The Ecommerce space needs to learn from Snapdeal

Snapdeal is already in the final stages of negotiations to sell out to Flipkart. It has surely been a rapid comedown for Snapdeal. Just a year back, Snapdeal was giving Flipkart and Amazon a run for their money. However, as losses accumulated, the aura began to wane rapidly. There are 3 key learnings…

How do you buy profits? 

That is the million dollar question that the ecommerce industry is grappling with. It is easy to buy sales. You raise money from willing VCs and private equity investors. Then you use the dollar muscle to create assets and eyeballs. You go a step further and actually use the muscle to finance obscene discounts. Sounds good but that does not lead to profits. Be it Flipkart or Snapdeal; companies are literally bleeding themselves to death. The entire model is based on the assumption that the funding pipeline will sustain. The day that does not happen, the entire cycle implodes. When profits are not visible, the funding sources start drying up. As investors downgrade valuations, funding becomes more difficult. As funding gets tighter, the ecommerce companies are forced to scale down their volumes and that also means lower discounts. As the perceived advantage over brick-and-mortar vanishes, the business model starts imploding. That is exactly what happened at Snapdeal. They could buy sales, but how to buy profits?

Look out for entry barriers… 

The biggest refrain of ecommerce players in India is that they cannot match up to the deep pockets of Amazon. That is missing the point. Amazon has not stayed purely an ecommerce player using VC funds to finance obscene discounts. First, Amazon literally invented the online shopping cart. Then Amazon took the reading experience a step further by launching the Kindle, which was another hit product. Subsequently, Amazon went on to become one of the most formidable players in the Cloud space. Now Amazon is looking at drones and predictive selling as future growth areas. Indian ecommerce players need to take a leaf and constantly reinvent.

Don’t lose total control…

Some of the marquee technology players in the US like Microsoft, Amazon and Facebook never ceded control. What is happening at Snapdeal is a case of PE funds dictating business strategy. That is exactly what is already happening at Flipkart where Tiger Global has replaced the founding entrepreneurs with its own nominee. The rule is that, as founding promoters lose control of the company, the company loses its core DNA and culture. That is the time the companies start to implode. Raising PE funds may sound chic; but it has a huge control risk that ecommerce players cannot ignore! ©

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