the last few years it lost its footing. eBay India launched with the same platform they use in other markets, but once Amazon, Flipkart and Snapdeal got serious it didn’t have much to offer.
In 2013 eBay invested into Snapdeal, and they still own roughly 5% of the company, but Snapdeal has been loosing ground. In a recent interview eBay CEO said this about Snapdeal when asked why they also invested into Flipkart “It’s not like we’re giving up on them[Snapdeal]. But if I want to be in a market, I want to win. And I realize it’s not going to happen only organically through eBay, so partnerships are critically important.” eBay India and Snapdeal were both clearly not going to win, hence the focus on Flipkart.
In comparison when Amazon decided to enter India, they went in with full force. Amazon only entered in 2013, but has already become the most visited e-commerce website in India, and is catching Flipkart quickly in terms of sales. Amazon has committed to investing billions of $ into their operations in India, this meant that local players are faced with foreign capital way beyond their reach.
Indian government has been putting rules in places for how foreign-owner e-commerce companies are allowed to function. The Indian government doesn’t allow companies with major foreign ownership to operate retail locations where they are selling their own inventory. But that’s not the only limiting rule for Amazon - e-commerce marketplaces are prohibited from offering discounts and capped total sales originating from one vendor at 25%. Analysts estimate that 40% of sales on Amazon.in are by Cloudtail India, a joint venture between Amazon and Catamaran Ventures.
Thus Indian market is all about marketplaces. Our thesis is that in big markets no single retailer can have a majority stake of the market. There are limits to growth if it all has to be done by a single company. US market is unique because here Amazon is still the biggest retailer, but every quarter the marketplace share grows by 1 percent. In India Amazon doesn’t get to use many of their skills doing retail, instead they are forced to focus on the marketplace. Which we think in the long-term is beneficial to Amazon anyway.
Flipkart is pushing for more favorable laws for domestic companies. This is important to pay attention to, because Flipkart is still mostly a domestic company, even given their foreign investments, thus they can benefit a lot from being able to influence government decisions.
Microsoft, Chinese internet firm Tencent, and eBay participated in the most recent Flipkart’s $1.4 billion funding round. India has become the battleground for foreign capital. The question is thus can any of them outlast Amazon’s willingness to go without profits.