While e-commerce is flourishing in India, huge discounts and customer acquisition costs are affecting online retailers
India’s second largest e-commerce company Snapdeal is in preliminary talks for a possible merger with the largest home-grown player Flipkart and Amazon India, says a VCCircle report, quoting several unnamed people familiar with the development.
As per one of the sources, Snapdeal Co-founder Kunal Bahl had met with top executives of US-based Tiger Global, the largest investor in Flipkart, to discuss the merger.
The talks, still in the initial stages, have not reached the negotiation stage, according to this report.
A Snapdeal spokesperson has, however, denied any such development saying it is baseless, speculative and unfounded. A Tiger Global spokesperson declined to comment to VCCircle.
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As per this report, Snapdeal’s move to reach out to its key rivals has something to do with its largest investor SoftBank. While Snapdeal has enough cash in reserve to stay afloat for the next 12 more months, SoftBank is unlikely to further invest in the company, which will seriously prevent its business from moving forward.
This follows a top-level shake-up at SoftBank as its then VP and COO Nikesh Arora — who had facilitated the deal with Snapdeal — recently quit the company after a group of investors demanded an investigation into his “poor investment performance and a series of questionable transactions” during his tenure as Head of Investments.
The e-commerce market in India is expected to nearly double to INR 211,005 crore (US$315 billion) by December, according to industry body Internet and Mobile Association of India (IAMAI) and IMRB. Of this, apparel and footwear sale is expected to reach INR 72,639 crore (US$108 billion) by the year end.
Under pressure from investors
While e-commerce is flourishing in India, huge discounts and customer acquisition costs are affecting the companies. Despite wielding significant market share, none of them are close to profitability. In a pessimistic funding environment, these companies are under pressure from investors to reduce cash burn and do away with discounts, and focus on the core business. While the likes of Flipkart and Snapdeal thrived on discounts, this is not going to work in the long term, forcing a rethink on their strategy.
A few months ago, Morgan Stanley, a minority investor, marked down the value of its holding in India’s Flipkart by 15.5 per cent to US$9.4 billion.
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Recently, The Times of India reported that Chinese major Alibaba is in talks to acquire online marketplace ShopClues and merge it with Paytm, a leading m-commerce company in India. Alibaba is an investor in both Snapdeal and Paytm.
From a customer point of view, if these deals are materialised, the winner in the industry will monopolise the market and it is the price-sensitive Indian customer who is going to feel the pinch.
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