New Delhi: Less than a year ago, Snapdeal was seen to be neck-and-neck with bigger rival Flipkart in the race for domination of India’s e-commerce market. Today, depending on which version you believe, the SoftBank Group Corp.-backed Snapdeal is either the smart company that has realized the importance of profitable growth or is in real danger of becoming a distant rival to both market leader Flipkart and Amazon India, which has made rapid strides. Over the past six months, it has cut discounts and ad spending to conserve cash as funding slows down.
In an interview, co-founder and chief executive officer Kunal Bahl said Snapdeal is now focusing on net revenue instead of gross merchandise value (GMV), a much-hyped e-commerce metric that refers to the value of goods sold on a site but does not account for discounts or even sales returns. Bahl, who has steered Snapdeal through two successful pivots (or business model changes) in the past, said the new focus is part of another big change at the e-commerce marketplace.
With $500 million plus in the bank and its entire focus on expanding net revenue and reducing costs, Bahl claims Snapdeal is well positioned to turn profitable in the next two to three years. Edited excerpts:
What is it that you are trying to build? There is Snapdeal, FreeCharge, Shopo, Vulcan, Gojavas and Exclusively.
I would like to put it in three buckets—marketplace, logistics and payments. At a meta level, these are three. If you think about the pyramid of e-commerce, the base is P2P (person-to-person) commerce, middle is Snapdeal and the tip is premium, where Exclusively fits in. We don’t want to lose that customer base.
The emphasis on FreeCharge seems to have gone up. Is it slowly becoming the core of the business?
No, the core business is marketplace. The enablers are logistics and payments. FreeCharge has grown very fast because of core business, because of the anchor merchants. But FreeCharge can become equally important for independent merchants.
Are you creating Paytm in reverse?
There is a big disconnect there. I completely disagree that it is something in reverse because it actually isn’t.
We have always made it clear that payments should always be a different brand… think about Taobao-Alipay, eBay-Paypal; there is a reason they weren’t called eBay Pay or Taobao Pay. These businesses only become successful when there is large widespread adoption by third parties. They have to be built independently with independent management.
Have the conversations around FreeCharge funding progressed?
Yeah very well… quite happy with that. When it happens we will share the news.
The good thing about FreeCharge is we haven’t spent anything outside the IPL (Indian Premier League) sponsorship. The fixed monthly spends are less than $1 million. So, it is not that the company is spending a lot of money. I am not concerned that they should raise money, but there is a lot of interest in FreeCharge. We will take the money when we know where to use the money and at the terms we like.
As part of becoming a professional company, you had brought in some senior talent. But two out of those five employees left in a short span. Does it have to do with the culture of the company?
We have publicly articulated that they want to do their own thing. Those statements are a reflection of our culture, which is acutely entrepreneurial. Also, we have acquired about 15-16 companies and not a single entrepreneur has left in six years since our first acquisition! If you go and track the same in other companies you will realize that not a single founder is left… so I think we tend to attract very entrepreneurial people and the flip side to that is that they will always have entrepreneurial ambitions.
There is speculation that between you and Rohit (Bansal, co-founder), you have diluted you stake to less than 3-4% in the firm. What does it reflect about the health of the business?
We are very clear that at some level, we are not doing it for money. For us the motivator is how can we create something impactful. You should know from me that this number isn’t correct. It is way higher… and time will validate this.
Does it worry you that your investor, global e-commerce giant Alibaba, is eyeing a stand-alone entry into India?
At the end of the day, we have to do what we have to do and that should not change because of entry and exits of other players. If at all, it only opens opportunities for collaboration. Who would you rather collaborate with? Someone you already know or someone totally new?
So are there any discussions on collaboration already happening?
There are discussions that keep happening with everyone… there is no specific update I can share.
Do you expect consolidation to happen among the top three marketplaces in the country?
At the end of the day they are all great companies. But there has to be a reason. If someone is desperate for capital or… but I think the best consolidation happens when there is a win-win and not when someone is getting bailed out.
Consolidation can also happen when you probably want to fight a big rival together.
Maybe… but look at China. In e-commerce, there are many companies that are doing billions of dollars of business. In India, it is neck-to-neck and very difficult to predict who will be number one… our focus is to build a real business.
How is your relationship with competitors—the (other) Bansals (Flipkart co-founders Sachin and Binny) and Vijay Shekhar Sharma (founder of Paytm)?
It is fine… some of them you end up meeting more, some you end up meeting less. I think entrepreneurs, even if they compete, must keep a dialogue open.
SoftBank seems to have gone slow in India after couple of investments didn’t work out as well as it thought.
I don’t think it is fair to isolate it… everything has slowed in China, US. I think it is a healthy pause, the difference between now and last pause in 2012 was it wasn’t healthy because the investors did not have liquidity. Right now, all the funds are sitting on billions, waiting to be deployed only in India. There is a lot of liquidity waiting at the dam to be deployed.
Do you think life after Nikesh (Arora, who recently announced he would leave SoftBank) will change for Snapdeal?
Our relationship is with individuals and institutions both. I don’t think it will change. Masa san (SoftBank founder Masayoshi Son) is a big supporter of India… he has acute amount of love for India. His interest is much longer-term and not tied to one individual.
There have been murmurs of a lot of job cuts in Snapdeal. Were they driven by investor pressure or just pure survival instinct?
There weren’t any (cuts). Initially, when we started, we were figuring out the process on our own. Seller functions, call centres…and many more functions are today outsourced.
Is it true that there have been concerns around Snapdeal’s corporate governance? Is there an investigation being done by investors?
This is all speculation. When there is nothing else to malign someone, you spread something completely ambiguous. A few facts—we have more public companies as shareholders than any other start-up in India. We have eBay, Intel, SoftBank, Foxconn, Recruit, Alibaba… we have a great sense of responsibility to them and they have a great need that we are compliant.
We took a call that we would not follow the 1P (where the seller sells to the marketplace owner instead of to consumers through the marketplace) model because it was not in conjunction with what our interpretation of the law was. We were not the ones who off-shored our companies to (a) foreign country because that would yield better tax savings. We have always taken the conservative call when it comes to regulation and I think that has always helped us. We do full quarterly audits as part of house cleaning.
What are you doing to address fake sellers, fake GMV issues? There is speculation that your GMV could be inflated...
If we were concerned about that, why would we change the metrics to net revenues from GMV?
No one seems to be complying with the new foreign direct investment (FDI) norms. Especially in terms of the name and address of sellers being displayed on the site. Why are you not implementing that?
Biggest thing you need to ask is why isn’t the 25% rule getting implemented (the rules say no seller can account for more than 25% of the sales through a marketplace)? Companies need to address the related parties and the 25% norm. Other stuff is only hygiene… they will get implemented.
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In August 2015, you made a public statement that you will overtake Flipkart’s GMV (gross merchandise value) by March 2016. What happened there? Why the sudden shift in focus to net revenue?
It is a fair point… at some level you have to accept if your focus has shifted. And for us the focus has shifted. There comes a point when you re-calibrate and I am glad we did a re-calibration, otherwise one will run out of resources. I don’t see it as a negative re-calibration, I don’t see it as a forced one, I see it as an essential (re-calibration) in appreciation of the changing orbits of the industry.
Net revenue is the key metric that we will look at… GMV is so 2015. The actions people have to take in order to grow net revenues are often times in conflict with the actions companies have to take in order to grow GMV. For instance mobiles, you can sell a lot of mobiles and increase your GMV but chances are you are going to make very less net revenues.
Why the sudden realization that GMV is not important?
I think we will not go back to GMV as an industry for a while till everyone is profitable.
Is it just a co-incidence that the shift happened around the time you failed to achieve your target of becoming No. 1 in GMV?
I think the realization dawned on us post-Diwali… it always help when markets are no longer as euphoric. It makes you take a step back and think what is it that is going to be valued in a company going forward. Until Diwali, it was still GMV; it was only after Diwali 2015 where the undercurrents were that the GMV is not going to test the times.
This is also coming at a time when investors are asking some serious questions about financial metrics...
Investors were asking this question always. These undercurrents in e-commerce around profitability have been there for three-four years. It just became stronger in last two years, which is fine. I would say we realized (that) if we keep waiting for someone else to change the narrative, it may be too late for us.
If you take tough decisions, you have to stand by it and we are delivering the results. Our net revenues have grown 4X year on year. It is a reflection of the amount of work we have done around data sciences… the catalyst in setting up the office in Palo Alto.
The e-commerce market is more mature now than last year. What differentiates you from others?
We are focused on three things: One is driving best-in-class experience, because I feel that eventually experience will drive highest preference among customers. Pricing will be similar, selection will be similar. Internal surveys have revealed that people find our shipping to be very fast.
Secondly, we realized that the biggest concern for Indian buyers was the speed of returns and faster refunds. The market is evolving very fast, two years ago the preference driver was discounts; last year, it was faster shipping; right now we feel that the biggest drivers are fastest returns and refunds.
Third is how to grow rapidly while keeping costs in check. We have maintained a very lean cost base as a company…relative to other marketplaces, we never went crazy on headcount addition.
It is counter-intuitive to focus on returns/refunds and at the same time talk about being cost-efficient. Shouldn’t the focus be on bringing down returns through efficiency?
You cannot inconvenience customers because you want to make money. Delivering (a) great experience at any cost even a five-year-old can do, but delivering (a) great experience at best-in-class cost is where rocket science comes in. I don’t think anyone wants people to return more. We want to make returns simple, but we have to take into account that cost in our economics.
You mentioned that your shipping time and quality of service has improved. Is that also because of fall in orders?
Our orders haven’t shrunk. We are just selling different things… proportion of certain categories was higher last year versus the proportion of certain categories this year. Also, we are seeing that customers are buying categories that they didn’t buy last year… like a lot of personal care.
But that should reflect in the order value and not number of orders.
That is why I am saying the orders haven’t gone down.
The SoftBank report stated that your growth has slowed to 90% from 300% plus last year?
The denominator also changed by 3X.
What are your current net revenues?
We only disclose the growth trajectory.
How much cash do you have in the bank?
We haven’t touched our Alibaba money yet.
The entire $500 million round, you mean?
That is correct.
What about the latest $200 million round you announced? Only $50 million has hit the bank. Is the rest coming?
All of that has already come in… it was a combination of primary and secondary. The round was in pieces.
Are you looking to acquire (logistics firm) Gojavas completely? Or are there any plans of having your own last-mile delivery?
We have (a) significant stake in Gojavas. A lot of people will argue whether the investment worked out for us or not but we were not able to get the same results working with a lot of third-party firms. There were good guys, not-so-good guys… and you need control on the supply chain and technology.
Your last round (of funding) was fairly small. Why raise a small tranche if you already had enough cash in bank?
Why would you say no to money? There was in-bound interest. We are always open for business if there are highly-quality investors who want to come in and take a piece of our company. It does not hurt to have more liquidity.
Do you think it is the right time to hire professional management, say, an external CEO?
It is way too early. We are really enjoying what we are doing. I can’t see myself doing anything else which I will enjoy even remotely as I am enjoying this. There are very tough problems we are solving every day. Everything else that I will do in this lifetime will be very underwhelming. Secondly, it is very critical for us to be here. Clearly the space needed a pivot, which we are giving. This GMV to net revenue (change)…we are leading the charge. Thirdly, we built a phenomenal management team to complement our relative lack of experience. Professionals can significantly assist entrepreneurs in this journey but there are still many tough decisions that have to be taken.