A recent report by Worldpay projects India to be the world’s second largest e-commerce market by 2034. The Indian e-commerce market is estimated to grow to $63.7 billion by 2020 driven by increasing internet penetration. Internet users in the country are expected to grow from 350 million in 2016 to 600 million by 2020. But impressive market trends aren’t necessarily translating to improving market valuations for India’s e-commerce players. Plagued by a lack of profitability, they are seeing declining appeal, as investors start to look elsewhere.

Photo Credit: 2Tales/Flickr.com

Snapdeal’s Financials

New Delhi-based Snapdeal was founded in 2010 by high school friends Rohit Bansal and Kunal Bahl who wanted to build a website that could offer Amazon and Groupon rolled into one. The business offering was well liked by the Indian consumers and it soon transformed itself out of a daily deals business to become a household name amongst the online marketplace players in the country.

Snapdeal relies on sales made through its website for revenues. More recently, it has started selling promoted listings to vendors for ad revenues as well. The company has seen strong revenue growth in the recent past. For the year ended March 2016, revenues for the company grew 56% to Rs. 1,457 crore (~$217 million). But losses have far outpaced revenue growth. During the same period, losses for Snapdeal grew 150% to Rs. 1,328 crore (~$198 million).

Snapdeal has been venture funded with $1.8 billion in investments from investors including SoftBank Internet and Media (SIMI), Ratan Tata, Tybourne, PremjiInvest, Myriad, BlackRock, Temasek Holdings, Saama Capital, eBay, Nexus Venture Partners, Kalaari Capital, Intel Capital, Bessemer Venture Partners, SoftBank Capital, Ru-net, Clouse SA, and IndoUS Venture Partners. Its latest round of funding was held in August 2016 when it raised $21 million at an undisclosed valuation. Analysts estimate that Snapdeal was valued at $6.5 billion last year. Back in 2015, SnapDeal was estimated to be valued at $5-$6 billion.

Snapdeal’s Improving Offerings

Snapdeal continues to invest in business growth. Last year, Snapdeal invested in the development of another entity E-Agility Solutions Pvt. Ltd, which is acting as a wholesale unit to purchase products upfront to help improve service levels and deliver tighter control over inventory. This method is not unfamiliar to the e-commerce world where big e-tailers like Amazon and Flipkart have similar purchasing arms. The move is a shift from its earlier business model where Snapdeal operated as an intermediary for the sale. The entity is a part of its seller support program and will be used to fund vendors especially fashion brands that sell directly to e-commerce firms. The unit will help Snapdeal meet with India’s foreign direct investments norms, which state that e-commerce firms can sell only 25% of their goods from a single vendor or group of firms. Whether or not sales through E-Agility will help Snapdeal earn more revenues remains to be seen.

Snapdeal is also hoping to grow its advertising revenue and is targeting more than Rs 100 crore (~$15 million) in revenues from its ad platform this year. Its ad platform offers promoted listings to sellers to help make their products more reachable to the consumers. For now, it is attracting sellers to the platform by announcing rate cuts. Snapdeal believes that its ad platform will be crucial in delivering higher profitability to its business. I am not entirely convinced that Snapdeal will be able to leverage the ad-supported business model, given that other than Facebook and Google, pretty much no other media firm is doing well.

Snapdeal’s core business model remains riddled with issues. It has traditionally given deep discounts to attract new customers and has lost focus on keeping its costs under control. It claims that it is now focusing on profitability and not just market share. To achieve profitability, it has announced layoffs and reduced focus from its non-core activities.

Snapdeal’s Worries

Snapdeal has had a difficult 2016. Last year, Amazon established a bigger footprint in the country and surpassed Snapdeal’s market share. Flipkart remains the biggest e-commerce player in India, followed by Amazon India, and Snapdeal.

Until a few years ago, Snapdeal was hopeful of listing on the US stock exchange in 2016. But market conditions and investor realism have curbed some of its enthusiasm. News reports published earlier this year reveal that Snapdeal is now in talks with SoftBank to raise additional funding at a valuation of $3-$4 billion. Meanwhile, investors have become much more savvy vis-a-vis e-commerce businesses. Unprofitable businesses like Snapdeal, eight years into its existence, do not offer them sufficient comfort.