By Nivedita Bhattacharjee
MUMBAI (Reuters) - For viewers of Oscar-winning film "Slumdog Millionaire", Mumbai's vast Dharavi slum is a byword for poverty, but to online retailer Snapdeal.com it is a battleground for new customers and, it hopes, a source of better margins.
The company's aspirations are backed up by serious investment from the likes of Japan's Softbank Corp, which ploughed $627 million into Snapdeal last October, and could soon get a boost from Chinese e-commerce giant Alibaba (NYSE:BABA) Group, which is in talks for another cash investment, a source told Reuters on Wednesday.
Snapdeal trails Flipkart in India's $12 billion online shopping market, with Amazon.com Inc (NASDAQ:AMZN)'s India unit close behind in third place, as measured by gross merchandise volume.
The three are already fighting over India's 300 million-strong urban middle class, who have come to expect price wars and great deals on everything from mattresses to motors, but as competition intensifies, Snapdeal has begun chasing a different demographic.
It tied up with remittance provider FINO PayTech in November to set up online shopping services in semi-urban, rural and low-income residential areas across India.
In Dharavi, India's largest slum and home to as many as a million people packed into a dense collection of shacks, Snapdeal's storefront is in an 8 foot by 10 foot concrete room it shares with FINO.
On most days it draws only a couple of visitors, a FINO worker said, while the store next door selling subsidized cooking gas did a brisker trade.
Among slum dwellers, who can place orders on shared computers, popular items include low-end mobile phones and accessories, dishes and shoes.
Because residents have no official address, Snapdeal delivers to the Dharavi center, where buyers pick up their orders and typically pay cash on delivery, said FINO vice president Ashish Ahuja.
BEYOND THE MEGACITIES
Snapdeal is planning to set up such outlets across 65 cities and over 70,000 rural areas by the end of this year as it tries to steal a march on rivals with this poor but vast market segment. Research firm Etailing India estimates the online market will be worth $100 billion by 2021, with 60 percent of that business coming from India's small towns and cities.
"The metro cities are not the majority sales contributors for us anymore; it is the non-metro cities that bring more sales," said Sandeep Komaravelly, senior vice president of marketing at Snapdeal.
Komaravelly said partnerships like the one in Dharavi contributed only a tiny share of current revenue, but the company was drawn to the untapped potential.
Amazon India and Flipkart are also looking beyond the big cities of Delhi and Mumbai for the next round of growth.
Amazon's India head, Amit Agarwal, said the company was expanding its next-day and two-day delivery services to hundreds of new neighborhoods, and tying up with corner stores and kiosks to act as pick-up points.
Flipkart, which has expanded delivery to remote areas and partnered with the Indian postal system for reach in remote towns and cities, was not available to comment.
The company, backed by Accel Partners and Tiger Global, is valued at $11 billion currently, according to investors. Snapdeal is looking for a valuation of around $7 billion.
Conversations with investors are increasingly revolving around how to increase margins, which would eventually mean e-commerce sellers would have to do away with the deep discounts that have fueled their growth, private equity sources said.
"There is enough money now, but it will soon dry up," said an executive at a private equity firm that has invested in Indian e-commerce companies.
"There is definitely investor pressure to increase margins. The sentiment is that if the tide turns, will the companies be able to sustain themselves?"