What Snapdeal CEO Kunal Bahl's $100 mn investment plan in fashion means

Snapdeal co-founder and chief executive Kunal Bahl recently said something that took industry watchers by surprise.

At an event in IIM-Calcutta on Monday Bahl said that Snapdeal would invest $100 million within a year to boost fashion retailing, emphasising the company's focus on fashion.

"In the next few months we will make some big moves in fashion. We will not limit ourselves to selling other people's products only," Bahl was quoted as saying by The Hindu BusinessLine on Nov 14.

By the looks of it, fashion has always been on Bahl's mind. Last year, Snapdeal had acquired Exclusively.com, an online destination for premium and luxury fashion, to strengthen its fashion business.

Earlier this year, Jasper Infotech Pvt Ltd, which runs Snapdeal, had tried to acquire fashion portal Jabong. But eventually Snapdeal's biggest rival ecommerce firm Flipkart bought the fashion etailer. Flipkart already owns fashion portal Myntra.

A few weeks after the Flipkart-Jabong deal, Bahl said he will spend the $100 million saved by not buying Jabong to build Snapdeal's fashion business.

"They were quite aggressively trying for Jabong, but missing out on that may have prompted them to look out for more avenues, with fashion being the most lucrative category for all e-tailers," says Mrigank Gutgutia of RedSeer Consulting.

Pivoting consistently

Snapdeal had started, in February 2010, as a deals site and later it became a marketplace.

If Bahl's recent announcement is something to go by, now it wants to have its own fashion brand too.

Fashion is a sought after category for e-tailers due to better margins, customer stickiness and better average tickets.

"While lots of people in the start-up ecosystem talk of the wonder of pivoting, Snapdeal is one of the ever-pivoting examples which makes me think whether they had any clue at all in the first place," says Mahesh Murthy, co-founder of investing firm SeedFund.

"And like all precious efforts to copy, I believe it will fail here too," said Murthy.

In total, Snapdeal has raised around $1.65 billion from about two dozen investors. These include SoftBank and SoftBank-backed Chinese e-commerce company Alibaba, Taiwanese contract electronics manufacturer Foxconn, global online marketplace eBay Inc., Indian media company Bennett Coleman & Co. Ltd, and venture capital investors such as Bessemer Venture Partners, Intel Capital, Kalaari Capital and Ratan Tata.

Murthy is of the opinion that just because the promoters have the money, one can't say they will build a scalable fashion business.

"If it was so easy a thousand people would have done it. You have to have a differentiated and remark-worthy idea first. And from all evidence and their history, neither Snapdeal nor their investors have ever thought beyond copy-paste," Murthy said.

Snapdeal, Flipkart and other Indian e-commerce firms spent heavily on discounts and marketing over the past few years, as they focused on building a strong customer base, before working toward profitability. This widened losses at the top e-commerce companies.

But investors are now increasingly looking for profitable growth and have tightened their purse strings. That has forced companies to preserve cash and cut costs by scaling down operations and trimming the workforce. Many consumer Internet companies are also looking at consolidation and strategic sales to survive.

"Fashion has become a very important category for e-tailers. The margins are the best in this segment. Typically, the way it could work for any e-commerce company wanting to launch a private label, is that the company could support their sellers to produce brands for them," says Gutgutia of RedSeer.

But what about the current FDI rules which prevent e-tailers with foreign investment from selling directly to customers?

"The company can support the seller financially to develop a new fashion brand on the basis of revenue share. The platform itself may not build the product. If the ownership is in the hands of sellers, FDI rules may not be an issue. It is not clear what he meant by their own product," adds Gutgutia.

What's on at Snapdeal?

From the outside, it would seem that all is not well at Snapdeal.

Snapdeal reportedly held talks with rivals Flipkart and Amazon for a possible merger.

Snapdeal and Flipkart have been trying to raise more funds. On the other hand, their deep-pocketed rival Amazon is rapidly growing in India. Billionaire Jeff Bezos-led Amazon in June decided to invest $3 billion more in Indian operations, taking the total funds earmarked so far for the country to $5 billion.

Snapdeal last raised funds early this year when it received $200 million from Canada's Ontario Teachers' Pension Plan and other investors. This round valued Snapdeal around $6.5 billion. That's less than half the $15.2 billion valuation of Flipkart when the company last raised funds in 2015.

Snapdeal went through a restructuring at the top recently. There have also been social media rumours of top-level exits, which the company denied.