Bengaluru/New Delhi: Flipkart seems poised to lose its cherished status as India’s largest e-commerce firm to arch-rival and role model Amazon.com Inc.’s Indian unit after losing its lead in July—a potential watershed moment in the country’s fledgling Internet business.

Barely three years after launching in India, Amazon (Amazon Seller Services Pvt. Ltd) likely exceeded Flipkart in terms of gross sales in July.

Flipkart reported gross sales or gross merchandise value (GMV) of less than ₹ 2,000 crore in July, while Amazon’s gross sales crept up above ₹ 2,000 crore, according to five people familiar with the companies’ numbers. Another local online marketplace Snapdeal (Jasper Infotech Pvt. Ltd) reported gross sales numbers of roughly ₹ 600 crore, a fall of more than 50% from the sales it had been generating until the end of last year, said two other people, familiar with the company’s numbers.

Gross sales refer to the value of goods sold on a site, and not net revenue. (Flipkart, Snapdeal and Amazon are structured as marketplaces because of regulations; their net revenue comprises the commissions they charge their third-party sellers on every transaction and fees for services)

To be sure, the numbers are only for the month of July and the market share battle between Flipkart and Amazon is far from over.

Flipkart’s numbers also exclude revenue at Myntra and Jabong, the two large fashion retailers it owns. Snapdeal’s numbers exclude sales at FreeCharge, its payments arm. Including Myntra and Jabong revenues, Flipkart is still comfortably ahead of Amazon.

Yet, the numbers confirm reports in Mint and other publications since the start of the year that Flipkart and Amazon are running neck-and-neck in the e-commerce market share battle and the latter is close to overtaking it. This is the first time the exact picture has emerged.

“We continue to have a significant lead over the competition on all important customer parameters including sales. We are also the market leader in the biggest categories of e-commerce including mobiles, fashion, home, electronics and appliances. Our sales are witnessing a steady growth and in the recent months, we have significantly raised the bar of execution, speed of customer delivery and product quality," said a Flipkart spokesperson in an email.

Flipkart started off in September 2007 and has been the largest e-commerce firm in India since at least 2011, followed by Snapdeal. Until the June quarter of last year, Amazon was a distant third.

That pecking order is clearly a thing of the past now. What’s open to question is whether Amazon will be able to keep ahead of Flipkart, whether Flipkart will bounce back and whether Indian e-commerce will be a winner-takes-all business.

Against the odds

The upcoming festive season sales will provide more clarity on how the e-commerce market is shaping up. Flipkart is betting on a blockbuster Big Billion Day, its signature yearly sales event that is held in October. E-commerce firms typically generate a majority of their annual sales in the festival-filled Diwali quarter when customers spend freely on a host of products. But given that this time Amazon will have disproportionate spending power, Flipkart and Snapdeal are up against the odds to repeat their solid performances of the past two years.

“This festive season is key for the (future of the) e-commerce industry. If Amazon keeps up the momentum, then it will be very difficult for Flipkart to keep pace with them. But if Flipkart has a great BBD (Big Billion Day), there’s hope that Amazon won’t run away with it," said one of the people cited above.

If Amazon sustains its spending and market share gains, it may force the shakeout in e-commerce that some analysts have said is inevitable. Analysts say some kind of consolidation among Flipkart, Snapdeal, Paytm and Shopclues, two other marketplaces, is likely. China’s Alibaba Group, an investor in Snapdeal and Paytm, could play an important role if such consolidation happens.

“We haven’t seen a splurge on advertising by the e-commerce firms in a while but with Diwali on the heels, I am sure all the companies would want to showcase big revenues. While some companies would have lesser budgets to play with, you will see reactive discounting to maintain market share," said Harish H.V., partner at Grant Thornton, a consultancy.

The astonishing speed at which Amazon India has raced past Snapdeal and caught up with Flipkart is down to three main factors: a spending spree of more than $2 billion by Amazon, a funding crunch for Indian start-ups including Snapdeal and the missteps made by Flipkart last year.

In July 2014, Amazon.com’s chief executive Jeff Bezos said the company will pump in $2 billion into its India unit, in a move that was a direct challenge to Flipkart, which had announced a $1 billion fund-raising just one day earlier. It was an unusual move for Amazon, which claims it never reacts to competitors; it highlighted how desperate Amazon was to succeed in India after missing out to Alibaba Group in China.

At that time, many analysts wrote off Snapdeal, simply on account of the capital available to Flipkart and Amazon. Snapdeal surprised the market in October that year by announcing a $627 million fund-raising from Japan’s Internet conglomerate SoftBank Group Corp.

For the next 15 months, the three companies splurged hundreds of millions of dollars on advertising, discounts and logistics, trying to attract customers and sellers alike. In this time, the start-up funding frenzy was at its peak and Flipkart and Snapdeal raised a further $1.4 billion and $600 million, respectively.

Funding slowdown

Late last year, however, investors started becoming more cautious about funding because the millions of dollars start-ups were spending on discounts and advertising were resulting only in deep losses without yielding customer stickiness. The caution fast turned into a severe pullback by investors this year.

Apart from the funding environment, Flipkart and Snapdeal had their own problems.

Then Flipkart CEO Sachin Bansal horribly misjudged customer shopping behaviour by predicting that all or nearly all of online shopping would happen on smartphones; he pushed the company to become an app-only platform after implementing the same move with Myntra in May 2015. At the same time, Flipkart was trying to shift abruptly to a marketplace model, where tens of thousands of third-party sellers would sell to customers from its then largely inventory model.

These two moves (even though Flipkart eventually didn’t end up going app-only) alienated customers in a big way. Flipkart lost out on the desktop to Amazon, a shift that also had some spillover effects on its mobile commerce business. Its push to go headlong rather than gradually toward a marketplace model hurt its product quality, product delivery times and overall brand image with customers. For a company that had risen to the top on the basis of its motto of pleasing customers at all costs, the two moves were akin to scoring own goals.

ALSO READ | Flipkart launches speedy, loyalty service to take on Amazon

In the case of Snapdeal, its CEO Kunal Bahl predicted in August 2015 that the company would overtake Flipkart in GMV by March 2016. But since the company didn’t have the logistics machinery that Flipkart and Amazon had built, its main attraction for customers was simply low prices. Once the funding boom died late last year and investors demanded a move toward profitability, Snapdeal was forced to cut back on discounts and advertising and its sales dropped precipitously.

Bahl said in an interview in July that Snapdeal’s focus had shifted to increasing actual revenues and moving toward profitability rather than boosting GMV, which is “so 2015".

Not for Amazon.

Where Amazon scored

The American online retailer has remained intent solely on building popularity with customers through improving product selection, discounting, advertising and offering fast delivery. For instance, as of August, Snapdeal offered more than 35 million products; Flipkart had more than 40 million products; while Amazon had more than 65 million.

After learning from its mistakes in China, Amazon customized its offerings to suit the tastes and habits of Indian customers from the time of its launch. Amazon also found a way around the foreign direct investment (FDI) rules that ban online retail by setting up Cloudtail India Pvt. Ltd, its e-commerce retail joint venture with Infosys Ltd co-founder N.R. Narayana Murthy’s Catamaran Ventures.

Cloudtail started operations in the middle of 2014 and soon became Amazon’s single-largest seller, contributing more than 40% of its business in some months. Amazon was able to control its customer experience via Cloudtail and its seller programmes such as Fulfilment by Amazon, Easy Ship and Seller Flex.

In the product category of smartphones, the single-largest revenue generator for e-commerce firms, Amazon struck important exclusive partnerships with key smartphone brands such as Motorola, Xiaomi and OnePlus via Cloudtail. The Moto and Xiaomi deals were a double whammy for Flipkart, which earlier had exclusivity with these brands.

ALSO READ | Merging Flipkart, Snapdeal the best way to beat Amazon

Mint had first reported on 15 August 2015 that Amazon India was gaining significant market share from Flipkart and Snapdeal, both of which were still significantly larger than Amazon in terms of monthly sales. Since then, Amazon’s market share gains accelerated, particularly from the start of this year.

Overcoming the disruption

Then, in late March, the government disrupted the e-commerce business by coming up with new regulations, which legitimized online marketplaces but prevented them from influencing product prices and capped the contribution of one seller at 25% of a site’s overall sales.

All the three companies, Amazon, Flipkart and Snapdeal, put planned sales events on hold. Snapdeal and Flipkart had anyway cut back on discounts but Amazon was hit particularly hard by the new laws. It didn’t have the spending constraints that were put on Flipkart and Snapdeal by investors.

The decline in discounting and advertising led to a worrying dip in India’s e-commerce market. Online retail sales fell to an annualized $12 billion in June, compared with $13 billion in March and $15 billion in December, according to estimates by research and advisory firm RedSeer Management Consulting.

For nearly three months, Amazon executives worked on coming up with new ways of funding discounts. In June, Amazon’s Bezos promised another $3 billion for the Indian unit.

ALSO READ | Flipkart brought online shopping to India. Then Amazon showed up with deep pockets

Soon after, Amazon was ready with new discounting mechanisms and by the end of the month, it restarted sales events and extensive discount-driven advertising.

In July, Amazon’s discount-driven events were around the end-of-season fashion sale. Earlier this month, it held its Great Indian Sale of all kinds of products on its platform. Flipkart has started discounting and advertising again as well, but is spending much less than Amazon, given investor pressure to cut losses.

“The FDI rules (temporarily) stopped Amazon from spending the kind of money it wanted on discounting and ads. But now, they’ve sorted it out and that’s why you’re seeing sales again. They’re doing it in ways where it’ll be very tough for anyone to prove they’re actually funding discounts," said one of the five people cited above.

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