E-commerce in India: The Snapdeal and Flipkart story

Bangalore – Snapdeal and Flipkart, India’s two largest online marketplaces, are frequent recipients of honorific, hopeful nicknames. They are often called the eBay and Amazon of India.

But lately, Kunal Bahl, the young chief executive of Snapdeal, has been drawing parallels with another e-commerce juggernaut, Alibaba of China. India lags well behind China in e-commerce shoppers, and its incomes, credit card use and Internet penetration are also lower. But the Indian e-commerce market has headroom, and its leaders are trying to convince the global finance world that Alibaba’s success can be replicated in India.

Bahl, 30, recently toured Silicon Valley, where his New Delhi-based company is said to be seeking $100 million in investment to give it a valuation of $750 million to $1 billion.

Eight years ago, Bahl, a graduate of the Wharton business school, was settling into corporate life in the United States, first with Deloitte, then Microsoft. But in 2007, his visa renewal was rejected, forcing him to return to India.

“It was a blessing in disguise,” he said in a recent interview in Bangalore. After starting Snapdeal, he became a model for the faults of US visa policy, landing at the center of a 2011 USA Today article on technology brain drain in the United States.

At that time, Snapdeal had about 400 employees. Now, its staff of 1,300 coordinates deliveries to about 4,000 towns and cities in India. The company, incorporated as Jasper Infotech, has altered its shape along the way.

When Bahl started his company with Rohit Bansal, a high school friend, the pair focused on online coupons, a model similar to Groupon’s. They tried other types of deals and discount cards, with little momentum.

“For the first two years or so, we were struggling,” Bahl recalled.

On Feb. 4, 2010, Snapdeal.com began operations primarily as a website for restaurant discounts. A year later, the company received its first significant investment, from Nexus Venture Partners, and shifted into its current form as an eBay-like marketplace for Indian sellers and buyers to find one another. Today it lists goods from about 20,000 merchants in a variety of categories and has about 20 million registered users.

Bahl, whose father ran a small automotive parts business, casts Snapdeal as a champion of tiny enterprises in the country. “Irrespective of who you may be, you have a level playing field against anyone in the market,” he said.

Estimates of the size of this market vary. The brokerage firm CLSA suggests that in five years, Indian e-commerce will expand to $22 billion, from $3.1 billion. Flipkart, a Bangalore company often compared to Amazon that sells books, clothes and electronics online, predicts a market of $70 billion by 2020.

As the projections have grown rosier, technology investors have poured in. In a May 2013 report, Allegro Advisors, an investment bank, said that 53 e-commerce companies in India had secured $853 million in venture capital money in the previous three years.

But now, financing is slowing and several online retailers are shutting down. Analysts say the industry is consolidating, with the victors emerging.

“The e-commerce landscape in India is becoming clearer,” said Deepak Srinath, a partner at Allegro. “It’s a two-horse race; it’s Snapdeal and Flipkart.”

Flipkart has netted about $540 million in funding since it was founded in 2007, including a $160 million investment in October. (In November 2012, a government agency began investigating whether Flipkart, which had received venture funds from US firms, had violated foreign investment laws.)

The company previously sold to consumers from an affiliated seller, WS Retail, before turning into a full merchant marketplace in April. So far, its marketplace has 1,000 sellers and 14 million registered users, well below Snapdeal’s totals. For the past fiscal year, which ended in March 2013, Flipkart posted revenues of $190 million.

Srinath says Flipkart is leading in name recognition – a crucial category in India, where brand and service matter immensely. When Motorola introduced its newest phone in India on Feb. 6, it chose Flipkart as its exclusive vendor for early sales.

“It’s almost like e-commerce is synonymous with Flipkart,” Srinath said.

Snapdeal is now compared most often with eBay, which in June led a $50 million round of strategic funding in Bahl’s company. Since 2011, the company has raised more than $200 million from investors, including Intel Capital and Nexus Venture Partners.

Bahl said Snapdeal planned to go public but would not specify a date. In an interview with VentureBeat, a technology news website, he said he was planning an initial public offering in the United States.

An IPO would come after the company reached $1 billion in sales, he said in a separate interview. “We’ll be there in a matter of months.”

Likewise, Flipkart has broadcast its desire to file an IPO, although it has no “fixed timelines,” a company spokeswoman said in an email. The company expects to hit $1 billion in sales by 2015.

The two companies may be racing to go public for an unspoken reason. One technology industry adviser suggests that India’s online shopping potential is being oversold, saying that e-commerce companies may be increasing their sales but are not adding new users as quickly as they claim.

To warrant a large valuation, either company would need to mimic Alibaba’s spectacular success and quickly reach 100 million Indian shoppers. This is unlikely, said the adviser, who spoke on the condition that he not be named because his data on the companies was not public.

If that truth surfaces with one IPO, a second would fetch much less interest, he said. In short, India probably will not produce an Alibaba, let alone two.

Until either company goes public, parsing their financial data is very difficult, said Aditya Rath, an associate director at PricewaterhouseCoopers India. “I would not be overly enthusiastic about sales,” he cautioned.

For Snapdeal, he added, a bigger question lingers: “When are they going to meet their investment targets?”

Snapdeal has set ambitious goals before. In a 2010 interview, Bahl pledged that the company would soon be expanding to Sri Lanka, Bangladesh and Singapore. Those plans were shelved, and the company is focused solely on India now.

Right now, India’s online retailers are sheltered from competition abroad, thanks to the government. In September 2012, India’s Cabinet opened its retail sector to foreign direct investment but excluded e-commerce.

Amazon, which entered India in June, spent some lobbying funds in the United States on issues related to India’s foreign direct investment laws, according to the company’s latest disclosure. Industry experts do not expect the law to change soon, at least not before elections in May.

But Amazon is not holding back. On Feb. 5, the company added luggage, video games and music to its product list in India. The list now encompasses 900,000 items, excluding books, and it has 2,300 sellers in India. It is working with the postal service to ship to remote areas and has started same-day delivery in six Indian cities.

In its latest earnings report, Amazon posted $74.5 billion in global sales in 2013, with a market capitalization more than twice that – dwarfing both Flipkart and Snapdeal.

Still, analysts noted that Indian companies would not necessarily be plowed under if foreign e-commerce arrived in full force. India’s market is diverse and complex, which may give local companies a leg up. A total of 65 percent of Snapdeal’s customers pay in cash, and other companies have even higher rates of cash-paying customers. India’s poor roads and highways also make logistics difficult.

Bahl insisted that Snapdeal, as it grew and evolved, had adapted enough to India’s peculiarities to compete. When asked about his better-funded rivals, Bahl offered a boastful verdict on his industry.

“It’s not about the money that you have in the bank; it’s how you spend it,” he said. “This is a game of execution. India’s not an easy market to execute in.”