The battle of the big boys

Flipkart vs Snapdeal vs Amazon
 Goutam Das        Print Edition: May 24, 2015
The battle of the big boys

The conversation with Amazon India's country manager Amit Agarwal begins with him dismissing his rivals. Flipkart, India's largest e-commerce company, does everything Amazon does, and vice versa, I point out. There is little product differentiation.

Agarwal snaps back. "They are a very low benchmark."

Colleagues call Agarwal a "Type A" - a personality type that psychologists say are excessively competitive, aggressive, work-obsessed, success-oriented, proactive, and mostly workaholic. Not just Agarwal. Almost all leaders we come across in India's nascent but fast growing e-commerce industry fit that description. It is becoming a slugfest.

According to a 2014 report by Morgan Stanley, three players have pulled ahead in the horizontal marketplace race. Flipkart leads with a 44 per cent share of the $6.3 billion Indian e-commerce market, by Gross Merchandise Value (GMV). Snapdeal is No.2 with 32 per cent share, while Amazon, a late starter in India - it launched in June 2013 - has 15 per cent. Amazon touched $1 billion in sales in 2014. For the company, India is the fastest-growing international market to reach that mark, in just one-and-a-half years. Amazon does not agree with the Morgan Stanley report on the difference in GMV share.

And Snapdeal CEO Kunal Bahl insists the race between Flipkart and his company is much closer. The Morgan Stanley report was published in February, before Snapdeal bought FreeCharge, a mobile transactions company. "Today, if you add FreeCharge, which is a few hundred million dollars annually, it is really neck and neck," Bahl says. "Flipkart and Myntra had a five-year, $500-million, and 10,000-person head start on us. Today, it does not seem someone had a head start on us," he adds. Snapdeal started in 2010. By the time Amazon launched in mid-2013, Flipkart was already nearing an annual GMV of a billion dollars. Flipkart, meanwhile, thinks its first-mover advantage will hold good. "Flipkart as a brand has very high consumer interest. It is the most trusted online retail brand in the country," says Mukesh Bansal, the company's head of e-commerce. "We have deeper understanding of consumers. Between Flipkart and Myntra, it would be more than 50 per cent market share of all consumer transactions in India," he adds. Founders Sachin and Binny Bansal did not speak to BT for this article, but four company executives spoke on Flipkart's behalf.

Meanwhile, revenue figures from Registrar of Companies (RoC) do show Flipkart remains in lead. Flipkart didn't have much competition in 2007 when it started. Its founders initially thought of a price comparison website - an aggregator of e-commerce sites. But they soon realised there were hardly any e-commerce sites in India. So they founded Flipkart and it quickly pulled away from older e-tailers such as Indiaplaza by innovating and offering many firsts - 24/7 customer support, cash on delivery, as well as a return policy.

But those innovations are now commoditised. Every big player offers the same. All three also advertise aggressively on television and print to build their brand recall; they are battling to be the first to announce category launches, new services, and funding; competing for global talent while taking potshots at each other on social media.

On February 20, a picture of a Flipkart office with two receptionists and an Amazon-branded package lying in one corner went viral on Twitter. "Even @Flipkart Orders from @Amazon!" the tweet read. Flipkart responded: "We recycled said packaging as our reception's dustbin." Twitteratis screamed for more blood. "Flipkart and Amazon, go get a knife you both, let's see who wins," a post said. Amazon India tweeted: "There is a bit of Amazon in every e-commerce company."

The real knives in this battle are more dangerous than tweets. According to industry sources, Amazon India has data scientists whose job is to only execute strategic pricing that makes Flipkart bleed. Sellers on Amazon may have 2,000 refrigerators, for instance. It may offer deep discount on 300 of them. That will provoke Flipkart to discount further - and hence add up to its losses. "Amazon is using it out of design to maximise the bleeding at Flipkart. Today the game is about who has the stamina to last longer," says an industry veteran who does not want to be identified.

All three are marketplaces and sellers on their platforms don't necessarily agree to price cuts the companies want; the trio indulge in 'gap funding'. They make up the difference by paying sellers and charging the cost to promotional expenses. While companies remain tightlipped, it is widely believed that Flipkart, Snapdeal and Amazon burn more than $100 million of cash every month. Flipkart has the highest cash burn rate but then it also raised the largest amount - some $2.3 billion so far. Snapdeal has raised close to $1 billion in 2014, while Amazon India is backed by a parent which has pledged $2 billion investment in the Indian marketplace. All will probably need even more money. To win market share, all three discount constantly and add to their already humungous losses. Flipkart, in 2013/14, ran losses of Rs 400 crore whereas Snapdeal lost Rs 265 crore, and Amazon Rs 321 crore. Some estimates say Flipkart and Snapdeal have roughly enough cash to last out a year and a half at current burn rates. And this war is unlikely to be settled within that time period.

While all three appear largely similar to the average customers, there are subtle differences in offerings and business philosophies. "People don't go to Amazon for a crazy sale. But they do to Flipkart and Snapdeal. Amazon's philosophy is to offer a better product at everyday low price. But Flipkart and Snapdeal are seen as deep discounting sites," says Mahesh Murthy, Managing Partner at Seedfund, an early-stage venture capital company.

Q&A: We'll get 100,000 sellers by December 2015: Flipkart's Ankit Nagori

Snapdeal insists it is wrong to see it as a vanilla e-tailer. It says it targets the entire consumption ecosystem. "Retail in India is a $500 billion market, consumption is $1.4 trillion, and retail is a subset of consumption," says Bahl. "What comes between retail and consumption are travel, utility payments, education, financial services, etc. There is no reason a digital ecosystem should not make those more efficient," he adds. Snapdeal's acquisition of mobile transaction company FreeCharge and RupeePower, a marketplace for loans, credit cards, and financial services, is part of that overall strategy to be the big player in the consumption space, he says.

The battle of tomorrow, it emerges, will be fought on two other parameters. The rivalry will be about offering new and more selection of product and services, and faster delivery. Low prices, of course, will continue to be a primary driver but all the three e-tailers are innovating to reduce the seller's expenses. The big hope: it would induce him to sell cheaper all by himself; gap funding and, thereby, cash burn, would slow.

Amazon has played the e-commerce game for many more years than both Flipkart and Snapdeal combined - the company was founded in 1994 in Seattle. Its India team says it has in place the most comprehensive plan to reduce cash burn. Amazon has brought in a range of seller services that have been tested in markets globally. Services such as 'Pay with Amazon' addresses payment costs. It allows sellers to use Amazon's payment infrastructure, its customer base, and the delivery addresses on their website. Traffic costs, similarly, are addressed through some ad products while 'Fulfilled by Amazon' gives sellers access to warehouse space, picking, packing, delivery, and return services. "There is a per-unit rate. All capital costs that lock up working capital have become variable costs," Agarwal says. If the seller already has a warehouse, he can just use the company's delivery logistics through a product called 'Easy Ship'. The company recently launched Amazonbusiness.in, a separate website for small and medium businesses to buy bulk quantities at wholesale prices. This is a business-to-business (B2B) marketplace, similar to Amazonsupply, the retailer's industrial buying venture in the United States.

"We are taking every single cost element out of the equation. That is a big driver of low prices - the only sustainable way to drive low prices," says Agarwal. "You can lower the price yourself through discounting. But you cannot afford to do it for a very long time."

Q&A: We'll never compete with our sellers: Snapdeal's Kunal Bahl

While Flipkart and Snapdeal offer fulfilment services and other products to ease seller costs, neither of them has quite the bouquet Amazon does. However, both are working to offer their sellers cheaper capital.

"We are partnering non-banking finance companies (NBFCs) where sellers can source capital. We have already provided capital to more than 50 sellers as part of the lending pilot. We provide data and risk profiling to NBFCs," says Ankit Nagori, Senior Vice President at Flipkart. Snapdeal has a 'Capital Assist' Programme for seller financing. Sellers get funded through a marketplace created for them where lenders partner. CEO Kunal Bahl says the company would have assisted loans worth Rs 100 crore to small businesses on its platform, and thus far, there is no non-performing asset. "The businesses borrowing are paying 100 to 150 basis points less than what they would have otherwise in the offline market. That they pass on to consumers as price benefit," he explains.

All e-tailers are aggressively stocking up on sellers and products. Snapdeal is adding one product to its selection every 10 seconds. Amazon has about 700,000 items in stock today that can be delivered the next day; about 22 million products in its catalogue overall. Both these companies have 100,000 sellers (Amazon number includes sellers on Junglee, a comparison site owned by the company's US parent). Flipkart has 30,000 sellers and plans to get to 100,000 by 2015-end. WS Retail, set up by Sachin and Binny Bansal in 2010, held most of its inventory and is the company's largest seller - it had sales of Rs 3,135 crore in 2013/14. The founders have now divested their stake. And Flipkart flipped from being an inventory-led model to being a marketplace in 2013. "Flipkart is now a 100 per cent marketplace. The largest seller in different categories is not the same guy," says Nagori.

Quote

People don't go to Amazon for a crazy sale. But they do to Flipkart and Snapdeal.

Mahesh Murthy

Managing Partner, Seedfund

Flipkart has its eyes on the next big vertical after electronics and fashion to grow its selection. These are India's largest e-commerce categories, accounting for about 82 per cent of GMV. According to Morgan Stanley, 34 per cent of Flipkart's GMV as of 2014 is electronics, followed by 30 per cent from apparel. Now, it wants to test the market for home and furniture, says Mukesh Bansal. "There are a lot of activities planned," he says. He estimates this slice of the market at $20 billion. "Today, our furniture delivery is very difficult. The experience is not smooth. So we are looking to innovate and substantially improve the supply chain," he says. Of course, that would bring Flipkart into competition with Pepperfry and Urban Ladder, no mean warriors themselves. But that is another story.

Snapdeal is oiling the third leg of the e-commerce machine - faster delivery. Half of its orders are shipped through its fulfilment centres. That reduces time to delivery, while improving homogeneity of packaging. The company has picked up an undisclosed stake in supply-chain company GoJavas that is present in more than 100 Indian cities. "Our sales were growing faster than the capacity of third-party logistics companies," Bahl says. The stake will help GoJavas scale up while providing Snapdeal with visibility in underserved routes and capacity.

Flipkart is banking on technology and automation to do same-day deliveries, within a few hours of the order being placed, in a few categories. There is talk that the company is working with kirana stores, much like Amazon, but no details are known yet. "That's how FMCG will be sold in India where small and medium enterprises fulfil orders," is all that Flipkart's Nagori is willing to say.

And what of Amazon? The company recently launched a service titled 'Kirana Now' with a focus on everyday essentials delivered in two to four hours. The logic is simple: for products to reach fast, it needs to be closer to the customer. It can't get closer than the kirana store. "We are currently doing a pilot for 24 hours. The kirana store that can serve one km can now serve five km using our tools. They have software available to them that connects to the Amazon platform and we manage the logistics and after logistics," says Agarwal. This is a service that will take time to perfect and scale but Amazon, meanwhile, is tapping the kirana stores for a different reason as well. Kiranas that have excess space can now register with Amazon and function as delivery centres and pick up points for orders.

Both Amazon and Snapdeal want to unseat Flipkart as market leader. Flipkart knows that well and is trying to come up with fresh ideas to maintain its lead. The e-commerce space is unforgiving and typically only one player survives. Even funding dries up as market shares slip.

Amazon will be happy to play the waiting game, say strategists. It will wait for its rivals to burn out. This is what the company did in the US. In a recent talk, Scott Galloway, the founder of L2, a think tank for digital innovation, and Clinical Professor of Marketing at the NYU Stern School of Business, said that no company in the world has ever had access to cheap capital in a way Amazon did and now they are taking advantage of it.

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