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Fear Factor

Amazon's aggression drives Flipkart into two terrible M&As.
By Rajeev Dubey   NA     Print Edition: May 7, 2017
Amazon's aggression drives Flipkart into two terrible M&As

Sheer desperation of losing the No.1 spot, and the anxiety of cash burn, have driven Flipkart into two incredibly bad M&As: acquisition of eBay India as part of $1.4 billion funding from Tencent, Microsoft and eBay; and the ongoing discussion with Snapdeal for a merger.

The acquisitions may help Flipkart retain its No.1 status among Indian e-tailers, but, only just. It is a temporary reprieve in the face of a marauding rival like Amazon that has been nipping at Flipkart's heels and has already taken all the mindshare (if not market share) in this bitter rivalry. Amazon has consistently outfoxed competition in the domestic market with its customer-centricity and groundwork in seller and buyer acquisition.

Companies acquire or merge with rivals for a few common reasons, none of which apply to the Flipkart-eBay deal and the Flipkart-Snapdeal discussion.

Acquire a brand!: Flipkart's previous acquisitions of Myntra and Jabong were logical because they allowed it to dominate fashion retail - a great weakness since its inception. But acquiring horizontal players eBay India and Snapdeal has no such advantage because in horizontal retail (selling products across several categories), Flipkart is already a stronger brand. Post-merger, weaker brands become unsustainable and are shut down to rationalise the cost of promoting them independently. The same fate awaits eBay, Snapdeal.

Acquire a customer base!: Flipkart's own customer and supplier base is already substantially larger - more than double of Snapdeals and several multiples of eBay India's. Acquiring them doesn't provide Flipkart with an exclusive customer or supplier base because in all likelihood, any eBay or Snapdeal customer is already a Flipkart shopper or a supplier.

Acquire a business!: Just like Flipkart, which is burning $40-50 million every month, both eBay and Snapdeal are broken businesses. Snapdeal's parent Jasper Infotech reported a net loss of Rs2,960 crore in 2015/16 on a top line of Rs1,456 crore (losing Rs2 for every Rs1 of sales) while eBay lost Rs172 crore on sales of Rs132 crore in 2014/15. It is not clear yet how much of eBay's and Snapdeal's accumulated losses Flipkart will have to absorb. But it will be naive to believe that all of this $1.4 billion will fall into its kitty.

Neither Snapdeal nor eBay has anything to offer that Flipkart doesn't have. The deals are driven by investors who are putting together two weak entities in the hope that they will be stronger as a whole. Flipkart aims to halve the $40-45 million monthly burn, but post-merger it is likely to increase rather than reduce because Snapdeal is also burning $40-50 million a month while eBay lost nearly $25 million in 2014/15, which is likely to have accelerated in 2015/16.

Eliminate rivals!: The biggest advantage of such M&As is they eliminate competition. That is not the case. While Flipkart will cannibalise businesses post-merger, Amazon will continue to be a formidable rival. Last year, it lost Rs3,572 crore on revenue of Rs2,217 crore, indicating it will bleed itself and rivals in the fight for a piece of India's fast-growing e-tail pie. Also, Alibaba (Tencent's biggest rival in China) is readying through Paytm. Not to forget that ShopClues.com is also likely to gain at the expense of any cannibalisation.

There is so little to gain and so much to lose for Flipkart that it is almost unbelievable that it is in discussion to acquire Snapdeal. It appears a desperate attempt to keep its nose ahead in 'market share', come what may.

@rajeevdubey

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