Snapdeal 2.0: Ticket to redemption or a shot in the dark?
Photo Credit: Reuters

The emotions in e-tailer Snapdeal's camp are mixed. While the falling through of a merger with rival Flipkart is a victory of sorts for founders Kunal Bahl and Rohit Bansal, who were against the deal from the beginning, it won't be lost on the team that reviving the beleaguered company will be a herculean task.

A merger with the muscled Flipkart would have meant resolution of some, it not all, of its problems. Going solo, Snapdeal must ensure industry-beating operational efficiencies, low or zero cash burn, far less flab in terms of employee strength and a flowing funding tap if it wants to have a serious shot at a turnaround.

VCCircle spoke to industry experts and analysts to understand if the path chosen by Snapdeal will turn out to be an uphill climb, and whether a pivot to the much-touted “true marketplace” model will give the company wings.

Viability of zero-inventory model

“This will be a seller-centric marketplace similar to Alibaba-owned Taobao in China and eBay in the US. The management has been working on this plan for the past two months,” a person with direct knowledge of the company’s plans had told VCCircle.

Online commerce companies, such as eBay (now part of Flipkart) and Alibaba-backed Paytm Mall, have been operating on the pure marketplace model, i.e., they act merely as a seller-buyer platform and don't store any goods. However, most e-tailers in India, including Flipkart and Amazon, operate what is called a ‘managed marketplace’ or hybrid model. It’s a mix of marketplace and inventory-involved e-commerce operations. In fact, even Snapdeal ran a pure marketplace till Amazon's onslaught forced it and its arch-rival Flipkart and Snapdeal to go hybrid.

A company official said on the condition of anonymity that Snapdeal won’t be competing with the likes of Amazon or Flipkart any more. "It will be more like Taobao and it will be much easier for sellers to sell. In the segment Snapdeal choses to operate, it will be more of a local e-commerce, asset-light player. It will not be making fancy 'one-day or two-day delivery' promises. A lot of efficiencies will be built in,” he elaborated.

Founder Bahl has long been an advocate of the zero-inventory model.

“There are certain advantages of the inventory-led model but they come at a crazy cost. To me, inventory is just a very expensive way of marketing,” Bahl had told VCCircle in an interview.

However, if the model indeed is the way to go, what explains the lack of its adoption by peers?

The pioneer of true marketplace eBay couldn't even compete with the might of Flipkart and Amazon in India. It rolled its India business into Flipkart earlier this year, with the US parent putting additional money into the homegrown e-tailer.

“All of them [e-tailers] have realised that operationally and for customer service, a pure-play marketplace is very complex. There is no control on inventory, logistics or delivery. The cost of retaining customers is huge,” said Satish Meena, analyst at Forrester Research.

Other experts want to wait and watch what Snapdeal actually does on this front.

“Whatever has been released by Snapdeal on version 2.0 is only a statement of intent. It’s going to be a new maybe in a year’s time, we would get to know if it’s working out,” says Arvind Singhal, chairman of retail consultancy Technopak.

Clearly, the new model might kick in a few efficiencies here and there, but saying it will be a panacea for all that ails Snapdeal would be jumping the gun.

Funding tap

After the deal fell through, Snapdeal's biggest investor SoftBank that was orchestrating the merger, said it “respected the decision to steer the company in a different direction”.

However, SoftBank's eagerness to push for a sale of the troubled e-commerce firm, evident also from its willingness to engage in six months of excruciating discussions with multiple shareholders, suggests it might have lost faith in its bet.

“SoftBank has lost confidence on Snapdeal and they are unlikely to invest any more. Snapdeal may sell both Vulcan and Unicommerce to raise capital to experiment with the 2.0 version for at least a year before they turn profitable, or raise more funds,” Meena said.

The aforementioned company official corroborated this. He said there was no funding commitment from SoftBank, and neither did the company have any expectations. "Obviously costs are coming down and it expects to make profits at the operating level, so there is no intention to raise funds as of now,” he added.

Meanwhile, Reuters has reported that SoftBank is still in talks to invest in Flipkart – despite the collapse of merger discussions – but it would do so through its Vision Fund.

“SoftBank will invest in Flipkart as that has been their plan. At the same time, they might also sit at Snapdeal with their shareholding at zero value,” a second person close to the development told VCCircle.

The collapse of the merger deal has also come as a blow to most of Snapdeal's 25-plus institutional investors, whose investment has soured badly. It is unclear if they will keep backing a company whose performance has been ordinary in the last couple of years, whether it's high cash burn, falling orders, or nosediving valuation.

However, a third person close to the developments at Snapdeal said early investor Nexus was in favour of the company running as an independent entity. It is yet to be ascertained if Nexus will commit any funding going forward.

Snapdeal, which sold its digital payments unit FreeCharge for $60 million to Axis Bank last week, plans to divest its logistics arm Vulcan Express for up to Rs 200 crore. A sale is expected within the next 30-40 days, people close to the company had told VCCircle. The fate of Unicommerce, an e-commerce management software and fulfilment solutions provider that Snapdeal acquired in 2015, remains uncertain.

Proceeds from subsidiary and asset sales might shore up Snapdeal's coffers for a few months, but it remains to be seem how the company extends its runway.

Attrition, downsizing

In the aftermath of the merger's failure, a Snapdeal spokesperson said the company had made significant progress towards executing its new strategy by achieving a gross profit this month. “With the sale of certain non-core assets, Snapdeal is expected to be financially self-sustainable,” the statement said, referring to FreeCharge.

Separately, in a letter to employees announcing the termination of merger talks, the founders said: “In every market, there are multiple successful e-commerce businesses, and as long as one’s strategy is differentiated and has a clear path to success, there is a great company that can be built.”

However, the new model may entail further downsizing of its operations and workforce. While one of the persons close to the development said the company would eventually end up with fewer than 200 people (the e-tailer is estimated to have around 1,200 employees), another person said in three months it would be half the current size, that is, 600 people.

In February, Snapdeal had laid off 500-600 employees across the e-commerce marketplace and its subsidiaries, mobile wallet FreeCharge and logistics wing Vulcan Express.

Besides, the company is also likely to see a lot of attrition.

"A lot of people will quit because they were thinking they will get some retention bonus if the merger with Flipkart happens. Exits across levels have already been happening at Snapdeal," the second person cited above said.

All in all, it is up to the company and its management to effect a turnaround in all these crucial departments. Only time will tell if declining Flipkart's $900-million cheque was a wise choice or a foolhardy decision.

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