Softbank’s Massive Flipkart Bet Shows E-Tailing Is A Double-Or-Quits Game

The Flipkart office in Bengaluru, India. (Hemant Mishra/Mint via GettyImages)  
  • The stakes in the Indian e-commerce world are getting higher and higher, with Masayoshi Son deciding that Flipkart is the only one in a position to remain market leader.

    The full marketplace model, which is what Flipkart and Amazon India are chasing, cannot take on more than two big players in a $16 billion online retail industry.

Last week’s announcement of a huge investment by Softbank in Flipkart makes some things obvious: that the e-commerce game is ultimately about double-or-quits. You either have to keep building scale and pour in billions of dollars until you are the last man standing, or you drop out, and/or you become a niche player. This was the logic that prompted Masayoshi Son, boss of Softbank, who has a large investment in Snapdeal, to push for its merger with Flipkart, but that did not happen as the promoters had other ideas. Snapdeal is thus (at least temporarily) out of the big league, unless it finds yet another big investor to play the double-or-quits game.

The stakes in the Indian e-commerce world are thus getting higher and higher, with Son deciding that Flipkart is the only one in a position to remain market leader. He will invest $2.5 billion in Flipkart, giving it a valuation of around $8 billion, though some of the money will go to buying out a part of the stake held by Tiger Global, Flipkart’s original big investor.

Post the investment, Son’s Softbank will hold around a fifth of Flipkart, while Tiger Global will hold another 18 per cent. Another 20 per cent will be held by Chinese net giant Tencent and South African media firm Naspers. Flipkart got $1.4 billion in an earlier round of investment by Tencent and others, and the Softbank cash will thus give it a huge war-chest against Amazon.


This kind of commitment is needed if Flipkart, which is a nose ahead of Amazon in terms of market share, is to maintain its lead and continue to grow faster than its deep-pocketed rival. A recent Economic Times estimate suggests that the market shares of Flipkart and Amazon are around 39-40 per cent and 32-33 per cent respectively in terms of gross merchandise value (GMV, or total value of goods sold through the portals). But the race is likely to get tighter, as Amazon has already pledged to invest nearly $5 billion in the Indian subsidiary.

The stakes are as high even for Amazon, since Alibaba has effectively made it an also-ran in China, which leaves India as the single-largest market of the future.

Given the scale of the prize, both Flipkart and Amazon are likely to seek both organic and inorganic routes to growth through acquisitions. Last year, Flipkart bought out fashion e-tailer Myntra, and followed it up by snapping up Jabong.


Amazon has not been a slouch either, and was recently in talks to buy out grocery e-tailer In a few days’ time we will know whether the 60-day exclusivity in acquisition talks has resulted in a deal or not.

Groceries hold the key to volumes in the Indian market, since these are necessities, and the value-conscious Indian customer has to buy groceries. Whether it is brick-and-mortar retail or online, groceries give customers a reason to shop, and once in, they can be enticed to buy other products. For e-tailers, the volumes possible in groceries allow for spreading the investment in logistics over a larger turnover.

Online commerce is a winner-takes-all game, which means whoever is the last man standing will end up with a near monopoly, and the bulk of the customers and margins.


It is also a long-term game, where losses will stain balance-sheets for years as companies seek to acquire more and more customers and vendors on their platforms, till the value-proposition for both of them is unbeatable due to the network effects of platform monopolies.

Thus, losses can only mount as both Amazon and Flipkart work harder for market shares. In fiscal 2017, Amazon India is estimated to have made losses in the region of $1 billion; in the year before, Flipkart’s losses were said to be Rs 2,306 crore, and in fiscal 2017 it could be larger.

Right now, e-commerce is a two-horse race between Amazon and Flipkart, global Godzilla versus Indian T-Rex, with the third and fourth places going to Paytm and Shopclues, both associated with Alibaba, and the fifth to Snapdeal.


The only thing that can be said with certainty is that e-commerce will see spectacular failures over the next few years, as the top two slug it out with large investments. A third player, Alibaba of China, could also raise the stakes all over again, but as things stand, its two entries in India have a collective market share of around eight per cent, and Snapdeal around 6 per cent. Without large funding, all three will flounder, unless they choose to become niche, where the opportunities of focus and branding are better.

The full marketplace model, which is what Flipkart and Amazon India are chasing, cannot take on more than two big players in a $16 billion online retail industry.

(A part of this article was first published in DB Post)


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