Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Shall we name it Snapkart, or Flipdeal? Perhaps either Snapflip or Flipsnap.

Whatever the moniker, a merger between India's Flipkart and Snapdeal needs to happen.

The two e-commerce companies are burning through cash and it doesn't look like the flames of competition are going to die down while they're being fanned by that 800-pound American gorilla called Amazon and its $15.9 billion war chest.

Just this week Snapdeal reduced the levy it charges sellers, allowing the company to claim that after the changes -- effective July 14 -- it will have the lowest marketing fees among competitors in half its product line, VC Circle reported.

Having the lowest commissions may be something to boast about to your buyers and sellers, but it's not a thing investors that have so far pumped at least $5 billion into those two companies alone want to hear.

Indian Ink
Amazon has committed as much to India as Flipkart and Snapdeal have raised combined, and has a war chest of more than $15 billion that Chairman Jeff Bezos could tap
Source: CB Insights, Bloomberg News, Bloomberg data

You can't really blame Snapdeal for the move. When Flipkart less than a month earlier tried to raise its own fees and tighten rules on refunds, including passing the cost of product returns to sellers, they faced a backlash. According to VC Circle, two unions that represent merchants -- yes, even e-commerce sellers in India have unions -- declared a strike and took about one million products off their respective e-shelves.

Growth Spurt
Indian e-commerce revenue is set to double over the next five years, led by a tripling in online retail
Source: Euromonitor, IAMAI via Goldman Sachs

India's government accidentally imposed a truce earlier in the year when its easing of foreign direct investment rules included the provision that marketplaces with foreign shareholders -- such as Amazon India, Snapdeal and Flipkart -- not influence the prices of products they list. That meant an end to sales subsidies and a temporary ceasefire in the price war, until the gloves came off again and Amazon India joined the slash-and-burn game by cutting commissions.

With even accidental intervention failing to control the market, the best outcome would be a merger similar to Chinese ride-hailing apps Didi Dache and Kuaidi Dache getting together to form what's now known as Didi Chuxing. 

But although a joining of Snapdeal and Flipkart is the most logical strategy for both companies to take on Amazon -- and a possible entry by Alibaba -- such a move won't happen for another six months at least, Arvind Singhal, chairman of Indian consultancy Technopak told Gadfly. 

For one, management teams will likely be given more time by investors to attempt a turnaround. Snapdeal is already making the right noises, with CEO and co-founder Kunal Bahl telling Mint he's focused on revenue instead of gross merchandise value, which tracks how much product is transacted on a marketplace. 

Flipkart's changes have been more drastic. At least four senior executives are reported to have left in recent months, and the company has swapped CEO, from co-founder Sachin Bansal to co-founder Binny Bansal.

Yet, such changes are unlikely to bring a fast turnaround on their own. With profitability being another two years away, both startups are going to need more cash and you can bet investors will be less keen to hand it over under the shadow of Amazon, which has already committed $5 billion to its Indian operations and has more to spare.

Instead, investors, including venture capital firms Accel, Bessemer, DST and Tiger Global, should seek to broker a merger that could cool the fight with Amazon and bring the duo back to the business of making money. Even then, turning a profit in India won't be a snap but it would be the best deal for all.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. No relation.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net