Indian e-commerce – Road to ruin.

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The only likely winner in India is now Amazon.

• Snapdeal has ended merger discussions with Flipkart in a move that, I think, snuffs out the one chance the local players had to keep Amazon at bay.
• At the same time Softbank is now looking at committing $1.5bn – $2bn into Flipkart in a move that I think will solve nothing because in a network economy, two halves do not make a whole.
• I think Softbank should not put any more money into Indian e-commerce as the most likely winner in this market is now Amazon in which Softbank has no stake.
• Snapdeal’s strategy is now to become a niche player and is cutting costs and selling assets in order to raise the capital required to reach profitability in its niche.
• In my opinion, this strategy demonstrates a fundamental misunderstanding of how Amazon works and what it is likely to do to win the Indian market.
• Most companies have a strategy that involves trade-offs such as offering high quality or low prices.
• This is the route that Snapdeal is taking by deciding to streamline and focus on by giving sellers the best experience in India.
• This is not how Amazon functions as there is no either / or in its vocabulary.
• Instead Amazon goes for dominance and offers high quality and low prices or in this case the best experience for both sellers and buyers
• How Flipkart will alter its strategy following the failure of the merger remains to be seen, but without the scale that Snapdeal would have given it, its chances of seeing off Amazon are greatly reduced.
• Flipkart, Snapdeal and Amazon are network businesses just like Uber, Alibaba, AirBnB, Craigslist and so on and consequently, they are bound by the same rules.
• 20 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 rivals 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.
• Furthermore, both will now have to contend with Amazon which is absolutely determined not to make the same mess of India that it made in China when it went up against Alibaba and lost.
• I estimate that Amazon pumped $400m of losses into the Indian market in Q1 17A and roughly the same amount again in Q2 17A and I don’t think it will be afraid to up the ante from here if needed.
• Amazon is not the largest in India but it can lose far more money for far longer than either of the other two.
• Flipkart has around 35% of monthly active users but it will need to reach at least 50% before it is double the size of Amazon (7Park Data).
• This is why a Snapdeal merger made sense, because adding Snapdeal’s users to its own would have got it pretty close to achieving that milestone.
• Consequently, Amazon will now be able to grind its two main rivals down to the point at which they either exit the market or agree to be acquired.
• Both of these scenarios are likely to result in much lower valuations than were being discussed as part of the deal.
• Hence, I think that Amazon is the only real winner from the failure of this merger which I think raises existential questions for local providers of e-commerce marketplaces in India.
• In the short-term this is unlikely to help Amazon’s fundamentals much and so I remain unenthused with an investment in its shares.
• I continue to prefer Tencent, Baidu and Microsoft.