Snapdeal: connecting the dots between demand and supply in India

Photo Kunal Bahl / Founder and CEO, / January 26th, 2015

Indian e-commerce firm Snapdeal recently got a major boost: a $627 million investment from SoftBank, the Japanese telecom and media giant. This is the largest investment so far in the Indian e-commerce space. Snapdeal began as an online group discounting site in 2010. In 2012, it transformed itself into a marketplace almost overnight, and today has more than 50,000 merchants, five million products and 30 million users. The company is also entering new categories like real estate and automobiles. But co-founder Kunal Bahl doesn't consider Snapdeal to be an e-commerce player. In a conversation with Knowledge@Wharton, he says the firm is really a technology company, enabling others to do e-commerce.

Knowledge@Wharton When we last spoke — at Wharton three years ago — Snapdeal had 10 million users, and you had called it a “discovery platform” for Indian consumers. Now, SoftBank’s $627 million investment in Snapdeal is the largest single investment in the history of Indian e-commerce. So, can you take us through your journey over the past three years, and how it led to this investment?

Kunal Bahl We have had an interesting journey, even getting to the point when we last spoke. We had taken many pivots along the way. We started as a coupon book business, then mobile coupons, discount cards…. Then Snapdeal became a deals platform, which we started viewing increasingly as a discovery platform. That was the phase of evolution we were in when we met three years ago.

It was an interesting juncture in our business. We started feeling that the core deals platform was not going to be as large a business as we originally thought it would be. We were trying to figure out how to expand the scope of our platform to enable consumers to get access to not only services, or deals, but also products. A few months after we met, I went to China. It was December of 2011. There, we met with many e-commerce companies, including Alibaba. We realized that if we attached a large products-merchant marketplace to the demand pipe we had, theoretically-speaking, intent would meet availability and transactions would grow.

So we came back from China and, in January 2012, we almost overnight changed our business model from being very services or deals focused, to a-product-focused marketplace. It was a very drastic shift, and one that surprised many people, including our board and our management team. But it was the right thing for the company. We felt that using the demand pipe, the platform and the brand trust we had created, we could significantly move the needle for these product merchants. At some level, it’s a much larger space to go after and a much bigger need to solve. Suddenly, you are making a percentage of India’s consumption — which is about $1.2 trillion to $1.3 trillion — more efficient as compared to just catering to a small subset of it.

That’s where we were at in January 2012. But at that point, our business was back to zero merchants, zero products and a bunch of users. It has taken a lot of work since then. Our goal at that point in time was to get to 20,000 merchants on our platform in five years. We were quite blessed to have the team we have; in two-and-a-half years, we had more than 50,000 merchants doing the key billing part of their sales through our platform. It was increasing at 600% year-on-year, to reach more than 30 million users now. So, things have evolved pretty significantly since we last spoke. And the business has also changed quite significantly.

During your trip to China, what happened to change your mind so drastically? Did it have anything to do with Alibaba?

I think a lot had to do with Alibaba. We realized that structurally, the same problem that Alibaba was solving in China was the problem that needed to be solved in India — bridging the gap between the very long tail of supply and the very long tail of demand. Only 5% to 7% of India’s retail is organized, and the rest is really just small businesses that sell to their catchment areas. We felt that technology was a great way to reduce the asymmetry of information that exists between demand and supply, and enable these small business owners, traders and retailers to buy locally, but sell nationally. We would provide the demand reach. We would provide the logistics support, the customer support, the payment support and the analytic support [needed] to be successful using our digital platform.

SoftBank also happens to be one of the early investors in Alibaba, and one of its biggest shareholders. Are there any lessons from the Alibaba experience that you think would be relevant to Snapdeal? And what do you think Indian e-commerce firms can learn from China?

Many things, actually. I feel the Chinese market is about seven to eight years ahead of India. So, it’s almost like looking into a crystal ball. I’ve spent a tremendous amount of time educating myself and my team on how the Chinese e-commerce ecosystem evolved. And what are our learnings, and what are the differences between that ecosystem and ours? Hence, how do we need to adapt our strategy for the Indian market? We are not looking to be a copycat here. There are many unique aspects of this industry, many unique aspects of consumers, many unique aspects of businesses in India vis-à-vis China. But at a meta-level, the problem that we are trying to solve is the same — bridging the gap between very fragmented supply and very fragmented demand.

The SoftBank partnership works because they have deep belief that this is the right business model for markets like India and China, perhaps Indonesia. They have made an investment there in a similar business. We wanted a partner who has deep belief in what we are doing. When we started building our marketplace, all the e-commerce companies in India were — and still are — retailers with a website. They are buying and selling inventory. And we said: “Look, that’s not really solving a problem. You are just aggregating products and reselling them. You are not necessarily bridging the gap between demand and supply. And you are not making commerce that otherwise wouldn’t have happened — happen, where a lady sitting in Chennai can now order saris made anywhere in the country, at a great price, delivered with free shipping to her house in two days. That commerce did not happen earlier. That’s what we wanted to change. And the only way to do that is by having the largest selection online, from the largest number of sellers. And if your goal is to offer infinite selection, theoretically, the only way you can do that is by not owning any of it.

You mentioned that there are similarities and differences between the Chinese market and India. What are some of the unique features of India’s e-commerce environment, and what are some of the unique challenges?

One of the differences in India is that commerce [via] mobile is far ahead of the Chinese market. So, we are leapfrogging the whole PC-commerce phase. Fifteen months ago, 5% of our orders were over mobile phones. Now, more than 65% of our orders are over mobile phones. China is a little behind on that because they have a pre-existing installed base of PCs. So, a lot of orders there are still placed over laptops, etc. We invested pretty significantly behind mobile, early.

What do you think of the Indian government’s policies on e-commerce? Do they seem very clear to you, and how does that impact the industry?

I think the policies are very clear — foreign investment is not allowed in multi-brand retail, online or offline. We are really a technology company. We don’t even see ourselves as an e-commerce company; we enable others to do e-commerce. We don’t hold any inventory of our own. We don’t have any private labels. So, we are not a merchant. We’re just a connector between the dots of demand and supply. There’s no restriction on foreign investment in a technology businesses like ours. There is a restriction of investment in businesses that actually take the title of the product — e-commerce. And whatever the policy is at any point in time, there will be people who will want to get it changed.

You said you see Snapdeal more as a technology company than as an e-commerce venture. Do you plan to offer any new products and services as you go along that direction?

We are making massive investments in technology. Much of the money we have raised, we’re investing in growing our technology base, both organically and inorganically. Within the next three months, we’re going to acquire at least five companies, mostly for enhancing our core technology — in recommendation, personalization, supply chain, payments and so on. Right now, we have 500 engineers in the company. We’re going to hire 1,000 more in the next 12 months. We are setting up new development centers in NCR (the National Capital Region, where Snapdeal already has a base), Hyderabad and Bangalore.

We have also been launching many new categories that are very unique to the Indian market, and even at a global level. We launched real estate online with the Tatas; people started buying apartments online on Snapdeal. We launched cars from Mahindra. We’ve started selling cancer testing as a service. We started selling gourmet food, online education… All these categories are actually very unique. Our philosophy is: if you can buy it offline, we should sell it online. For every consumer who can buy something offline in India, there are at least 100 who don’t have access to that product or service. That’s the problem we want to solve.

When you venture into categories like real estate or autos, do you see this as an experiment, or do you see this aspect of your business as something that is going to expand, and you will add more similar categories in the future?

It’s going to expand. Of course, we start everything in pilot form. So, after the Tatas, we have launched with Godrej to sell apartments online. And there are many more in the pipeline. It’s the same in the car space. There are many more car companies in the pipeline also. We have been selling two-wheelers from Hero and Mahindra in the past — and very successfully. It is very important for us to keep innovating, to keep a vibrant ecosystem going and to have this perception of innovation in the consumers’ mind, so that they keep feeling that, “Hey, I should keep checking out the site. There is something or the other that’s going on here all the time.” That is very critical in our kind of business.

You say your goal is to add more vendors, tens of thousands of vendors. As the number of vendors on your site increases, do you face issues of getting visibility for all your vendors?

It’s a great question with a two-pronged answer. One, it’s a meritorious marketplace — a completely merit-driven marketplace. If you have a great product at a great price, and you ship fast and resolve customer queries fast, you will end up being more successful than the next guy. This is how the world of commerce anyways works, even offline. If you do a good job, you will become Walmart. We offer the same opportunity to every small and big merchant. So, we have merchants who are operating from home. You know, 30% of our sellers are first-time women entrepreneurs. Many of them have started companies out of their homes. And they are becoming very successful.

At the other end of the spectrum, we have people like Tata Croma, which is the largest electronics offline store in the country. If someone does a great job, the hole-in-the-wall guy can actually now successfully compete with the largest offline retailers in the country. In a way, our platform is enabling a great democratization of retail in the virtual world. It doesn’t matter how big your store is anymore, or if you have a store offline.

That’s one. Secondly, we are now in the process of ramping up our advertising platform. Similar to advertising on Google, merchants can advertise on Snapdeal. As you know, 60% of Alibaba’s revenues are through their ad platform.

If you look at Alibaba as one possible model that connects buyers and sellers and eBay as another, what do you think is closer to what the Indian market needs?

Alibaba has multiple businesses. There’s Star World, there’s Tmall and Taobao. Taobao is more similar to eBay than Tmall. eBay and Taobao are open marketplaces. Anyone can sell anything to anyone. Tmall, or Taobao Mall, is actually a more managed marketplace, only for screened businesses to sell to consumers. Our business model is like Tmall. That’s really the crown jewel of Alibaba. We feel that open marketplaces sometimes have a challenge of lack of trust, given that it’s hard to control who is selling. And the world is probably moving more toward managed marketplaces. Hence, our decision to pursue that business model. It has worked really well for us, because the consumer has a very predictable experience, a predictable catalog on the site to choose from. It doesn’t seem like a random constellation of products and an unpredictable assortment.

One of the very interesting developments in the Chinese e-commerce market has been the entry of some of these players into financial services and banking. Is banking something that Snapdeal might consider in the future?

I have developed a deep interest in financial services. At the end of the day, we are a marketing distribution company, leveraging technology. The problem that we are trying to solve for product merchants, small and large, is the same problem that we can solve for services merchants. Whether it’s getting a loan or getting a credit card, we can probably make it more efficient online. So the quick answer is, yes.

E-commerce in India still seems to be seen as a loss-leader business, with price determining where the buyer buys from. Now, given the discounts that competitors provide, how do you see the growth vs. bottomline question evolving? How have your vendors been able to compete with all the price cuts?

That’s the exact reason we don’t hold any inventory of our own; we don’t want to compete with our own merchants. That’s why we don’t do any private labels; we don’t want to compete against our brands, either. We want to be purely a platform. So, when we say we have done $3 billion of sales, that’s actually the sales of our merchants. They’re not Snapdeal’s sales. We’re just the conduit.

What happens in a marketplace like ours is that the same product may be sold by 100 different sellers. These 100 different sellers have different economics at which they buy their products from their suppliers. They have different overheads. Some guy may say, “Hey, I want to make at least 5% on everything I sell.” And some other seller may say, “I’m OK with making Rs. 50, because I don’t have any overhead and I’m a one-man show.” So they compete amongst themselves to drive down prices. Of course, we do run promotions from time to time. But it’s largely a pricing that’s set by the sellers on our platform.

Snapdeal has grown really fast. What are the main risks you see in continuing high growth?

You know, all those risks are actually more organizational. You want to make sure that you are able to attract the right talent, that you are able to upgrade the talent, organically or inorganically, and constantly assessing whether your team has the right level of skills, readiness and experiences to support what needs to be done in the business as we move into higher orbits. We have no plants or machinery. Speed and sluggishness — success and failure — are all a function of our people. Twitter  I think that will always be the biggest risk for our business.

Do you see the Indian market for talent improving in this regard? Or are you sourcing talent globally?

We’re doing it globally. But the good thing is, given the stage of the business, the scale, the excitement, and the stature of the brand and the company, we don’t have a hard time in at least having a conversation with anyone we want to bring on board. CEOs of fairly large, established companies are very open to taking senior roles in our company because they know that what today is $2 billion or $3 billion can tomorrow be $50 billion. And they want to be part of that journey, because they realize that these waves don’t come every day.

Long-term success and sustainability depends on profitability. Where does Snapdeal stand on that, and what’s your strategy there?

We are a technology company and a large part of our investments is going into technology, both organic and inorganic. Right now, given that the market is still young, and we need to invest in building scale and increasing the size of the buy, we need to invest in our brand. So the two areas of investment for us are really technology and our brand. We want to continue doing that over the next couple of years. Given that our business model has significant operating leverage, we feel less concerned about the path to profitability for our company. It’s a conscious decision to frontload our investments in technology.

Do you have a sense of when you might expect to be profitable?

We have to play it a little bit by ear. We have seven times the money we have spent to date — since we started the company — in the bank. So the fear is not that we will run out of money. The fear is always: Are we investing enough for future growth, in terms of building our infrastructure? Right now, I’m very focused on solving that, as compared to figuring out how we can start generating cash flows. I think if we build the right business, with the right infrastructure, the right technology, the right brand and the right people, that will eventually happen. Alibaba took many years to get to profitability. Once they got there, they started generating more profits than most companies in the world.

And one last question. Where do you want Snapdeal to be in another three years?

That’s a hard one. The bigger the business has become, the more dynamic it has also become, as has the space itself. In three years, I would love that the company is well on its way to change lives of one million businesses in India.

This article was published in Nov. 2014 by Knowledge@Wharton, under the title “Connecting the Dots between Demand and Supply in India.” Copyright Knowledge@Wharton. All rights reserved. Translated and reprinted by permission.

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