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Snapdeal Shrunk Itself To Survive. But Will That Help?

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Snapdeal tottered through months of uncertainty before the online retailer called off sale talks with bigger homegrown peer Flipkart in July 2017. Japanese investment firm SoftBank—which owned stakes in both—wanted the competitors to merge to take on Inc. That didn’t happen, and Flipkart was eventually acquired by the U.S. retail giant Walmart Inc. for around $16 billion.

With depleting cash in one of the world’s most competitive ecommerce markets, Snapdeal survived a near death. “We were going to fall off a cliff if a call was not taken immediately to continue to build the business,” co-founder Kunal Bahl wrote in a blog in October last year.

Going by just numbers, the strategy Bahl dubbed Snapdeal 2.0 at least helped him curtail losses. That came after Snapdeal slashed expenses by reducing promotions and laid off staff to cut costs. It’s now leaner with a focus on tier-2 and smaller cities.

Cutting Flab

The fight with Amazon and Flipkart had left Snapdeal’s financials awash with red. Losses had risen by nearly 40 percent year-on-year to Rs 6,000 crore in 2016-17 on a two-fold jump in its expenses, according to filings with the Registrar of Companies.

After snapping sale talks with Flipkart, Bahl wielded the axe. Snapdeal slashed fulfilment expenses by 67 percent, cut business promotion expenditure by 81 percent, lopped 67 percent off employee costs and lowered technology spends by about 75 percent. It also sold logistics arm Vulcan Express to Future Group and wallet platform Freecharge to Axis Bank Ltd.

By the end of March 2018, losses narrowed by nearly Rs 4,000 crore, according to the filings.

More than 80 percent of its business now comes from products other than mobile phones and electronics—the core categories for Amazon and Flipkart. Snapdeal relies on home and general merchandise, fashion and accessories to drive growth, a person privy to the company’s strategy said requesting anonymity since he is not authorised to speak to the media. The focus is on the value-conscious consumer, the person said, adding that the bulk of the growth is coming from tier 2 and smaller cities.

Bahl and co-founder Rohit Bansal’s stake increased in the last 18 months from 7 percent to 18 percent as founders bought about 10 percent from Kalaari Capital.

That doesn’t mean it has become easier to survive. India’s e-commerce war has only become fiercer with Amazon already having infused close to $3.5 billion since March 2016 and Flipkart mopping up $5.6 billion. That compares with Snapdeal’s $700 million funding during the period. Moreover, India’s richest man Mukesh Ambani also plans to marry online and offline retail.

There is still a long road for Snapdeal, said Satish Meena, a New-Delhi based analyst at Forrester Research. “While they have been able to achieve profitability at a limited scale, the challenge lies in how to scale up with the same costs.”

That’s already showing in its sales. Snapdeal’s revenue fell almost by half to about Rs 528 crore in 2017-18. The drop is due to the company moving away from high-priced categories like high-end phones and electronics, the person quoted earlier said adding that the revenue has increased in the ongoing financial year.

BloombergQuint’s emailed queries to Snapdeal remained unanswered.

Snapdeal also reduced the number of sellers on the platform from the peak of about 3,00,000 to 50,000 as of today, the person said.

With over 11.5 million transacting users, the company said in its annual report that it’s now building a leaner and more capital-efficient business which came at the expense of a lower top line.

The firm which generated cash for the first time in June last year has been able to make money month on month, the person said, adding that money is now being redeployed for growth.

The change in foreign direct investment policy by Prime Minister Narendra Modi’s government also offers hope. The rules completely bar online retailers from holding inventory favouring Snapdeal’s pure-play marketplace model.

Also Read: E-Commerce FDI Policy: Bored Game

Arvind Singhal, chairperson and managing director at retail consultant Technopak, isn’t that sanguine. While the policy makes it a level-playing field, the rules close down foreign investment options for players like Snapdeal and Shopclues, he said. Even if Flipkart and Amazon slow down, it’s still not an open field for others, he said. “There are bigger players like Reliance that can take over the market without external capital.”

Bringing down costs and expenses is not a turnaround, Singhal said, adding that Snapdeal is still losing money. “You can’t achieve profitability till you have your own private labels, exclusive tie-ups, or inventory.”

. Read more on BQ Blue Exclusive by BloombergQuint.