April 11, 2017
The Indian online retail market is in flux. On April 10, Flipkart raised $1.4 billion and added eBay, Tencent, and Microsoft to an investor list that already includes Tiger Global Management, Naspers Group, Accel Partners, and DST Global. In addition, Softbank is working on selling Snapdeal, the third-largest online retailer in India, to Flipkart and investing in Flipkart to take on the rapidly growing Amazon. This realignment of investors follows the slowdown in India’s online retail growth rate in 2016: We slashed our online retail forecast for India by more than a third to $48 billion by 2020, down from the $75 billion we estimated last year, due to demonetization, eCommerce restrictions, dwindling funding, and slow growth in the number of buyers. What does Flipkart’s news mean for the key players specifically and the market in general?
- Flipkart gains funding and know-how. 2016 was not a great year for Flipkart. The company replaced both its co-founders and appointed Kalyan Krishnamurthy as CEO — he represents Tiger Global, Flipkart’s biggest investor — when the company failed to meet its internal sales targets or counter Amazon. As well as funding and access to eBay’s global cross-border inventory (along with eBay India), Flipkart is expected to gain technical know-how in artificial intelligence, social commerce, and cloud computing through its new set of strategic investors. It can now focus on growing the overall market by adding more buyers and categories to the online channel as well as improving the customer experience. And Softbank’s investment will give Flipkart a solid financial backer with access to $100 billion of tech funding. To summarize Flipkart gained backing of eBay and may get backing of Softbank via Snapdeal but not much in terms of customer base.
- Amazon is India’s favorite online retailer. In contrast, 2016 was a great year for Amazon in India. According to the Forrester Data Consumer Technographics® Asia Pacific Online Benchmark Survey, 2016, Amazon surpassed Flipkart as the preferred online retail destination for metropolitan Indian consumers for the first time since 2014. Amazon’s takeover has been rapid: In 2014, 30% of our survey respondents reported buying from Amazon; in 2016, 76% said they did. The company mostly stole market share from players like Snapdeal and battled Flipkart in categories like smartphones and electronics. Amazon has alsosigned up more than 9.5 million active subscribers to Amazon Prime since its launch in December 2016. Amazon’s key investment focus remains infrastructure, video content, and categories like grocery and fashion.
- Snapdeal has hit turbulent times. Most of the market share that Amazon gained came from Snapdeal, leading to a rapid decline in the company’s valuation — from $6.5 billion to around $1 billion. After firing a major portion of its team and failing in multiple attempts to raise funds, Softbank, Snapdeal’s largest investor, is now looking to sell it to Flipkart and invest further in that firm instead of investing in Snapdeal. This clearly reveals the limitations of the pure-play marketplace model in India, where the company has limited control over the customer experience.
- Alibaba is playing the waiting game. After selecting payment and eCommerce company Paytm as its key mode of investment in India, Alibaba is still waiting to enter the market fully. As well as its significant investment in Paytm (the Indian version of Alipay), Alibaba announced that it was investing $177 million to launch Paytm Mall — the Indian version of Tmall — in March 2017. It is looking to focus more on the offline-to-online (O2O) market rather than competing directly with Amazon and Flipkart. Alibaba, along with Softbank and Foxconn, invested in Snapdeal in 2015; given Snapdeal’s current woes, Alibaba must be rethinking its Indian entry strategy. Whether Alibaba decides to back Flipkart or compete as a third player in the market against Amazon and Flipkart will depend on its appetite for a long and expensive war with these players, which already have a significant edge in the market.
- eBay is looking to Flipkart for success. After entering the Indian market in 2004 by acquiring Bazee.com, eBay failed dramatically to build upon its first-mover advantage and was still a very small player in the Indian online retail market in 2016. eBay’s best move was investing $34 million in Snapdeal at a valuation of $210 million, the majority of which it sold to China’s Foxconn and Canada Ontario Teachers’ Pension in the past two years, when Snapdeal’s value ballooned to $6.5 billion. With Flipkart acquiring eBay India as part of this new deal, eBay will give Flipkart access to its global cross-border inventory and open its platform to Indian sellers. eBay is now betting on Flipkart to remain relevant in the Indian online retail market.
- Tencent has not yet found success. After investing in Alibaba rival JD.com, Tencent looked for investment opportunities with other eCommerce players, as well as taking the WeChat-based selling platform to markets other than China. However, its plans to push WeChat were unsuccessful in India, so Tencent decided to back WhatsApp rival Hike in August 2016 by leading a funding round of $175 million. However, it still needs a platform like Flipkart in order to capture a share of the online retail market and experiment with the social selling platform in the coming years. This also adds to Tencent’s existing rivalry with Alibaba in the Chinese market.
- Microsoft is focusing on the cloud wars. Microsoft’s investment is more strategic than financial. Flipkart announced a partnership with Microsoft in February 2017 to adopt Microsoft Azure as its executive cloud platform. This is part of Microsoft’s ongoing battle in the cloud market with Amazon Web Services. The deal with Microsoft will also give Flipkart access to the artificial intelligence, machine learning, and analytics capabilities in Azure, such as Cortana Intelligence Suite and Power BI, in coming years.
- Online buyers will benefit from a greater focus on the customer experience. After the discount wars of 2014 and 2015, Indian online shoppers got used to buying only when discount offers were available. With new money in the market, we expect to see Amazon and Flipkart use similar tactics in the coming months to capture market share. But it will be different this time: Flipkart will spend wisely and focus on matching Amazon’s customer experience to increase both the purchase frequency and wallet share of its existing online buyers; it will also invest more strategically to capture new customers. If Flipkart enters a discount war with Amazon, it might end up in the same position again in 2019 as it was in last year — but raising funds will be more difficult at that stage than now. We expect an increased focus on sales events like “Big Billion” days, the expansion of the online market to new categories like grocery, as well as growing penetration in big-ticket categories like furniture and home appliances. And we expect both Amazon and Flipkart to spend a significant amount on infrastructure and logistics to control the customer experience and increase their buyer base.
The market is now Amazon versus everyone else, with Alibaba waiting on the sidelines to decide whether or not to make it a three-way fight between Amazon, Flipkart, and Alibaba. For more detail on the future of the Indian online retail market, ForecastView clients can access our online retail forecast for Asia Pacific.