What A Flipkart-Snapdeal Marriage Will Mean As SoftBank Plays Matchmaker

Flipkart Ltd. just raised $1.4 billion from technology giants amid speculation over its merger with Snapdeal.

With cash in the kitty, why would India’s largest online retailer consider a merger with its smaller rival, especially when Snapdeal’s losses more than doubled to over Rs 3,000 crore in the year ended March 2016? Flipkart’s own accumulated losses mounted five-fold to nearly Rs 10,000 crore over the three years to 2015-16, according to its filings to Singapore’s audit regulator.

A potential deal will help Flipkart bring on board an investor in Japan’s Masayoshi Son-led SoftBank Group Corp. that has committed to invest up to $10 billion in India over the next decade. Son is willing to infuse up to $1 billion in the e-commerce company in a deal with Tiger Global Management, the largest investor in Flipkart, according to a Bloomberg report quoting people familiar with the development. And the homegrown e-tailer will require all possible firepower to take on not only an aggressive American rival Amazon.com Inc. that plans to invest $5 billion in India, but also China’s Alibaba Group Holding Ltd. that has backed Paytm’s e-commerce arm.

SoftBank, which owns a third of Snapdeal’s parent Jasper Infotech Pvt., is pushing for a merger to avoid writing off its investment, two people aware of the development told BloombergQuint requesting anonymity as the talks are private.

While the companies have not confirmed merger talks, Snapdeal co-founder and chief executive officer Kunal Bahl admitted in a letter to employees that “our investors are driving the discussions around the way forward”. If Son succeeds, Flipkart will add SoftBank to a clutch of investors including Microsoft Corp., Tencent Holdings Ltd. and eBay Inc., which invested $1.4 billion in the latest funding round last week.

Flipkart, Snapdeal, SoftBank and Tiger Global didn’t reply to BloombergQuint’s emails seeking comments.

Beyond Fat Cheques

Flipkart had average gross sales or merchandise value (GMV) of Rs 2,000 crore a month over the past one year, people familiar with the numbers told BloombergQuint on the condition of anonymity as the data is not public. Snapdeal’s GMV has come down by nearly a third to Rs 500 crore, the people said. GMV is the total value of merchandise sold, on which an online retailer earns fees and commissions.

While all of Snapdeal’s business may not come to Flipkart, the e-tailer wouldn’t have to invest more on people or infrastructure if the two merge, said Arvind Singhal, chairman and managing director of retail consultancy Technopak Advisors.

A deal will give Flipkart additional supply chain infrastructure to take on Amazon, which is aggressively expanding its network across India, said Mrigank Gutgutia, engagement manager at RedSeer Consulting. Earlier this month, Amazon announced that it has opened seven new warehouses to boost sales of high-priced products such as televisions, refrigerators and furniture.

Flipkart will be able to expand its supply chain reach quickly and inorganically by getting access to Snapdeal’s numerous small and big warehouses, especially in northern India.

Mrigank Gutgutia, Engagement Manager, RedSeer Consulting

Fast deliveries and regional fulfillment of orders have become crucial for e-tailers to achieve both higher customer satisfaction and lower supply chain costs.

Flipkart will also get additional sellers. Snapdeal has three times the sellers compared to Flipkart’s 1 lakh. While a chunk of these could be common, the seller base of the combined entity would go up.

Unlikely To Be A Smooth Marriage

Flipkart’s earlier acquisitions like Myntra and Jabong now operate as independent business units. But its potential marriage with Snapdeal would not be smooth. Flipkart runs a mix of marketplace and inventory-led model, while Snapdeal is a pure-play marketplace. Both are big companies and have an overlapping user base and market.

The foremost challenge Flipkart will face is how to reduce the burn rate. It is already battling to bring down its monthly cash burn of $40 million per month, while Snapdeal’s burn rate is nearly half its bigger rival’s, according to one of the two people cited above. The two e-tailers didn’t respond to queries on burn rates.

Operational efficiency will take time and a lot of synergies need to be in place, in terms of logistics and business, said Swetabh Pareek, head of transaction advisory services at Aranca. Till then, cash burn of the combined entity will go up, he said.

Other issues like business structures, culture and practices will also pose a challenge like in any other big merger. Geographic disparity and how both the companies approach integration could pose hurdles.