Snapdeal calls off merger with Flipkart; to tweak biz model, lay off staff

Online retailer Snapdeal has scrapped a proposed merger with bigger rival Flipkart after months of negotiations and will now tweak its business model, cut costs and slash headcount in a bid to revive its fortunes.

“Snapdeal has been exploring strategic options over the last several months. The company has now decided to pursue an independent path and is terminating all strategic discussions as a result,” the e-tailer said in a statement on Monday.

Snapdeal had engaged with Flipkart on a merger for the past six months at the behest of its biggest investor, Japan’s SoftBank Group Corp., after a few unsuccessful attempts to raise capital. The Delhi-based e-commerce firm, which trails Flipkart and Amazon, first explored a merger with rivals about a year ago. It later carried out a rebranding exercise, slashed its workforce and started serious talks with Flipkart for a sale.

However, six months of excruciating discussions culminated in both camps calling off the merger thanks to differences between SoftBank and Snapdeal founders, besides several clauses put forward by Flipkart.

Snapdeal’s announcement to call off the deal comes a week after its board, which includes representatives of investors SoftBank and Nexus Venture Partners as well as its founders, agreed to negotiate with Flipkart on its revised offer of around $900 million.

Snapdeal, which sold its digital payments unit FreeCharge for $60 million to Axis Bank last week, plans to divest its logistics arm Vulcan Express soon. After raising fresh capital by selling these subsidiaries, the company wants to chart out a new journey that it calls Snapdeal 2.0.

A Snapdeal spokesperson said in the statement that the company has made “significant progress” towards executing its new strategy by achieving a gross profit this month. “With the sale of certain non-core assets, Snapdeal is expected to be financially self-sustainable,” the statement said.

Separately, founders Kunal Bahl and Rohit Bansal, in a letter to employees announcing the termination of merger talks, said: “There isn’t going to be one successful model for e-commerce in India. In every market, there are multiple successful e-commerce businesses, and as long as one’s strategy is differentiated and has a clear path to success, there is a great company that can be built.”

They claimed the new business model that the company had rolled out a few months ago was already profitable at the net margin level.

SoftBank, which was looking to acquire a stake in Flipkart through the planned merger, said in a statement that it “respects the decision to steer the company in a different direction”.

“We look forward to the results of the Snapdeal 2.0 strategy, and to remaining invested in the vibrant Indian e-commerce space,” the Japanese investor said.

Snapdeal 2.0

Two people with direct knowledge of the company’s plans said Snapdeal now wants to position itself as a “true marketplace” without any inventory.

“This will be a seller-centric marketplace similar to Alibaba-owned Taobao in China and eBay in the US. The management has been working on this plan for the past two months,” one of the persons said on the condition of anonymity.

The company had briefly courted the idea of merging with Infibeam but did not make any substantial progress in this regard. “With all strategic conversations coming to an end the company can now focus on the actual business,” the person said.

However, this move would entail further downsizing of its operations and workforce. The second person said the company would eventually end up with fewer than 200 people. The e-tailer is estimated to have around 1,500 employees currently.

Snapdeal, which originally began as a discount coupon seller 10 years ago, had gone through several changes in its business model. It later transitioned into an online deal site. By 2012, it had adopted a pure marketplace model without managing its own inventory.

“There are certain advantages of the inventory-led model but they come at a crazy cost. To me, inventory is just a very expensive way of marketing,” Bahl had then told VCCircle in an interview defending his zero-inventory model.

After raising around $1.65 billion from SoftBank, Alibaba and other investors, Snapdeal pivoted to the capital-intensive inventory-led model. But this has not quite worked out and the company is now returning to the earlier model, which was championed by its erstwhile investor eBay.

eBay itself failed against Flipkart and Amazon in India and it rolled its India business into Flipkart earlier this year with the US parent putting in additional money into the homegrown e-tailer.