Will India follow China's footsteps and consolidate?China’s tech-startup sector has seen a recent spate of consolidation moves. Investors have become increasingly reluctant to put fresh capital into startups that have been burning through cash in order to compete with rivals. This has led to startup founders being encouraged to consider mergers to prevent battles with rivals that have degenerated into discounting wars. Meituan and Dianping, two companies that were originally created to replicate Groupon, merged and then went on to raise a colossal 3.3 billion dollars at a valuation of 18 billion dollars.
The two largest players in the ride-hailing market – Kuaidi and Didi – who were locked in an expensive battle for market share decided to merge to counter Uber’s advance in China. The company which was formed as a result of the merger (Didi Chuxing) then went on to merge with Uber in order to put a stop to their costly battle for market share. Is this something Indian startups and their investors should consider? We are already seeing the first signs of consolidation in the Indian market. MakeMyTrip acquired Goibibo in Oct’16. This will consolidate two large players in the online-travel industry that has witnessed a fierce battle for market share.
Indian e-commerce too appears ripe for mergers and acquisitions. Walmart has shown willingness to consider inorganic route to compete effectively with Amazon. It recently acquired Jet.com in an expensive 3 billion dollar deal. Acquiring Flipkart outright or even buying a controlling stake will provide it with an ideal vehicle to take on Amazon in the fast-growing Indian market. What about Alibaba? Surely Jack Ma will look to enter the Indian market sooner than later. Alibaba already holds a sizeable stake in Paytm.
Combining Paytm with Snapdeal could provide a launchpad for Alibaba's India operations (close friend Masayoshi Son's Softbank is a large investor in Snapdeal). Outside the Top 4, ShopClues, with its strong focus on Tier 2 and Tier 3 cities could turn out to be an interesting target for the big boys of Indian e-commerce.
For now though, the market is witnessing a straight fight between Flipkart and Amazon for supremacy in the Indian market. But which are the key areas that are likely to see action going into 2017?
Key battle fronts for 2017Fashion is a vertical that Flipkart dominates along with its subsidiaries Myntra and Jabong. Flipkart though will do well not to underestimate Amazon’s capability and ambition in the fashion vertical. Just look at the US. Amazon is set to become the largest apparel retailer in the country in 2017. In Europe, Amazon has come out of nowhere and is now challenging the dominance of Zalando, the Germany based fashion portal.
Grocery will be another key battlefront. The Indian food and grocery market is currently estimated to be 400 billion dollars. Given the size of the market, it is but natural that both Amazon and Flipkart would want a piece of the action. Amazon started with a pilot program called ‘Kirana Now’ in Bangalore which has now been expanded to include other cities such as Delhi NCR, Mumbai and Hyderabad.
Flipkart too plans to re-enter the grocery business after its initial attempt to enter the market fizzled out in early 2016. Historically hyperlocal grocery business has been a tough business to crack for Indian players. Peppertap had to shut down its grocery delivery business whereas another startup Grofers was forced to shut operations in 9 cities.
On the private label front too, Flipkart has been slow off the blocks. A month back it launched a limited range of electronic accessories under its ‘Flipkart SmartBuy’. The delay is surprising because retailers the world over prize private label brands for their high margins. Margins of private-label electronic products for example can be 20 percent higher than those of similar branded products.
To be fair, Flipkart did attempt to launch private label brands once earlier but the brands had limited or no success. Amazon on the other hand has been selling a wide range of electronic accessories through its private label line - Amazon Basics - since early 2016. In addition, Amazon has recently launched a range of home furnishing and kitchenware products under the label Solimo, while it has targeted men’s wear and women’s ethnic clothing with ‘Symbol’ and ‘Myx’ private lines respectively.
Post the demonetization move of the Indian government, payments has become top priority for every retailer. Not to be outdone, Flipkart has announced that it will invest 100 million dollars in its payment solution, PhonePe, over the next few years. The decision appears tricky for a couple of reasons.
First, payments is a very crowded landscape. Paytm using its first mover advantage and financial muscle has cornered a sizeable chunk of the market. FreeCharge (owned by Snapdeal) and MobiKwik, though not as large as Paytm, are strong incumbents. The largest bank in the country, SBI, has been aggressively promoting its wallet, SBI Buddy. To complicate matters, Government of India has recently launched its BHIM application. Once the initial kinks are ironed out and if marketed well, the app could give Paytm and others a serious run for their money.
Second, is payment a top customer pain point for Flipkart? No. Once availability of cash improves, most users are likely to revert to ‘cash on delivery’ as their preferred payment mode.
Customer analytics will be another focus area. Amazon is miles ahead of Flipkart on personalization. Amazon has a section dedicated to items that it recommends based on the consumer's shopping and browsing history. The consumer can also tinker and help Amazon improve its recommendations. These features are absent in Flipkart. The search engine is far superior on Amazon. Just type in a few random keywords such as “Sony”, “Adidas”, “laptop”, “sofa”, “guitar”, “diapers” or “jeans” and see for yourself the difference in search suggestions and quality of search results. For Flipkart to compete effectively with Amazon, it really needs to bolster its analytics and search capability.
The author categorically counts Amazon’s innovative ways as he writes:
“In a recent interview, top leaders of Flipkart – Binny Bansal and Kalyan Krishnamurthy – criticized Amazon for copying every move of Flipkart.
“They copy everything, or they wait for someone from somewhere to tell them what to do.” “
To read how the battle of the ecomms may pan out, go
here.
Guest Author
Biplab Chakraborty is group manager of M&A at Tech Mahindra. He has more than 17 years of diverse experience in mergers and acquisitions (M&A), investments, technology
consulting and business development.
