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Indian e-commerce set to open up a new war front

14 August, 2017

The events of the past few weeks could redefine e-commerce in India. While SoftBank led a record $4 billion round of investment in Flipkart, homegrown rival Snapdeal, which had once posed significant challenge and spurned its buyout offer, chose to be a much smaller operation with just a few hundred staffers.

Now the stage for the near-term seems to be set for a two-horse race between Flipkart and Amazon, but the debate around the market dynamics only throws up a fresh set of questions.

Will we see the emergence of a third player, say, in Alibaba-backed Paytm? Or will it join the grand alliance in the fight against Amazon and decide to back Flipkart? Is there also a possibility of cash-rich Indian corporate houses, such as the Tatas and the Ambanis, making deeper inroads into the ecommerce space?

Well, e-commerce in India is still evolving, and the the battle lines can be drawn and redrawn, giving way to several realignments, but what may not work is the high rate of cash burn witnessed over the past decade.

“The battle over gross merchandise values will not play out again and there is no need for it, as it has not really helped in gaining customers,” said Satish Meena, senior forecast analyst, Forrester Research.

The Indian ecommerce market, which is currently estimated to be $15 billion by gross merchandise value, has been experimenting with different business models. Some, like Flipkart and Snapdeal, had survived the initial onslaught and later went on to woo investors, while others, including IndiaPlaza and Taggle, fell by the wayside by the mid- to late-2000s.

Discounts propelled their gross merchandise value, which in turn increased the valuations of the companies. At some point, it seemed the battle for the pole position is between the two local players, but Amazon’s entry made life difficult. The US-based deep pocketed e-commerce major slowly chipped away their customer base, even as they struggled to sustain huge marketing spends.

Subsequently, as their valuations nose-dived and investors were wary of putting in more money in the startups, both Flipkart and Snapdeal were forced to cut costs, which involved efforts to slim down the workforce. A few initiatives reaped results, while others remained experimental moves without much headway.

Perceived to be better managed and equipped, Flipkart did ultimately weather the Amazon challenge to win back investor confidence, but Snapdeal had to bite the dust and was forced to become a smaller entity with an asset-light business model.

With just two players of significance left in the Indian e-commerce space, the ground is now wide open for fence sitters, many among which were keeping a close watch on the powers at play, to make a strategic entry.

Arvind Singhal, chairman of retail industry consulting firm Technopak, believes Paytm should not be written off, while Reliance may be the dark horse. “Reliance may not necessarily get into this through an acquisition. It already has a very significant presence as the largest retailer in the country, physically. Now, with 100 million-plus customers on Reliance Jio app, they may enable shopping at some point in time.”

Singhal was also upbeat about a fast turnaround in the sector. “I think, may be the same time next year, the e-commerce market will see four strong players who are very competitive.”

While the ecommerce projects by Reliance or Tata are yet to play out on a big scale, Paytm, which would most likely replicate its investor Alibaba’s Tmall model in India, is waiting in the wings.

“We believe we will very comfortably be one of the final two players (in the ecommerce business). It is very doable because of the kind of business model we are working on,” Paytm’s founder Vijay Shekhar Sharma had earlier told VCCircle

“Paytm is the only one that is well funded and have fairly decent operations. It is not dependent only on e-commerce like others, but is fairly diversified and has several other sources of revenue. So Paytm is the third player which can emerge in the space,” said Anil Joshi, managing partner, Unicorn Ventures.

The industry has also witnessed some chatter around Alibaba’s direct entry into the Indian market, but we are yet to see a bold move from the Chinese e-commerce major along the lines of what Amazon did earlier. Expanding its presence through Paytm, however, remains a strong pitch.

“Alibaba is so sizable and powerful that such a move will not be out of the ordinary because the potential in the Indian market is definitely very large,” said Sandeep Ladda, partner and national leader, technology and e-commerce, PwC.

What may, however, cause them some worry is the obscure geo-political situation at the moment. “As I see it, the current e-commerce scenario is Amazon vs everyone else. It is a two-way thing now. We may also see Alibaba joining hands with Softbank or put more money in Paytm. At this time Alibaba is still evaluating its options,” said Meena, of Forrester Research.

The expansion ambitions of the big boys may also be a test of endurance for niche players. “Flipkart and Amazon will become bigger, and potentially Paytm and Reliance, too. And this will put pressure on the likes of ShopClues and also many single category e-commerce players,” said Singhal, adding that some of the vertical-focussed ecommerce players will have to go for consolidations or may even have to shut down.

In fact, say analysts, some of the ventures in grocery, furniture, travel and movie ticketing segments are potential targets for the horizontal players. “Travel sector is going to be a very big play…where many of these vertical players could see themselves as part of the horizontal setup,” said Anup Jain, managing partner at consumer and retail consulting firm Redback Advisory Services.

Jain’s observations gains more importance with Amazon and Alibaba already in the race to acquire BigBasket. “With cash in hand, Flipkart might again consider talking to online grocers for an M&A,” said Meena.

Analysts including Meena, Jain and Pareek think major action will be in logistics, wallet and technology, as horizontal players would focus on expanding their reach in small towns and rural areas. “This might even involve user interphases in vernacular languages,” said Meena.

The recent events, therefore, mark the beginning of a new war front, moving away from the discount-driven phase of whopping valuations. A tougher fight to acquire every customer and a bigger share of shopping spend will see companies build sustainable business models for long term survival.

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Indian e-commerce set to open up a new war front

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