After IT, it's e-commerce

Consolidation in the space will hurt jobs

After a five-year-long period of headlong expansion, the Indian e-commerce sector has moved into a phase of consolidation. Flipkart is expected to formally buy out its rival Snapdeal in about two months; a term-sheet has been signed and the due diligence process initiated. SoftBank, which is a key investor in both Flipkart and Snapdeal, has already negotiated deals with two of Snapdeal’s backers, Kalaari Capital and Nexus Venture Partners. The merger will mean that India’s e-retail space will effectively be a face-off between Flipkart and Amazon. The thrust towards consolidation is driven by market forces. Flipkart loses over $40 million a month and Amazon absorbs even larger losses. Given such massive burn rates, weaker players will be forced out. But the key unfortunate consequence of consolidation will be the lay-offs. The merger may also impinge on the sector’s ability to generate employment in the medium term. This comes at a time when e-commerce is one of the few engines of employment.

Snapdeal’s valuation has collapsed. The term-sheet indicates a valuation of about $1 billion in a share-swap deal. This is a huge discount on the $6.5 billion valuation Snapdeal received in its last round of funding, as recently as February 2016. This may also impede other India-focused start-ups in their efforts to raise funding at high valuations. As with conventional retail, e-commerce is notable for its ability to generate employment for both blue-collar and white-collar personnel. At the low-end, e-commerce requires security staff, movers and packers, delivery personnel and clerical data-entry operators. At the high-end, it needs business graduates and data scientists. All e-commerce firms are major IT clients and they also support real estate with their demand for warehousing and office space. 

Flipkart acquired Myntra in 2014 and Jabong in 2016. Those marketplaces still run as separate brands. It has been reported in this newspaper that Snapdeal will be subsumed and extinguished as a brand. Whatever Flipkart does, there will be job losses. Snapdeal, which is operated by a holding entity, Jasper Infotech, was already discharging around 1,000 employees, comprising 30 per cent of its formal workforce. It has also let go some 5,000 contract workers in its logistics arm, Vulcan Express. The Flipkart takeover will trigger more “rightsizing”. Flipkart has 30,000 formal employees and its own logistics arm, and will seek to eliminate duplication. There is talk of a generous settlement. But, given share swaps in unlisted companies, the deal is, at some level, notional. 

Investors have poured in money in the past due to inflated estimates of market size. Although India’s e-commerce market is growing fast, it comprises just about 60-70 million online consumers at the moment. The sector must also tackle a new adverse development. The goods and services tax (GST) imposes a 1 per cent tax on online sales at source, which means more bleeding. Whether this phase of consolidation will be followed by another cycle of expansion is an open question, but the short-term outlook looks far less promising than before. Unfortunately, this is happening at a time when employment opportunities are under pressure in the information technology industry as well.