India e-commerce: Arms race

India's e-commerce giants have yet to reach the IPO phase but the arms race is already well underway. Consolidation was already a prevalent theme, with the strong typically preying upon the weak. But it has taken on a new edge with Flipkart's acquisition of fashion retailer Myntra - the very strong buying the certainly not weak, with an estimated deal size of more than $300 million.

Meanwhile, huge sums of money continue to be staked on the major players as they seek to establish scale and supporting infrastructure. According to AVCJ Research, VC and PE investors have sunk $622.6 million into Indian e-commerce so far this year, compared to $692.4 million in 2013 and $302.1 million in 2012. In 2010, it was just over $40 million. Of the total amount invested in 2014, Flipkart and rival platform Snapdeal account for 71% between them. In 2013, their share was 70%.

The competitive landscape has taken on a new twist with the arrival of Amazon, which launched its India marketplace last year and is aggressively building out its product offering.

Having switched from the inventory-led to the marketplace model, these firms are still channeling cash into marketing spend in order to defend their positions. But at the same time there is investment in quality of service, with improved logistics systems cutting delivery times and lateral acquisitions that develop domain expertise.

A united Flipkart and Myntra can reap economies of scale but the former will also benefit from the latter's knowledge of fashion retail. After the fundraise that following the acquisition, Flipkart said it would pursue more M&A opportunities in e-commerce as well as in technology and supply chain management. Snapdeal has also been on the acquisition trail and is expected to stay on it.

As the funding rounds get bigger, capital sources change. It was much the same with JD.com in China. Unless a VC investor is re-upping to protect an existing position in a company, it is unlikely to want to play when valuations enter multi-billion-dollar territory. There is no guarantee that the dominant players now will be equally powerful in five years' time - and in situations where a company has yet to go public there is always a risk that in aggressively building up scale ahead of an IPO it will flounder.

For early-stage players, the opportunity set has moved on, and there is talk of retail verticals rather than giant horizontals. In a China context, the buzz word is "category killers": online brand owners that are responsible for everything from product design to marketing. In India, meanwhile, there is an appreciation of the value that sits in niche segments and private labels.

Success relies on a nuanced awareness of what sells, not just big marketing spend.

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