India e-commerce – The big if.

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Flipkart for Snapdeal looks increasingly likely.

• The probability of consolidation in Indian e-commerce is creeping ever closer as Softbank, is pushing for the sale of Snapdeal to Flipkart at a valuation considerably less than the $6.5bn at which the company last raised money.
• I think this move makes complete sense as on their own, both Flipkart and Snapdeal are likely to be crushed by Amazon should it decide to pull out all the stops in order to dominate the Indian market.
• This is because, on their own, neither of them is large enough to keep Amazon at bay, but together, they might just have a chance.
• Snapdeal and Flipkart like Alibaba and to a lesser degree Amazon are market places which bring together merchants and buyers in one easy to use location and from which they can take a small cut.
• In effect, they are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
• 18 months ago I proposed a rule of thumb that states: A company that relies on the network must have at least 60% market share or be at least double the size of its nearest rival to begin really making profit (see here).
• This, in a nutshell, is the problem faced by both Flipkart and Snapdeal in India.
• Flipkart is bigger than Snapdeal and so it is in a slightly better position but it is not double the size of its nearest rival.
• Data from 7ParkData shows that Flipkart has about 35% of e-commerce monthly active users followed by Amazon at 23% and Snapdeal at 13%.
• As it stands today, not one of the Indian e-commerce players has established itself as the go to place to buy and sell goods, meaning that all parties are likely to be losing large amounts of money through aggressive competition.
• If Flipkart is able to successfully execute the acquisition of Snapdeal and hold onto all of its users, then its share of MaU will reach 49% more than double that of Amazon.
• This could give it just enough scale and momentum to become the go to marketplace in India making extremely difficult for Amazon to compete.
• This is a big if and will require flawless integration, streamlining as well as customer service.
• This is why I suspect Softbank is willing to take a substantial haircut on its investment as I think it has concluded that should Snapdeal remain independent, its investment could easily be worth nothing.
• Amazon does not have a good track record in emerging markets as its performance in China vs. Alibaba was dismal and it does not seem to do much with its acquisitions other then leave them to their own devices.
• Hence, I think the combination of Flipkart and Snapdeal has a chance but Amazon does seem to be determined not to repeat in India the mess it made in China.
• Valuations are falling, highlighting the prospect of bargain hunting, but the high-level of uncertainty keeps me from wanting to be involved.