THE GLINT IN KUNAL BAHL'S EYES IS OF A MAN PROVED RIGHT. MORE THAN TWO and a half years ago when Fortune India met the Snapdeal CEO for the first time (see ‘The Real Deal on E-coupons’, March 2011), he rattled on excitedly about the big opportunity in getting small businesses online.

Bahl, 30, took to couponing back then. But early last year, his Delhi-based company changed course to become a products and services e-retailer. (Coupons currently account for less than 1% of Snapdeal’s revenue.) Even as the items on sale changed, Snapdeal stuck to the idea of being a place where buyers meet thousands of sellers. This ‘marketplace’ philosophy seems to have clearly resonated with investors. Earlier this year, Snapdeal became India’s second-best funded e-retailer, behind resident giant Flipkart, with $102 million (Rs 605 crore) pumped in at various stages.

eBay—the San Jose, California-based big daddy of online marketplaces—was among those funding the latest round of investments in Snapdeal. It is part of the group of investors which coughed up $50 million for a yet-to-be-disclosed stake in Snapdeal. (eBay refused to comment on the specifics of the deal but a press statement issued last month further confirmed a “commercial partnership”, where both companies would work together in growing the market.)

In the context of the fast evolving e-retail market this is a major sale. The e-retail battle was between two distinct business models—inventory-led (Flipkart) and marketplace (Snapdeal). The trends and events over the past 18 months, suggest that the latter—more efficient in terms of low costs—has gained more traction. Though the inventory model ensures better customer satisfaction, it is hugely cash-burning. A case in point: Flipkart has raised more than $380 million in five rounds—that’s more than thrice Snapdeal’s corpus.

It also means that Flipkart, while having been able to create a powerful brand, has to remain the biggest in the long term. However, its model—which integrates sourcing, warehousing, and delivery—can be profitable only at scale. Flipkart’s brand-building muscle has been crucial in ensuring that it is better capitalised than competitors, but not everyone has that kind of money.

Marketplaces, on the other hand, satiate profit- and valuation-hungry investors quicker. The constant need for funds from inventory players without much to show for it had dried up e-retail investments for a few months. The good to have emerged from that phase was that those still standing are stronger and wiser, having closed down unprofitable areas in the business to readdress their model. Those, like Timtara, a Noida-based electronic goods e-retailer, who couldn’t manage either, fell. Others like, a designer and hand-crafted products portal, were bought out (by Snapdeal).

According to Alok Mittal, managing director at venture capital fund Canaan Partners, the shift is visible in the kind of business plans, which new entrepreneurs draw up when they meet him. “It’s clear that the inventory model of e-commerce doesn’t hold, with capital intensity being the main reason. Hence, more marketplace- or information-oriented players are entering. Entrepreneurs are also finding new niches where they think horizontal players (those with a wide array of offerings and not specialising in any one kind of product) will not go. Typically, we are seeing high-margin categories, such as shoes and sporting equipment, because people realise that the kind of capital available a couple of years ago isn’t there anymore,” he says.

Players like online home and furniture store PepperFry, originally launched as an inventory-led model aligned with the marketplace theory. Flipkart too introduced a mixed inventory-plus-marketplace model. Apart from the business side, the regulatory environment—the government’s policy for foreign investments in inventory-led e-retailing is still hazy—pushed them towards the marketplace as well.

It gave Snapdeal a headstart with its business model: in particular, getting 10,000 vendors to list their products online. This, claims Bahl, is more than what anyone else has in the country. In comparison, Flipkart, which dipped its feet formally into the marketplace model only in April, is estimated to have more than 550 vendors.

What also distinguishes their paths are their contrasting partnerships, or the lack of it—one going with the established global biggie and the other, deciding to fight the biggest player in the world, Amazon, and a host of local rivals, solo. Flipkart’s comparison with Snapdeal is important because both sell a whole range of merchandise, unlike a Myntra or Jabong which focus on fashion and apparel. (According to Comscore, which tracks online usage metrics, Flipkart had 12.6 million visitors compared to Snapdeal’s 8.4 million in June. Myntra topped with 13.1 million.)

Ankur Bisen, vice president and head-retail and consumer products at consultancy Technopak Advisors, says Snapdeal’s dexterity in turning from a deals-based company into a marketplace is impressive. That would have been an important consideration for eBay’s investment along with the Indian market’s massive potential and relative openness compared with others like China, he adds. “The marketplace model has clearly found more takers here and Snapdeal is one of those companies well poised for the clear opportunity.”

Expanding the universe of transacting customers is the biggest challenge for e-retailers at the moment. In India, out of 138 million Internet users, around 68 million just window-shop on these sites. Only 8 million to 12 million, or less than 10% of Internet users, actually purchase. The way forward for eBay and Snapdeal is to join forces and make more people transact because “good and reputed players need to invest in building the category”, says Deepa Thomas, e-commerce evangelist, eBay India. “In countries like Germany, eBay has run out of customers. We’ve got everyone who is in the online shoppers’ age bracket [18 years to 88 years]. So, you have to focus on increasing the amount of transactions. India’s a country of 1.2 billion but the Internet population here is just sad.”

That is why eBay and Snapdeal, while continuing to operate independently, will list products on each other’s website, thereby increasing the number of sellers, customers, and the sellers’ ability to attract fence-sitters.

THE ONLINE BAZAAR HAS shaped up since eBay entered India back in 2004. It bought out, then India’s largest online auctioneer/marketplace and rebranded it as eBay India. Over the years, it added categories and consumers but e-retail took longer to take off than expected. And when it finally did, exhibiting what management gurus refer to as the “J curve” (picture the graph rising as a J) sometime in 2011, eBay remained a fringe player—distinguished, but behind local newbies like Flipkart, which wooed customers with cash-on-delivery and 30-day returns.

The latest arrival has been eBay’s famous rival, Amazon. Amazon had acquired Junglee, a shopping comparison site, back in 1998, but till last year had done nothing much with it. “Their idea of coming in with Junglee was to get as much front-end intelligence about the market before launching their marketplace in India,” says Mittal.

Now that Amazon has formally announced its entry here by launching its (wait for it) marketplace model, experts believe that eBay wants to recharge its India push with the Snapdeal-eBay deal.

The impact of the deal, along with the mega investment of $200 million into Flipkart by PE firms Tiger Global Management, Accel Partners, Iconiq Capital, and MIH (a part of South African media company Naspers Group) this July, is not limited only to e-retailers. It is the positivity that has reappeared after the gloom of the past few months.

“For a good part of the latter half of last year people were talking about how e-commerce was struggling in India and there were no new investments being made. All of a sudden, Snapdeal managing to get eBay and three other VC firms (Intel Capital, ru-Net, and Saama Capital) to invest $50 million, as well as the entry of Amazon, and the Flipkart news has created a buzz—one that policymakers, vendors, and buyers would, no doubt, notice,” says Praveen Bhadada, director, Zinnov Management Consulting.

Both eBay and Snapdeal have a lot in common, not least a strong belief in the marketplace model. Thomas recounts the synergies: “We looked at Snapdeal’s business model and those who ran the company. The business model was complementary to ours. From eBay’s perspective, there were ways in which we could partner together to expand the market—by adding more entrepreneurs and providing more selection for our consumers.”

A key area where they could gain from each other is analytics. Wharton-educated Bahl rattles off numbers during interviews. In fact, the obsession with math is part of Snapdeal’s culture. TV screens spewing out various metrics on buying behaviour are stationed around the office. This fixation was also a big draw for eBay at the time of acquisition, says Thomas. “Snapdeal has a very good traffic metric and has invested heavily to build it.”

It should also help Snapdeal closer to the black. Profitability, says Bahl, is still about 18 months away, even as he claims that the total value of the goods sold through the site is Rs 2,000 crore. (The company nets between 10% and 15% of the amount as its commission.) That’s natural according to Bhadada. “Amazon took about eight years to become profitable. Even now, its income curve over the past few years has been pretty flat although revenue took off. That’s primarily because it has been investing heavily since it believes the time is now, and rightly so,” says Bhadada.

Bahl expects to kick off from here. The landscape has become less crowded but more intense. “This game is no longer for boys. Either you have the kind of scale in terms
of a top line of a few hundreds of crores a month, or you need $100 million in the bank. If neither, how do you compete?

Mittal says the e-commerce space is one where serious players are now having a go at each other with more consolidation occurring in the future. “Maybe around 10 horizontal players are relatively well capitalised. It is difficult to figure how many inventory players are there compared with marketplaces because the business models are changing. For instance, we don’t know how much Flipkart sells as a marketplace. But it is difficult to see all 10 surviving in the long term.”

SO, WHAT’S NEXT FOR the partnership? Pearl Uppal Kachru, the former CEO of who recently founded 5 Ideas, a startup fund and accelerator, says, “eBay’s logic would have been that the alliance helps them extend its reach. And over a period of time it will be a merged entity that will ultimately exist.”

That’s certainly a possibility, with Bahl saying that “every company eventually has to hit the refresh button”. But for now this is a chance for him and co-founder Rohit Bansal to create what Bahl calls a once-in-a-generation business.

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