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Updated: May 25, 2014 22:15 IST

‘I’m disappointed that companies will give up so quickly’

  • Deepa Kurup
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Kunal Bahl. Photo: Shashi Ashiwal
Kunal Bahl. Photo: Shashi Ashiwal

In a year that saw e-commerce ventures shut shop by the dozen, the New Delhi-based online marketplace grew at a pace that surprised competition. The company, started in 2010 as a group deals site, claims it is “just months away” from catching up with market-leader Flipkart’s $1 billion (in gross merchandise value, announced in March).

The secret sauce to this “hyper growth” is the “zero inventory model” the company swears by, says co-founder and chief executive Kunal Bahl in a recent interview with The Hindu. Excerpts:

Flipkart recently crossed the $1-billion sales mark. How soon do you see yourself get there?

Back in 2012, we said that by 2015 we would get to a billion dollar. Based on our current trajectory, I think we’ll get there much sooner than that. One thing is sure that when we reach there, we would have achieved in one-third the time and one-fifth the investments. It’s not just about scale you achieve, it’s about how much time and how many resources went into achieving that scale — you must remember scale is not necessarily the only barometer that demonstrates whether you built a good company or not.

Do you attribute this rapid growth to the pure-play marketplace model that you’ve stuck to?

Yes. In the last 12 months, we grew six-fold, while e-commerce in India grew by 88 per cent (According to Assocham). During this time our focus on building a large assortment played out, where if you take out books (which is basically a plug and play catalogue), we have about 8 to 10 times more products than any other e-commerce company.

Having a wide selection of items is important as it drives impulsive buying. But, what our growth really demonstrates is that the inventory model is really broken. It just consumes so much money and time relative to a pure marketplace by us. Our success captures that.

Is this why we’re seeing your rivals now migrate, at least partly, to the marketplace model?

Not really. People are calling themselves marketplaces but they’re not, because they’re doing this for regulatory reasons. If you look at their sites, most products are sold by one seller — that is them. A marketplace is not a regulatory structure, it is a philosophy that you want to offer equal opportunity to any business that wants to supply locally and sell nationally. As a result, we do not compete with our sellers, which is inevitable if we own our own inventory. We see sellers have issues with that and leaving such platforms. We don’t do that — we make money if our ecosystem makes money.

Is the threat from Amazon real now? It claims selling 15 million products across 24 categories, and is already ahead of domestic players.

Very theoretically that number may be true, but practically it means nothing. If you take books out, which is the real barometer, we are 8 to 10 times ahead. The books business is based on catalogue feeds from a few companies, which boosts up your total assortment number. Is it a threat... as a company in a big space, which is still very nascent, you have to be paranoid. So yes, we are keeping our ears to the ground. The e-commerce space today is probably $3 billion, which is likely to go up to $50-60 billion in 7-8 years. The prize is large, and there will be other players; but eventually, I think there will be two or three large players and each will have their own economics. And, this economics will determine your eventual enterprise value. It has been proved, across geographies, that only marketplace model can get there.

Like Alibaba in China...

Yes! In investor circles, they’re calling us the Alibaba of India. Because like them we are pure marketplaces, zero inventory — like Gmarket in Korea, Marcado Libre in Latin America or Rakuten in Japan. It’s been proven over and over again that pure marketplaces, not our regulatory structured ones, are the largest and most profitable. In other models you are bringing upon yourself the cost, complexity and competitive structures of online retailers.

How did the bustling e-commerce segment shrink?

Yes, the market shrank so quickly; there were 900 players two years ago, now there are hardly any left. I think what happened is that there was exuberance in financing in 2011, and everyone wanted to launch an e-commerce company. The year after was just a drought. Hence, over the last one year, we have been seeing rapid mortality.

So, further consolidation is inevitable then...

Going forward, the consolidation you are talking about...I feel sad and disappointed that e-commerce companies that have attained a decent amount of scale would want to give up so quickly. Because the market is ahead of us, not behind — why worry. Actually, the success rate of M&As is quite low — at this stage when companies are young, there’s a lot of value destruction and distraction that happens. We’ve seen that whenever M&As have happened before, typically, the company that gets acquired gets shut down invariably though the intent often is to keep both businesses independent. This is because the companies, all our companies, are too young to run multiple businesses; it’s not that straightforward or easy.

But does this kind of consolidation bode well for the sector as a whole?

Also it creates an adverse dynamic for brands, as if brands feel that there’s too much consolidation — I’ve had brand owners calling us saying we want to create a direct-to-consumer channel because we don’t want to get gated by folks who are buying and selling from us. That’s what happened in some developed markets where big brands don’t sell on inventory-led e-commerce platforms as they feel they lose control of our consumer. So brands are telling us we’ll set up our own stores — this is a strong trend where brands want to leverage marketplace and connect directly with consumers.

Any acquisition is on the anvil?

We would never buy an e-commerce company. Buying an e-commerce company is not a very smart decision right now.

See, there are only three reasons you would buy a company — unique demand, supply or technology. Demand is never really additive and supply we don’t need anymore (we have bought a few like Shopo and Esportsbuy). So if we do an acquisition it will be a technology company.

eBay recently led a second round of investments in Snapdeal. So, the general speculation is that eBay’s stake is about a third...naturally, there’s talk about them buying you over.

First of all, the figure (stakes) you mention is just speculation. It’s much, much lesser.

See, eventually the board will decide. But given our size, scale and ambition, and the kind of growth trajectory we are in, an IPO is an increasing possibility for us.

How soon will we see you go public?

May be in the next 12-18 months.


A bold risk-takerMay 25, 2014

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