Flipkart-Snapdeal Merger: Bad Idea

In a provocative article in Bloomberg on July 14, 2016 titled India's Inevitable Merger, Tim Culpan writes that Flipkart and Snapdeal, India's two leading e-commerce marketplaces, should consider joining hands.

Here's the crux of Culpan's argument: "Shall we name it Snapkart or Flipdeal? Perhaps either Snapflip or Flipsnap. Whatever the moniker, a merger between India's Flipkart and Snapdeal needs to happen. The two e-commerce companies are burning through cash and it doesn't look like the flames of competition are going to die down while they're being fanned by that 800-pound American gorilla called Amazon and its $15.9 billion war chest.

"But although a joining of Snapdeal and Flipkart is the most logical strategy for both companies to take on Amazon -- and a possible entry by Alibaba -- such a move won't happen for another six months at least, said Arvind Singhal, chairman of Indian consultancy Technopak. For one, management teams will likely be given more time by investors to attempt a turnaround. Snapdeal is already making the right noises, with CEO and co-founder Kunal Bahl telling Mint he's focused on revenue instead of gross merchandise value, which tracks how much product is transacted on a marketplace. Flipkart's changes have been more drastic. At least four senior executives are reported to have left in recent months, and the company has swapped CEOs, from co-founder Sachin Bansal to co-founder Binny Bansal.

"Yet, such changes are unlikely to bring a fast turnaround on their own. With profitability being another two years away, both startups are going to need more cash and you can bet investors will be less keen to hand it over under the shadow of Amazon, which has already committed $5 billion to its Indian operations and has more to spare."

Culpan's thesis fails on several counts. First, India needs more competition, not less. Monopolies help cartels, hurt consumers. The last thing India needs is a monopoly, or even a duopoly, between a merged Flipkart and Snapdeal on the one hand and an all-devouring Amazon on the other.

What about Alibaba? The Chinese giant is already a stakeholder in Snapdeal so a Flipkart-Snapdeal merger will in effect mean an Alibaba-Amazon duopoly in India. That may be what foreign companies want. It's not what Indian consumers need.

There's a second reason why a Flipkart-Snapdeal merger is a non-starter: the promoters won't play ball. Snapdeal's Kunal Bahl, CEO of the smaller of the two firms, will have to make way for the Bansals (Sachin and Binny) in the event of a merger, an unappetising prospect for him.

The underlying reason for all the speculation is the plunging market valuation of Flipkart and Snapdeal. Both have fallen by around a third from their valuations a year ago. Both have reacted by stating the obvious: the focus must shift from gross merchandise value (GMV) - an utterly misleading metric - to cash profits.


Alas, profitability is some distance away. Like Amazon, Flipkart and Snapdeal have prospered on discounts. They used venture capitalists' largesse to fund huge discounts and snare customers. Who wouldn't want a Rs. 50,000 LCD TV for Rs. 25,000 or a Rs. 20,000 mobile phone for Rs. 10,000?

But once the discounts go, will customers follow? Bahl and the Bansals are betting they won't. The discounts though will have to go sooner rather than later. VC money is not limitless. Nor is its patience.

Flipkart made a loss of Rs. 2,000 crore for the year ending March 31, 2015. (Results for FY 2016 have not yet been declared.) Snapdeal lost Rs. 1,350 crore during the same period. Such losses are not sustainable.

Future rounds of VC funding will eventually dry up. Existing VCs will seek an exit. For that profits are essential. But with same-day deliveries and the ability to vault over infrastructure hurdles (bad roads, clogged traffic, last mile connectivity), e-commerce companies have an exciting future even in the post-discount era.

The Indian online market is large and growing exponentially. That's why Amazon is here. Alibaba will soon be too. Contrary to what Bloomberg's Tim Culpan says, India needs more, not less, competition.