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Snapdeal founder keeps close eye on Alibaba IPO

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Kunal Bahl, founder and CEO of Snapdeal.
Kunal Bahl, founder and CEO of Snapdeal.Kunal Bahl/Snapdeal

Investment bankers have been stalking Kunal Bahl these days. And they should.

With Alibaba poised to raise $20 billion from a monster initial public offering in the United States, no doubt a Goldman Sachs or Morgan Stanley would love a piece of the next foreign e-commerce giant likely to go public.

That would be Snapdeal, the online marketplace in India founded by Bahl that's poised to generate more than $1 billion in sales this year. The company operates a mobile digital platform that allows 50,000 local sellers to offer their merchandise to consumers in India and eventually around the world. Snapdeal's largest investor is eBay, which recently led a group of backers that plowed another $150 million into the fast-growing startup.

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In an interview, Bahl said the strength of Alibaba's IPO will help determine whether Snapdeal will float its stock on Wall Street. He said the company will make a decision by early next year.

"We're at a scale right now that we can go public in 12 months if we wanted to," Bahl said. "No decision has been made. But with every subsequent quarter, it seems to me that we are converging closer to a call. I think (Alibaba's IPO) helps. We've been watching it very closely. I've read every page of Alibaba's prospectus."

Not that Snapdeal necessarily has to go public. The company has plenty of money in the bank and could remain independent for some time, Bahl said, noting that Alibaba was a private firm for 16 years before it filed for an IPO.

But there's good reason to think Snapdeal should pull the trigger soon. Cross-border retail - the idea that online consumers in one country can order and receive goods from another - is finally becoming reality.

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For large American retailers, physically expanding into foreign markets has always been a tough, expensive proposition. Chains like Walmart, Home Depot and Sears have collectively spent billions building supply chains from scratch and trying to master the cultural nuances of other countries, often with little to show for it.

The big-box format, in particular, has been tough to export overseas. Unlike Americans, many consumers in Europe and especially Asia still prefer to shop at small, independent retailers. For this reason, Best Buy shut down its branded stores in Great Britain, Turkey and China.

Even Canada has proved vexing for Target. Despite strong brand awareness and historic ties between the U.S. and its neighbor, Target has not been able to translate its successful American formula northward.

Cross-border retail

The Internet would seem like the great equalizer. But cross-border retail has historically been a tough sell because consumers lack confidence in the quality of goods that originate overseas and the integrity of the distribution system that delivers the merchandise. Even shoppers in the United States, who have the most experience in e-commerce, complain about late or inaccurate deliveries and difficult return policies.

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"Negative experiences with delivery have the potential to switch consumers off online shopping altogether, or create significant noise around the specific e-retailer or delivery company," according to a report by the International Post Corp.

But as companies fine-tune their e-commerce operations, consumers are becoming more comfortable with ordering goods from overseas retailers. Today, about 25 percent of eBay's PayPal revenue comes from cross-border sales. PayPal recently started PassPort, an online portal that offers export advice to U.S. small businesses.

"There is big resurgence in domestic manufacturing," said Anuj Nayar, senior director of Global Initiatives for PayPal. "There is still huge value to American-made goods. Every small business needs to look at tapping into this massive opportunity."

OC&C Strategy Consultants and Google estimate companies, led by Amazon and eBay, exported $25 billion worth of goods via the Internet in 2013. That's 8 percent of the total value of global e-commerce. By 2020, those numbers should hit $130 billion and 18 percent of Internet commerce.

Which is exactly the reason Alibaba and Snapdeal are so appealing to investors. Through their online platforms, retailers can access the burgeoning consumer markets of China and India without having to build stores and warehouses overseas. Compared with the United States, companies in India spend more than 14 times more of their annual sales on real estate costs.

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"After China, India is the last large frontier for e-commerce," said Bahl. "Cross-border trade will be the biggest geopolitical event over the next 20 years. To sell, to buy, all you need is a mobile phone. In 12 months, we will open a platform that provides global access to the small businesses in rural India."

Beyond India's market

A graduate of the University of Pennsylvania's Wharton School, Bahl opened Snapdeal in 2008 as a way for Indian retailers to sell goods beyond their immediate markets. The company leases about 40 fulfillment centers and oversees payment, analytics and logistics. Snapdeal does not charge a retailer to list products on the site, but does take a fee off every sale. Today, Snapdeal boasts more than 25 million users, nearly 2.5 percent of India's total population.

So could eBay step up and buy Snapdeal? Perhaps.

In many ways, eBay's investment in Snapdeal makes more sense than Yahoo's stake in Alibaba. Unlike Yahoo, eBay is a pure play global retailer that would love to dominate those developing economies, both on the buyer and seller end. Today, the U.S., Germany, Great Britain, the Netherlands and Scandinavian countries control most of the global e-commerce export business. Tomorrow, China, India and Brazil could join that list.

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"We believe Snapdeal's marketplace-oriented business model is complementary to eBay's business model and consistent with the company's strategy to grow aggressively in emerging markets," Colin Sebastian, an analyst with Baird Equity Research, wrote in a report.

As for Bahl, he is not ruling anything out.

"India is a big market and they would like to get a piece of that market," he said. "They bet on this horse, knowing this horse has been doing well. I do belive there's tremendous potential in working with eBay on cross-border trade."

Thomas Lee is a San Francisco Chronicle business columnist. E-mail: tlee@sfchronicle.com Twitter: @ByTomLee. In December, Palgrave Macmillan will publish "Rebuilding Empires," Lee's book on the future of big-box retail in the digital age.

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Thomas Lee is a business columnist for the San Francisco Chronicle. He is the author of “Rebuilding Empires,” (Palgrave Macmillan/St. Martin’s Press), a book about the future of big box retail in the digital age. Lee has previously written for the Star Tribune (Minneapolis), St. Louis Post-Dispatch, Seattle Times and China Daily USA. He also served as bureau chief for two Internet news startups: MedCityNews.com and Xconomy.com.