E-COMMERCE CONSOLIDATION: GENESIS, SCOPE AND FUTURE

INDIAN INSTITUTE OF FOREIGN TRADE

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ABSTRACTConsolidation encompassing mergers andacquis itions have become a norm in the e-commerce industry. Despite a massive growth inrevenues, the heavy discounting strategies adoptedby the e-commerce companies is putting a massivestrain on their sustainability. E-commercecompanies suffer massive losses that indicate abubble burst might not be far away. Hence,consolidations are the norm of the day in e-commerce sector. In this paper, we discuss thevarious reasons for consolidation of e-commercecompanies, the comparison of consolidationmodels in China and India and the future of e-commerce consolidations in India.

WHAT IS TO 'CONSOLIDATE'?To consolidate is the action of combining ofassets, liabilities and other financial items oftwo or more entities into one. In the contextof financial accounting, the term consolidateoften refers to the consolidation of financialstatements, where all subsidiaries report underthe umbrella of a parent company. Thesestatements are called consolidated financialstatements. Consolidation also refers tothe merger and acquisition of smallercompanies into larger companies. Aconsolidation, however, differs from a mergerin that the consolidated companies could alsoresult in a new entity, whereas in a merger onecompany absorbs the other and remains inexistence while theother is dissolved. [1]

Figure 1: Value of Mergers and Acquisitions worldwidefrom 2010 to 2015 [2]

Although e-commerce companies have grownat an unprecedented rate over the last fiveyears with attractive valuations, they are stillstrugglingwith a host of other challenges.

E-CommerceConsolidation: Genesis,ScopeandFutureKARISHMAJAIN,PRANAVRAJ,SUPRIYADESHPANDEAVNEETHANDA,SHADANMAHTAB,VISHALBHANUSHALI

WHY DOCOMPANIES CONSOLIDATE?

Figure 2: E Commerce market of different countries [3]

• Portfolio expansionIn order to meet the needs of the everincreasing demands of consumers, companieswant to expand the range of services they offer.Partneringwith or acquiring another entity is anaccelerated way of expanding the productportfolio, increasing the consumer base andleveraging a successfully running expert team ofprofessionals on board. Flipkart acquiredLetsBuy to enhance its range of products inelectronics sector, Snapdeal acquiredFreecharge to expand their mobile usingcustomer base are a few examples to validatethe same.

• Consolidation to beat competitionCurrently, there is a cut throat competition invarious segments of e-commerce industry.Domestic firms want to outrun each other asthey vie for customer’s attention, whose loyaltywavers with every offer and discount. Hence,M&A is an effective way to beat thecompetition by acquiring a larger customerbase and offer better discounts. With the entryof international giants into the Indian market,the local players need to consolidate tochallenge these bigwigs. For instance, thearrival of Amazon in India led Flipkart to acquireMyntra for USD 300 million in 2014.• Utilize untapped potentialWhen two entities operating in differentsegments come together, they mutually benefiteach other by reaching out to one another’scatchment area. This gives them access to alarger demographic and a better and moreextensive product portfolio. Cross-countrymergers also help counter governmentregulations that limit business and growth incertain geographies.

3,431 3,418 3,274 3,6634,810

6,144

2010 2011 2012 2013 2014 2015

ValueofM&A(In$billion)

11 1348 52

177

6428 20

73 80

354

271

Brazil India UK Japan US China

2013(In$dollars) 2017(Projected)(In$dollars)

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• Investor pressureAlmost all ecommerce start-ups are backed byinvestors, and they need almost constant flowof funds from the investors in initial years tosustain their operations. The investors areconcerned about the bottom line growth of thecompany and for the same reason, Flipkart andSnapdeal are in a bid for optimizing theiroperations while reducing the amounts ofdiscounts and focussing on improvement ofmargins for market consolidation to retaininvestorswho havepumped in billions of dollarsinto such start-ups.• Avoid cash burn from price wars with

competitors

As the competition between firms intensifies,‘price wars’ are unleashed in the market forsales maximisation. In this price war betweenplayers, 'The customer' is the sole winner. Thisis a concern for the companies and especiallytheir investors. Customer acquisition cost is oneof the highest in the Indian ecommerceindustry. Consolidation offers a relatively lesscostly way of acquiring new customers andincreasing market share, in comparison toorganic growth. Based on the 'cash-burn'model, most of the funds raised are primarilydirected towards business expansion andcustomer acquisition. In such an environment,consolidation in the form of mergers will helpthem achieve this goal.

Figure3:FlipkartRevenuesandlossesoverthelast3financialyears[4]

HOWDOCOMPANIES CONSOLIDATE?MergersA merger means a combination of twocompanies to form a new company. In amerger, the boards of directors of the twocompanies approve the combination andseek shareholders' approval. After the merger,the acquired company ceases to exist andbecomes part of the acquiring company. [5]

AcquisitionsAn acquisition takes place when a companymakes an offer to buy the other company in itsentirety or purchase some of its assets. In anacquisition, the acquiring company obtains themajority stake in the acquired firms, which doesnot change its name or legal structure. [5]

THE WAY CONSOLIDATIONS AREHAPPENING IN CHINA

The e-commerce companies form a symbioticrelationship to provide value to theend users asmany innovations have developed ranging frommessage applications to online social commercefor payments by applications like WeChat inChina as there are no additional costs for onlinepayments. The reason for China being theleading e-commerce country is thehigh internetpenetration encouraging rise of e-commercialactivities. The percentage of Internet usersshopping online rose from 42.3% in 2012 to52.2% in 2016. The per capita income of China($11,850) substantiates the spending power ofpopulation. There is improved delivery timesthrough logistics, infrastructure and warehouseup-gradations.

Thenew strategic consolidation ofDianping andMeituan will result in diversifying anddeepening the service offerings, speeding up ofexpansion and absolute domination of theindustry along with acceleration of innovationsand new strategies

Dianping originally was a platform for lifestyleservices in urban sector offering services as e-coupon promotions, restaurant reservations,payment solutions, dine-out delivery coveringdiverse range from home business,entertainment tickets booking, weddingplanning and lodging. Its user base covers over200 million accumulated users with it becomingan inseparable part of the Chinese speakingconsumer base and as themost powerful onlinepartner in local businesses.

Meituan consisted of three business unitsincluding Customers to Shop (Local Merchantssupporting to promote marketing andmanagement capabilities), Home DeliveryServices and Hotel Tourism and the subsidiaryMaoyanMovie. It is a group discount website tosell vouchers subject to a minimum number ofbuyers demanding discounts from which itgenerated its commissions.

Zhang Tao (CEO of Dianping) and WangXing (CEOof Meituan) became the Co-Chairmenand Co-CEOs of the new company Dianping-Meiutan. This new company would maintainthe respective brands and managementstructures complementing each other to pushfor innovations. This consolidation would be athreat to the plans of Baidu which has plans toinvest US$3.2 billion in O2O units and pull offthepressureof cash burn by both Dianping andMeiutan.

1,163 502

2,938

917

10,246

2,583

Revenue (InRscrores) Loss(InRscrores)FY13 FY14 FY15

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Another Chinese consolidation is that of taxihailing app firms, Didi and Kuadi, who mergedto form Didi-Kaudi.The company is stiflingUber’s growth in China even though Uber isaggressively expanding into Asia with its highsubsidies and innovative services like fooddelivery. Didi backed by Tencent Holdings Ltd.and Kuadi by Alibaba Group Holding Ltd. werelocked into bitter price wars to gain majormarket share.Didi-Kuaidi’s superiority in service is owed to itsbetter networking of drivers and customerexperience. Uber has not been able to gainmarket share despite cheaper rates

HOW IS INDIA’S STORYDIFFERENT?In India, majority of the consolidations happenin the form of acquisitions whereby a firm buystheother company or a part of that company. Anew company does not emerge out of anacquisition, rather the smaller firm ceases toexist and its assets form a part of largercompany. Even if theacquired firm does exist asa separate entity, its owners are usually notelected to theposition of Board Members in theparent company.

Figure 4: Timeline of major acquisitions in India’s E-commerce sector

Some of the recent examples of majoracquisitions in Indian e-commerce sector arementioned below:

• OLA acquiring TaxiForSure -March 2015

Ola, the mobile app for personal transportationacquired TaxiForSure for $200 mn in a cash andequity deal. Ola and TaxiForSure are continuingto operate as separate entities till now.Pre consolidation: CEO of TaxiForSure -Raghunandan G

Post consolidation: The leadership and all ofthe 1700 employees continued to work withTaxiForSure, with Arvind Singhal (currentlyCOO) was appointed theCEO.

Aprameya Radhakrishna and Raghunandan G,the founders of TaxiForSure, were to contributein an advisory role. But now, the CEO, CFO,CHRO of TaxiForSure have quit and the entiretop management is from Ola.

• Flipkart acquiringMyntra -May 2014

Marking the biggest acquisition in the e-commerceenvironment in India, homegrown e-retailer Flipkart acquired online fashion retailerMyntra through an estimated Rs. 2,000 croredeal.

Pre-consolidation: CEO of Myntra - MukeshBansal

Post-consolidation: Flipkart and Myntracontinued to operate as separate entities.Mukesh Bansal joined the Flipkart board andhead their fashion business and continue in hiscurrent role as CEO of Myntra. Later, Myntraappointed Ananth Narayanan, Director atMcKinsey as its CEO. Mukesh Bansal assumedtheposition of the chairman of the Board whileleading Flipkart’s commerce platform. Bansalthen resigned as Head Of Commerce AndAdvertising Platform at Flipkart. Thedevelopment came weeks after managementrestructuring at India's largest e-commercecompany which saw Binny Bansal take over astheCEO and Sachin Bansal take over the role ofExecutiveChairman at Flipkart.

THE ISSUES REGARDING E-COMMERCEMERGERS IN INDIA

Compliance Framework

Regulatory non-compliance is a challenge thatcan hinder the e-commerce’s growth in India.There are a number of major issues regardingcompliance framework in India which are abarrier to the process of business mergers inIndia. Some of these include cyber lawcompliance, inefficient anti-corruptionframework, FEMA contraventions andregularization, legal exposure inagreements/arrangements and tax regulations.

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Tax & Regulatory StructuringMany upcoming start-ups have long complainedabout the restrictive nature of governmentregulations. Often cited as an impedimentto profits, and a waste of precious time andeffort, government statutory requirementshave been denounced, and violated by manyfirms. The main tax and regulatory issues inIndia that hinder theprocess ofmergers includeSup-optimal warehouse tax planning, imbalancebetween FDI norms vis-à-vis adequate entitycontrols, inefficient holding/IPR/entitystructures, uncertainty around GST roadmap. [6]

FUTUREOFE-COMMERCECONSOLIDATIONININDIAEver since the change of the political regime inIndia, the promising Indian e-commerce marketgrowth story continues to shift in a positivedirection buoyed by government schemes likeStartUp India, Digital India andMake in India.

India’s e-commerce market was worth aboutUSD 3.8 billion in 2009, it went up to USD 17billion in 2014 and to USD 23 billion in 2015 andis expected to touch a whopping USD 38 billionmark by 2016. [7]

In India, one can expect more mergers andacquisitions in near future. On the other hand,therehas been a collapseof a number of Indiane-commerce start-ups. The latest casualty hasbeen the onlinegrocery store, Peppertap. Thus,even though a number of start-ups showedmajor swell in revenues over the last few years,in 2016, many companies will be pursuingconsolidation in order to remain sustainableand attain profits.The unique and promising business models ofthe new start-ups will likely be acquired by thetop dogs in the industry. Large e-commercegiants that are interested in incorporating newfeatures in their product offerings will soon beacquiring smaller e-commerceportals.

One of the biggest ecommerce investorsAlibaba Group plans to expand its presence inIndia this year. It invested more than $500million for a 40% stake in One97Communications, which owns Paytm, a walletand ecommerce company. Snapdeal raised$500 million from a series of investmentsincluding Alibaba last year.

The bleeding losses that Flipkart and Snapdealhave had to suffer despite multiple foldsincrease in revenues might also lead to asynergy between the two e-commercegiants totackle the rise and might of Amazon.As the world moves from customer acquisitionto retention, revenue and profits, theconsolidation is a significant option for viablefuture. The e-commerce market world-over ispolarized and that is what one will experiencein India.

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REFERENCES

[1]Investopedia:Whatisto‘Consolidate’http://www.investopedia.com/terms/c/consolidate.asp[2]Worldwide,BureauvanDijk[3]ATKearneyandPwCReport[4]ACRA,Singapore[5]Investopedia:Whatis'Mergers AndAcquisitions-M&A'http://www.investopedia.com/terms/m/mergersandacquisitions.asp[6]eCommerce inIndia:DriversandChallengesThePwCIndiaProposition,2015https://www.pwc.in/assets/pdfs/technology/ecommerce-in-india-drivers-and-challenges.pdf[7]E-comindustrylikelytobeworthUSD38bnby2016:Assocham -BusinessStandard,1st Jan,2016http://www.business-standard.com/article/pti-stories/e-com-industry-likely-to-be-worth-usd-38bn-by-2016-assocham-116010100412_1.html

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