E-commerce: Creeping Consolidation

The consolidation story of the Indian e-commerce industry is old. And new. While the trend has been seen in the past, the industry is up for a phase of consolidation this year again, triggered by unsustainable business models and unwillingness of investors to continue pumping funds into businesses which are not on the path to profitability.

“Since the industry growth this year is not as high as the stratospheric levels of the last few years and focus has been on cost-cutting, it is natural to expect many consolidations, smaller/poorly performing players to get attached to the larger ones,” says Anil Kumar, founder, RedSeer Consulting. “We expect this trend to continue until the industry growth comes back on track.”

Over the past few years, the Indian e-commerce industry has seen a series of acquisitions, mergers, and shutdowns. Flipkart’s acquisition of electronics retailer Letsbuy.com in 2012 for an estimated $25 million was perhaps, one of the early signs of consolidation. Backed by common investors like Tiger Global Management and Accel Partners, this was also an example of investors pushing for an acquisition, as Letsbuy.com was not able to raise capital from the existing investors.

Then, in 2014, putting an end to months of market speculation, Flipkart announced that it had acquired leading fashion e-tailer, Myntra, at an estimated value of over $300 million. The move was seen as a measure to tackle competition from global e-commerce leader, Amazon, which was then just beginning to ramp up its business in India. The Flipkart-Myntra acquisition story also signified a positive wave in the sector, as it was not driven by distress. Flipkart’s then CEO (now executive chairman), Sachin Bansal, insisted that it was a “completely different acquisition story” unlike many others that had to be acquired because of lack of funds, or a clear strategy to pass on the baton.

Last year, Snapdeal acquired online recharge platform, FreeCharge, for an estimated $400 million. Snapdeal co-founder and CEO, Kunal Bahl, said at the announcement that the joint entity would create the country’s largest mobile commerce platform with over 40 million customers. Snapdeal has been most aggressive among its peers to grow inorganically with a string of acquisitions aimed at complementing its business. In a span of about one to two years, it acquired several companies, including online financial services platform RupeePower, luxury e-commerce site Exclusively.in, gift recommendation site Wishpicker, and product discovery platform, Doozton. Bahl had earlier said that Snapdeal’s objective was to add a number of related offerings around its core platform similar to what Chinese e-commerce major Alibaba has been doing.

In July this year, Flipkart’s acquisition of Jabong at $70 million through its fashion arm Myntra is the latest to reinforce the trend of consolidation in Indian e-commerce space. This acquisition is clearly an attempt by Flipkart (and Myntra) to overpower rival Amazon, by further strengthening its fashion category. The deal also indicates that the high-margin fashion category will be the most promising and profitable segment for e-tailers going forward. “Fashion and lifestyle is one of the biggest drivers of e-commerce growth in India. We have always believed in the fashion and lifestyle segment and Myntra’s strong performance has reinforced this faith,” says Binny Bansal, CEO and co-founder, Flipkart.

“Acquisitions happen for several reasons such as to increase new capabilities, grow market share, gain competitive advantage, diversify products/service offerings, build synergies/economies of scale, eliminate competition, speed up entry into a new space, survive in a challenging market etc.,” says Pragya Singh, Vice President, Technopak. “With acquisition of Jabong by Myntra, Flipkart has strengthened its position in the high margin and has registered growth in the Indian fashion segment. At the same time, it has deprived its competitors of strengthening their fashion offering by acquiring Jabong, thereby strengthening leadership in this space. This is a smart acquisition from the perspective of Flipkart.”

THE ROAD AHEAD
The consolidation trend in the Indian e-commerce sector is here for a while. “Mergers and acquisitions are part and parcel of this money-spinning industry and the signs are omnipotent for many more of these to follow. The call at this point of time is for the not-so-good doing businesses to join forces with the bigger portals to leverage their synergy. Some of these M&A will also be investor-driven,” says Kumar of RedSeer Consulting. “At the same time, acquisitions often end up reducing market competition and bring down spending on discounts, which is important these days as players are looking to bring down their cash burn.”

However, things might change once the industry enters the rapid growth mode again. “During the second half of the year or when online spending picks up in smaller cities in a few years, companies might want to invest in organic growth opportunities rather than on consolidation,” adds Kumar.

Meanwhile, Seattle-based Amazon poses a stiff competition to the domestic players and is among the key drivers of the consolidation. Reason — you can’t fight a rival with a war chest of $5 billion, all by yourself. Amazon chief, Jeff Bezos, has taken an aggressive stance on India, recently increasing the company’s total investment in the country to $5 billion, from $2 billion earlier.

The industry must keep a close watch on the entry of Chinese e-commerce conglomerate, Alibaba, which could be the real game changer. Paytm, in which Alibaba has a majority stake, is reportedly planning to spin off its marketplace business in India, which will allow Alibaba to organically expand in India. Alibaba already owns about five per cent in Snapdeal. Media reports have also suggested that it is in talks with Indian logistics startups, Delhivery and Xpressbees Logistics in an attempt to complete the ‘iron triangle’ of businesses in e-commerce, logistics and payments. According to available estimates, Alibaba gets less than a fifth of its revenue from outside its home base in China. In that case, India could be the stepping stone for it becoming a truly global entity.

“Alibaba is yet to lay its cards on the table regarding its India plan. However, it has made its intent clear that India is an important market and has already begun its groundwork. It has deep pockets to make big investments in India. It will not be surprising if Alibaba makes big ticket acquisitions to get a head start into the Indian market,” says Singh of Technopak.

The growth story of India’s e-commerce industry is being driven in the backdrop of one-and-a-half decade of valuable experience of marketplaces maturing in other geographies. This will shorten the learning curve to build scale. “The early mover therefore will not necessarily be at an advantage for a long time,” says Singh. India continues to present a huge opportunity in terms of its large size, demographic advantage, and open economy where a defendable differentiation among players is yet to emerge. Consolidation will be the order of the day and both domestic and international players will play a key role in it. Players like Alibaba are in a wait-and-watch mode, dormant but alert, ready to pounce on the right opportunity.

ayushman@businessworld.in