Flipkart Zooms on the Indian e-Highway

Online Shopping

Edited by Vani Rao

Crosses $1 billion in sales in its first year, but profitability seems far away

Flipkart.com, India’s largest online retailer, has just hit the $1-billion milestone in annual gross merchandise value, a year ahead of schedule, as more and more Indians switch from brick-and-mortar shopping to the click-and-order mode.

FlipKart Logo
Source Flipkart.com

Founded in 2007 by two ex-Amazon.com employees and university friends, Flipkart.com is the first Indian online retailer to achieve the milestone sales in just 12 months.

The e-tailing market in India might have been a late starter, but is now showing signs of growth. According to Internet and Mobile Association of India, the e-commerce market in India is expected to grow to $200 billion by 2020. Experts say that companies like Flipkart have been instrumental in creating excitement for online shopping in India. With its catchy television commercials, easy-to-use services, and popular product range, Flipkart has undoubtedly set the ground on fire.

India’s e-commerce market is expected to grow seven-fold to $22 billion in the next five years, as internet infrastructure improves further. Mumbai-based ratings firm Crisil Ltd. projects that online sales is expected to triple to INR504 billion ($8.13 billion) over the next three years.

However, industry experts argue that gross merchandise turnover is not always the best measure of growth and success for online retailers. Growth in gross merchandise, which is the total value of every product sold on a website, does not always correlate with the movement of the actual revenues and profits of a company like Flipkart. This is mainly because Flipkart follows the marketplace model that fetches lower margins since they are split between the seller and the platform owner.

Global Players Warming Up to Indian E-com Market

With the Indian e-commerce market witnessing rapid growth, global players are entering the market to cash in on the huge growth opportunities here. For instance, eBay-backed Snapdeal is targeting a $1-billion turnover by 2015. eBay has been desperate to catch up and tried to make up for past mistakes by aggressively chasing the opportunity to invest in SnapDeal. To date, eBay has invested around $170 million in SnapDeal. The Amazon Question

Flipkart is often referred to “as the Amazon of India”, and until some time back it was speculated that Flipkart could be acquired by Amazon before its Indian foray. However, existing regulations and Flipkart’s own growth valuations have made it a tough acquisition target. Amazon is quietly taking the marketplace route for now to ensure that it complies with the existing ban on foreign investments in the country’s e-commerce sector, and preparing an aggressive entrance when the market offers the right opportunity.

Amazon.in was launched in June 2013 and is already clocking 6.77 million unique visitors monthly, as per December data by online tracker comScore. Flipkart gets about double that traffic at 13.22 million.

E-commerce Space Heats Up

The e-commerce market is witnessing intense competition between the stalwarts – Flipkart and Amazon. For instance, Flipkart copied the one-day delivery model within a week of Amazon announcing about it in the media.This was not the first time that Flipkart adopted Amazon’s idea. Flipkart launched its marketplace in April 2013, just two months before Amazon launched its operations in India. Copying the one-day delivery service confirmed that the battle had just begun.

Catching Up Fast
Source Businesstoday.in

It is interesting to that what Flipkart accomplished in six years, Amazon has done that in seven months. Amazon has already achieved one-third of Flipkart’s size in terms of the number of transactions, with a fraction of the funds that Flipkart has spent.

Flipkart sells about 100,000 products daily. When that number reaches a million, it will be whole new level playing field. Flipkart recently raised $360 million in funding, but that will not going to last forever. Moreover, since Flipkart is built with venture capital money, it might not be able to garner huge amount of funds as it has done in the past. On the other hand, Amazon is under no such pressure and it can keep pouring in money without worrying about profits.

The most recent entrant in this space is Wal-Mart, which wants a piece of the action as well. It wants to beat the existing regulations and challenges of doing a big-bang offline retail entry by building an e-commerce marketplace in India. It has already hired professionals and from the little but strong progress Amazon has made so far, Wal-Mart looks confident to challenge existing rivals.

The Market Place Mess

Majority of the online stores in India like Snapdeal, Yebhi, and Flipkart have all switched over to market place model over the past year. This means that they don’t own inventory, don’t store it, and don’t deliver it themselves, at least not like they used to when they were direct sellers themselves. And that means lesser consistent user experiences in terms of product quality, deliveries, and returns. However, this model did not go down well with customers, especially with that of Flipkart, which had an unblemished history of perfect service and delivery. The result is that customers frequently experience cancelled orders, changing prices, and delivery delays, and even the odd instance of the wrong or no product delivered inside the package!

Snapdeal and Flipkart have been spending a fair bit of cash on high-decibel advertising. Most of the messaging do nothing to change the belief in consumers that these sites sell directly to users rather than manage a bunch of sellers. It’s not an easy task to alter one’s design and operational DNA, and even more challenging to ensure consistent quality and reliability from a large, assorted set of vendors. But over time, these e-commerce players will hopefully learn to improve not only theirs, but vendor-end processes, and fix a lot of these growth pains. Offline Comes Back with a Vengeance

There is a war brewing between manufacturers and online retailers, large brands are exploring to rectify the increasing tilt towards online shopping, as customers flock to websites that offer choices and prices that offline retailers can’t match. The first punch was thrown by Canon India, which is considering longer warranty periods for products bought offline to negate the steep discounts offered by e-tailers.

Companies like Lenovo and Toshiba have placed warnings on their websites telling customers that India’s three largest online marketplaces, Flipkart, Snapdeal, and Amazon, are not authorized to sell their products. Indian Cellular Association (ICA) the apex body of the cellphone industry, is also planning to issue a consumer advisory on the checks that a consumer needs to do before buying products online. These companies allege that online retailers are providing heavy discounts that destroy the price point of offline traders.

Apart from price, major brands are also raising concerns over unauthorized merchants hawking their products in online stores. Moreover, the intense competition among e-tailers has resulted in price wars, with some online sellers offering heavy discounts to attract customers. These online sellers are not looking at profits right now. In the international market, similar measures taken by some online brands have not gone well with the authorities. In 2013, Bloomberg reported that Samsung Electronics and Royal Philips NV were among companies raided by European Union anti-trust officials as part of a probe into suspected online-sales restriction practices.

India Shining

As the projections have grown rosier, technology investors have poured in. In a May 2013 report, Allegro Advisors, an investment bank, said that 53 e-commerce companies in India had secured $853 million in venture capital funding over the past three years.

There is a fear that India’s online shopping potential is being oversold as e-commerce companies may be increasing their sales, but are not adding new users as quickly as they claim.

To warrant a large valuation, Flipkart would need to mimic Alibaba’s spectacular success and quickly reach 100 million Indian shoppers. This seems to be unlikely given the current market scenario.

Right now, India’s online retailers are sheltered from competition abroad, thanks to the government regulations. In September 2012, the Government of India opened its retail sector to foreign direct investment (FDI), but excluded e-commerce.

Amazon, which entered India in June 2013, spent some lobbying funds in the US on issues related to India’s FDI laws, according to the company’s latest disclosure. Industry experts do not expect the law to change soon, at least not before elections in May 2014. Still, analysts note that Indian companies would not necessarily be ploughed down if foreign e-commerce companies arrived in full force. India’s market is diverse and complex, which may give local companies a leg up.

Figures Don’t Lie

In FY2013, Flipkart reported a $45-million loss on revenue of $190 million. Although revenue soared by more than five-fold in FY2012, losses reduced by just half during the year. This can be looked upon as a positive sign for the company, but the calculation on FY2012 losses in figures disappoints outrageously. Flipkart, which is yet to report profits, has been banking on huge investments brought in by the management for the last six years.

Rounds of Funding
Source Dazinfo

Flipkart is just a well-executed clone of Amazon.com, something that could be copied easily again by any business house in India with hoards of cash and huge advertising spend. Jabong another e-comm player is a classic example of this. After more than six years of existence, Flipkart is the 10th-largest website in India (as per Alexa), while Jabong is not far behind at the 37th position with little less than two years of existence.

Investors have their own view on Flipkart funding and on the possible, future rounds of investment. Flipkart is reportedly eyeing an initial public offering (IPO) in early 2015 to ensure the modest 3x returns to investors. From this calculation, Flipkart must be valued at about $5 billion, almost three times its current valuation. To achieve this, the company will have to achieve more sales, enhance its employee strength, gain more vendors, gain more in-house inventory, and undoubtedly, more funds to ensure smooth sailing, at least until the IPO.

This puts investors in a difficult situation; either they can invest more and hope for a healthy exit or let the company struggle to sail to the ill-fated IPO. It might not be a surprise if there is a sixth round of funding during mid-2015.

Will Flipkart be Well-received at the Stock Market?

Unlike Amazon, Flipkart has not got encouraging valuations despite its losses. Besides, it also needs to be considered that investors in India are still far behind the game, where they can bet big time on an e-commerce company constantly reporting losses, for customer acquisition.

Inventive Ways

Flipkart is almost synonymous with e-commerce in India. When Motorola introduced its latest phone in India, it chose Flipkart as its exclusive vendor for early sales. The US-based firm launched its much-awaited budget phone Moto G in India through Flipkart on February 6 this year. There has been a tremendous response from online shoppers, with around 20,000 handsets of the 16GB version being sold in the first 15 minutes of launch.

The latest funding values Flipkart at over $1.6 billion, which makes it worth more than the total market cap of all 15 listed retail companies in India. Going by these numbers, Flipkart is certainly in a strong position at this stage. The company had earlier been through major hurdles in managing its logistics network, with pressure on multiple fronts including manpower, technology, inventory, and sales. It has been able to overcome that and now the onus is on the company to manage its future growth path. The market is waiting to see how the company plans to scale up and handle competition from established players outside India head-on.

Flipkart has made it big with the Billion numbers, the question remains whether it can make it Large.

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