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Snap kart flip deal

Flipkart and Snapdeal are going head to head in the e-retail market. Why their duel will change the Indian consumer and the industry itself.
By Nirmal John

For those who came in late, the answer is no. Rohit Bansal, co-founder of Snapdeal, and Binny Bansal and Sachin Bansal, founders of Flipkart, are not related. Yes, they share a surname and are from the same college (Indian Institute of Technology, Delhi). And they make their living online. But one Bansal (Rohit) along with childhood friend Kunal Bahl read the market as being hungry for deals, leading to Snapdeal, a deals portal similar to global biggie Groupon. The other two Bansals, meanwhile, believed prompt delivery was vital, which is the big idea behind Flipkart, a site that wants to be India’s Amazon.

Now, the Bansals (and Bahl) are approaching a tipping point—a chance to determine the course of e-retailing in India. Their companies represent the two most popular business models in Indian e-retail today. They are among the best funded, and have great brand recall. Yes, there are several other companies that are profitable in niche areas (tickets, baby products, etc.). But when it comes to great deals (a meal at a five-star restaurant for Rs 200, for instance), the choice is almost automatically Snapdeal, while Flipkart has a strong base of customers who want a wide range of products in the least possible time. Most online retailers fall into one of these categories, or a combination thereof.
 

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Mukesh Bansal (again, unrelated to the other Bansals), the man behind apparel and accessories website Myntra, follows the Flipkart philosophy. “Discount will run its course soon because business fundamentals don’t often add up in many of these sites which discount massively,” he says.

On the other side of the fence is Gaurav Kachru, CEO of Deals and You. “Indian consumers always love a good deal, even if that means a day’s delay in delivery. That’s how we are wired,” he says, explaining why he thinks deals work better than delivery. 

But this is a view shared by fewer and fewer. John Kuruvilla, who was chief revenue officer at low-cost airline Air Deccan before he set up couponing site Taggle, says, “Couponing is not an easy business to be in when you do some math. You need to spend to get people in.” Taggle lasted only 20 months, and was a casualty of the growing dissatisfaction with pure deals sites. 
 

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That apart, e-commerce has always used the idea of ‘save money’ to get people to shop online. Prashanth Prakash, partner, Accel India, an early investor in Flipkart, adds, “The propensity of attaching ‘online’ with ‘cheap’ definitely grew with the arrival of deals sites. But the trouble is that people who come on board like this often have no loyalty. They are perennial deal seekers who will flock to whichever site gives them the best deal. Differentiation becomes crucial.”

Static notions of e-commerce firms don’t hold true any more, especially in large, evolving markets such as India and China. While Flipkart has stayed on the path of selling products (first books, then electronics, and so on), Snapdeal has made a more fundamental shift. It has moved into the Flipkart space, selling products rather than just deals.

This shift is not just about changing customer preference. It often comes down to investors’ revenue growth expectations. The big daddy of them all—Groupon—which has itself been struggling to live up to the initial hype, stepped into the product space with Groupon Goods in late September, after such a shift had started in India.
 

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Despite the environment favouring products over deals, Snapdeal’s move seems risky, since the site is associated with service deals; it has a 70% market share in this segment. The products space is already crowded with new players, and is dominated by Flipkart. Companies such as Naaptol, Infibeam, and HomeShop18 are jostling for market share. 

But Bahl believes that “being a deals player, we are uniquely placed in making the connection as to what product to sell to whom”. He adds that Snapdeal can take advantage of its strong brand and recall value.  

What’s also impressive about Snapdeal is the pace at which it has worked behind the scenes to make the shift. After all, the business of selling jewellery online is hugely different from selling coupons. According to Bahl, 50% of sales already come from products. The site has a user base of 12 million, of which about 2 million have transacted online so far.

But it will have to contend with Flipkart, the resident biggie. Flipkart’s founders say the company grew 10 times over the past year and is now targeting revenues of $1 billion by 2015. It has managed to do this riding on a wave of enviably positive word of mouth; it began advertising on TV only last year. Consumer reviews on rating websites such as MouthShut are overwhelmingly positive.

While Flipkart has not changed as drastically as Snapdeal, it hasn’t stagnated either. Having started out selling books, the site now offers a wide range of products—computers, mobile phones, pens, cameras, and even washing machines. Currently, less than 30% of sales comes from books; electronics, particularly mobile phones, account for the major part of sales.

Flipkart is also creating something akin to the iTunes Store and will soon launch its music distribution service to cater to the underpenetrated digital music/movies distribution segment in India (Last year, it acquired Mumbai-based Mime360, which specialises in distribution of digital media.)

Snapdeal seems optimistic about taking over a healthy chunk of the product-delivery market, while Flipkart is equally clear that it will not cede any part of the same market. Each of these companies is convinced that its business philosophy and plan will have an edge. So, while Snapdeal is going all out to structure deals based on analytics and consumer profiling, Flipkart is spending more time and effort in creating an enviable delivery mechanism (warehouses and logistics).

Binny Bansal, COO of Flipkart, talks with the assurance of a category leader when he says; “We will look at anyone as competition only when they breach the standards of service we have set for ourselves. We might not offer the lowest price, but ultimately we are serving the consumer who will call us up or e-mail us if they don’t get the product in under three days.”

To ensure that customers are not kept waiting, Flipkart plans to set up 25 warehouses and 60 delivery centres across the country. It is also on a hiring drive to beef up its logistics chain; from 730 employees last January, it now employs 3,500.

It is not as if Flipkart isn’t taking analytics or mobile commerce seriously. But these are not priority areas. “The basic problems need attention first,” says Binny Bansal. He clearly believes in tighter control over fulfilment of the shopping experience including products offered. So while Snapdeal is going horizontal by adding as many categories as possible, Flipkart is slow to add new categories until, says Bansal, it is sure that it can provide depth of choice in that category.

Those at Snapdeal disagree with this approach. “These days, product ownership is not a great proxy for who the consumer is. Service consumption patterns are,” says Bahl, in defence of Snapdeal’s single warehouse but stronger analytics. “A BlackBerry, for example, can be owned by anyone, but there will be a certain homogeneity when it comes to the people who eat at a Mainland China,” he says.
 

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Snapdeal’s big idea in moving into products, says Bahl, is to take its existing experience in local deals and combine it with a wide array of personalised product deals, especially in lifestyle e-commerce. This is where Snapdeal’s strength in analytics comes in, says Suvir Sujan of Nexus Venture Partners, which has invested in Snapdeal. “They want to make sure they rein in a user for a certain cost. He has to transact. They are taking that data at all times—what is selling, what is not, from which city—and refining the backend,” he says.

Essentially, what Snapdeal is betting on is cross-selling products and services based on the mountains of data generated about registered customers. A 20-member analytics team slices that data to glean insights and create algorithms. The end result is that the site can push appropriate products to appropriate customers. For instance, if a woman buys high-end spa sessions, specific cosmetics brands are pushed to her. It’s the search vs. discovery argument in real terms. Customers go to Flipkart to search for products they know they want; with Snapdeal, they discover products that they didn’t know they wanted—and often end up buying.

Bahl says that Snapdeal’s combination of local deals, product deals, and mobile commerce will give it an edge. The company will soon announce a tie-up with a yet unnamed mobile service provider, whereby deals will be pushed to the phone based on location. The user can then buy that deal against the talk time on the phone.
One of the clearest indicators of the difference in how the companies see the market is in the way they deal with logistics. Snapdeal does not plan to get into logistics, and is confident that courier companies will improve their standards. But this model, while being lighter on capital, comes with the uncertainty over the quality of fulfilment of the shopping experience because it can go beyond the control of the company.

All this is happening in what is still a small market. For all the talk about the 110 million who are currently estimated to be online, the transacting universe is just an estimated 3% of that and sales are currently not even worth $1 billion in a retail market of $500 billion. What entrepreneurs like the Bansals are looking at is the potential for growth in an expanding market. 

Players stand to gain more from market growth than market share growth. As much as 50% of Flipkart’s sales come from small towns where e-retailing is solving the problem of access. Shopping for brands has never been easy in these centres. At the same time, for most of urban India, shopping is still entertainment. Malls are about multiple experiences—eating out and watching movies, combined with the experience of shopping. Even so, there is the chance to talk about the convenience of shopping online. 

The opportunity, says Santosh Desai, CEO of brand consultancy Future Brands, lies in solving the right problem for the right audience. “The question that e-retailers should ask themselves as they evolve is whether it is possible to make online shopping more entertaining.”

This is already happening globally. Reports by consultants and in international media suggest that e-commerce will eventually shift from being just about making online purchases (where a single customer browses and buys online) to ‘going shopping’, which is essentially a social experience. In a recent interview, Marc Andreessen, the man behind Netscape Communications and Silicon Valley venture firm Andreessen Horowitz, said, “The new generation of e-retailers are much more appealing to normal people—people who like to go to the mall, have fun with their friends and try on clothes and compare clothes, and go home and brag to their roommate what they got on sale, and all the rest of it. A lot of new startups are not only viable but also growing fast because they provide a different experience.”

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The office reflects Delhi’s chaotic exuberance with bright red and blue walls full of posters. Employees sit around cartons overflowing with product samples.

Providing unique shopping experiences is all very well, but the bottom line is, well, the bottom line. Can all those good ideas help the business make money?Entrepreneurs say they are in the game for the long run and the investments that are being made today will bear fruit in the long term.

However, investors are not so sure they want to stay in for an undefined “long term”, and are increasingly wary of a bubble in the industry. The much hyped investment of $150 million to $200 million by Carlyle and General Atlantic in Flipkart at a $1 billion valuation hasn’t yet materialised. (Industry buzz is that the Bansals did manage to raise a quarter of that amount from an existing investor at a similar valuation.) Snapdeal managed to close its third round of funding early (June 2011), but most other ventures are still hunting for funds. Fashion and You, a flash sales site, which recently raised $40 million, is more the exception than the rule, unlike early last year when funds were flowing free.

Snapdeal might look to go public, possibly in the U.S. in the next three years, to raise funds. Flipkart’s founders, meanwhile, say they need no further investment for now.

How will the story unfold? Flipkart, by consensus, is best placed to succeed. Things could still go wrong at Snapdeal, with stiff competition from HomeShop18 and Indiatimes, which have the backing of established corporate houses.

But the critical factor is the recent entry of the biggest player of all, Amazon through Junglee.com, a brand it had picked up 14 years ago. comScore (a global provider of digital business analytics) data show that Amazon enjoys top billing when it comes to e-retail traffic from India. (See table on pg 127.) True to form, Amazon offered some 12 million products on launch day. The cash-rich Seattle-based company might go for inorganic growth and woo Flipkart and Snapdeal, but as Bahl says, “Why should we sell out? We are creating billion dollar businesses here.