Flipkart is in the process of raising US$2 billion in an effort to stave off an increasingly aggressive Amazon and a potential threat from Alibaba, in future.
The present drive to raise the first US$1 billion is being led by software giant Microsoft and Chinese technology major, Tencent. Another US$1 billion is expected to be raised from the market.
US-headquartered eBay, is reported to be showing interest in participating in the fund raising and with good reason. eBay India has been struggling with growth and has not really been able to dominate the e-commerce business in India, which has seen Flipkart along with Snapdeal and Amazon, get well ahead in market share.
Valuation and Market Share Drive Consolidation
Two critical factors drive success in the e-commerce business – market share and valuation. Flipkart, which has been the market leader in terms of market share has seen its valuation decrease significantly.
Morgan Stanley, an investor in Flipkart, has downgraded the valuation of the company to US$5.37 billion this February. That’s a far cry from peak valuations of US$15.2 billion witnessed in 2015.
Microsoft and Tencent are leading the current round of raising US$1 billion at a valuation between US$10-12 billion. The other US$1 billion, to be raised subsequently from the market, is expected to give Flipkart the much-needed capital boost to take on Amazon, which is itself raising US$3 billion to consolidate and expand its India operations.
eBay’s India Game Plan
Although an early entrant in India, eBay has failed to catch the pulse of the Indian buyer. Its operations in India has seen rising costs and mounting losses. The current plan to join the US$1 billion fund raising is seen as a step towards merging its India operations with Flipkart, a move that is likely to give boost to both entities.
Flipkart will get eBay’s India clients, along with the backing of a cash-rich international e-commerce giant, while eBay will get the Indian experience of Flipkart’s team, which will help in reducing operational costs and improving cost efficiencies down the line.
Furthermore, eBay is a shareholder in Snapdeal and therefore, a merger with Flipkart will give the latter a window to subsequently take over Snapdeal. Flipkart has been in a cut-throat competition with Snapdeal for market share.
At some point, if Flipkart succeeds in taking over Snapdeal, post its merger with eBay India, it will create a giant that both Amazon and Alibaba will find challenging in times ahead.
Amazon and Alibaba have deep pockets and long-term plans for India. Flipkart realises that and so from an earlier three-corner race between Flipkart-Snapdeal-Amazon, the new triangle of competition is likely to emerge between Flipkart-Amazon-Alibaba.
Microsoft and Tencent seem to be optimistic on Flipkart despite mounting losses and dropping valuations. However, the same sentiment is not shared by the other early-stage investor, Tiger Global, which led seven rounds of fund raising between 2012 and 2015, but has declined to participate in the current round.
What About the Other Players?
Online retail has seen new ‘niche’ segment entrants go through early rise in market share. However, once a minimum scale of operations are reached, to go to the next level requires deep investment in the entire supply chain. The company is forced to increase investment in marketing, people and processes – all being necessary to retain market share but end up driving up operational costs.
This is the point where most of the smaller players have either shut down or have been taken over by the larger players. The process of M&A will continue to witness the ‘Rule of Three’ applying to the Indian e-commerce space.
But interestingly, there is another segment that has emerged and is holding out against the big three. Offline retail majors like the Future Group, Aditya Birla group and Tata group, have all created their own online space and seem to be growing at a steady pace along with the larger players.
It will be interesting to see how they hold their own against the increasingly aggressive leaders.
Time For a Reality Check
Investors seem to ride the bubble, driving up valuations of several companies. Investors like Tiger Global and Softbank have led the way on valuations that in many cases seemed to overstate the optimism, despite dropping market shares and mounting losses in companies that they invested in.
In the post-2014 period, several companies have seen their valuations downgraded and yet, there are companies that investors seem to remain bullish on.
The latest example is D-Mart, owned by Avenue Supermarts. Post their rather successful IPO, the issue price of each share was Rs 229. This was being quoted at twice the premium. While the market seems to be very bullish on D-Mart and expect it to cross Rs 500 in the near future, it also makes a case for cautious optimism. Market sentiments remain fickle and so do valuations.
Meanwhile, eBay India can look forward to better times ahead by joining the Flipkart family. Snapdeal and Amazon will be watching this one closely.