It has been widely reported that by 2020, India is expected to
generate $100 billion online retail revenue out of which $35 billion will be
through fashion e-commerce. Online apparel sales are set to grow four times in
coming years. Key drivers in Indian e-commerce are:
- Large percentage of the country’s population subscribed to broadband Internet, burgeoning 3G internet users, and a recent introduction of 4G across the country.
- Rapid growth of smartphone users, soon to be world's second largest smartphone user base.
- Rising standards of living as result of fast decline in poverty rate.
- Availability of much wider product range on the online marketplaces compared to what is available at brick and mortar retailers.
- Competitive prices compared to brick and mortar retail driven by disintermediation and reduced inventory and real estate costs.
- Increased usage of online classified sites, with more consumer buying and selling second-hand goods
- Emergence of million-dollar startups like Flipkart, Snapdeal and others, and entry of multinational online marketplaces of the likes of Amazon.
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| Flipkart co-founders Binny Bansal (left) and Sachin Bansal |
Growing Internet access, largely through smartphones, and the
increasing emphasis on cashless transactions certainly make India a potentially
lucrative market for e-commerce. The country’s sheer size and its population
make it a potentially big market for e-commerce. Not surprisingly, Amazon,
Flipkart[1]
and Snapdeal[2]
are battling it out for supremacy in this market, estimated to be worth $38
billion in 2016.
India should, sooner than later, is expected to allow foreign
investment in supermarkets and also in e-commerce sites that are hybrid models
allowing direct retail and serving as a marketplace Amazon follows this model
in many countries, including the US.
The situation is further heightened by traditional brick and mortar
retailers (both small and organised) who have taken both the legal and the
lobbying route to prevent the march of the online marketplaces. While some of
this opposition comes from small kirana stores, some definitely comes from
Indian big retail that too would like some protection against the online
marketplaces.
While this is the first of the challenge for the online
marketplaces, the second is to build a brand and, through that, brand loyalty.
Through 2014 and 2015, the marketplaces have been big advertisers on TV and in
print, an evidence that the ability of the digital medium to build brands is
still suspect. Despite that, none has managed to build brand loyalty. In part,
the marketplaces themselves are to blame. They have used their capital,
including venture capital, to fund discounts—to such an extent that many
shoppers have been conditioned to expect significant discounts, sometimes in
excess of 50%. To be sure, many have now gone slow on such sales, and will
likely go slower, given the new government policy. The brand, and brand loyalty
challenge remain. The third challenge is to get the supply chain and customer
service right—certainly not an easy thing to do when millions of products are
being sold to millions of customers across a few hundred cities and towns. Of
the three marketplaces, only Amazon seems to have really focused on this, and
the results are there for all to see.
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 (2015), Amazon was a distant third.
Circa 2016
Flipkart reported gross sales of less than Rs.2,000 crore in July 2016, while Amazon’s gross sales crept up above Rs.2,000 crore. Gross sales refer to the value of goods sold on a site, and not net revenue. Flipkart, Snapdeal and Amazon – all three are structured as online marketplaces in India because of regulations; their net revenue comprises the commissions they charge their third-party sellers on every transaction and fees for services. Flipkart seemed 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 2016.
The American online retailer has remained intent solely on building
popularity with customers through improving product selection, discounting,
advertising and offering fast delivery. As of August 2016, 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.
A Fashionable Acquisition
Fashion, which offers higher margins to online retailers compared
with mobile phones and books, is expected to overtake consumer electronics as
the largest category at 35% of total online spending by 2020. Online retail is
expected to surge to $60 billion by then. For Flipkart, the acquisition of
Jabong will extend its dominance in the fashion space and is seen as a move by
the company to preserve its position as India’s No.1 e-commerce marketplace in
the face of an onslaught by Amazon India. Flipkart, which also owns Myntra, the
country’s largest specialty online fashion retailer, got a cut-price deal,
paying just $70 million for Jabong, which was worth as much as $508 million in
December 2013. Flipkart-Myntra is by far the largest online retailer of fashion
in India, far ahead of Amazon India and Snapdeal. Myntra was acquired by
Flipkart for $330 million in May 2014 in the biggest domestic consumer Internet
deal at the time. The Jabong acquisition will widen that gap. Additionally, the
acquisition of Jabong, which will be retained as a separate brand, will boost
sales at Flipkart, which is struggling to revive sales growth and has been
losing market share to Amazon.
Amazon India has been spending tens of millions of dollars on
advertising and adding products in fashion. Snapdeal is seen to be the weakest
of the lot in fashion and losing out on Jabong to Flipkart will come as a blow
to the SoftBank and Alibaba-backed marketplace.
Both Flipkart and Snapdeal were aware that if Amazon India had a
weakness, it was in the fashion segment. While Snapdeal (owned by Jasper
Infotech Pvt. Ltd) was nervously weighing the consequences of acquiring Jabong
with the company’s existing business structure, the regulatory issues and
seeking answers to alleged corporate governance issues reported in the media,
Flipkart took the deal as is.
Snapdeal’s legal team sent a long list of conditions; and were
negotiating hard. They were worried about an investigation (into alleged
irregularities at Jabong), if it happened post the acquisition. Snapdeal was
also wavering between only the assets (just the technology and the brand name)
of Jabong for cash or going ahead with a full share transaction. An asset
purchase would have meant no liability on Snapdeal in case of a legal probe, if
at all. These extensive negotiations were making Jabong’s investors nervous.
Flipkart, on the other hand, was swift. It was not afraid of buying
Jabong’s shares for cash. The deal was actually put together in the last 48-72
hours. Flipkart was always interested in buying Jabong but the valuation that
Jabong was seeking made it uncomfortable. The move to buy Jabong looks like a
desperate attempt by Flipkart to maintain its market leadership position,
albeit at a very attractive price of $70 million.
Global Fashion Group (GFG), Jabong’s holding company, had been
looking for a buyer for Jabong for over a year. It had held discussions with
several firms including Snapdeal, Future Group, Aditya Birla Group, Amazon and
Flipkart. Jabong had started with an asking price of $1 billion in early 2015
when Amazon showed interest in its business. The deal fell through. By
September 2015, the company was seeking a valuation of $500-$800 million and
was talking to eBay, Paytm and a few others. Jabong, which matched larger rival
Myntra in sales until early 2014, has ceded market share since then, as
Myntra’s parent Flipkart has been spending hundreds of crores of rupees on
advertisements and discounts to attract customers. Jabong’s value collapsed
because of a combination of leadership issues, market share losses and a
funding crunch.
“Jabong has built a strong brand that is synonymous with fashion, a
loyal customer base and a unique selection with exclusive global brands. The
acquisition of Jabong is a natural step in our journey to be India’s largest
fashion platform. We see significant synergies between the two companies, especially
on brand relationships and consumer experience,” said Ananth Narayanan, chief
executive officer, Myntra (now part of Flipkart), who will now also run Jabong.
“We will leverage each other’s capabilities and focus on healthy profitable
growth,” said Narayanan. According to Narayanan, Jabong’s strength is in
international brands and Myntra has strong private labels. “We can offer our
private labels on Jabong,” he added. He also points at the target audience.
While Jabong’s customer base is largely women, Myntra has a majority of male
shoppers. “We want to together grow the market,” he added. Jabong offers more
than 1,500 international high-street brands, sports labels, Indian ethnic and
designer labels and over 150,000 styles from over a thousand sellers.
Reversal of Fortunes
Flipkart is in the middle of a storm of its own making: It is faced
with a significant management churn at the top. For a company that pioneered
e-commerce in the country, growth has virtually stalled since the middle of
2015, and the leadership team hasn’t been anle to figure out a way to
kick-start sales. Its innovation engine isn’t firing. In e-commerce lingo, the
gross sales over a given period of time
has not grown substantially. In the offline world, it is the equivalent of
saying the sales or revenue numbers aren’t growing. And this, for the
e-commerce pioneer that until now grew its gross sales by over 200% per annum
for the past three years. Flipkart was the benchmark for a seamless buying
experience until two years ago. Compared to Amazon, the search function is poor
and the mobile site and app experiences are non-intuitive. The very culture
that made Flipkart a runaway success in the first phase of its existence is now
hindering its progress.
Sure, as things are, Flipkart is the market leader. But Amazon is
sniping at its heels and Flipkart has no clue which way to go. No doubt,
Flipkart is in the middle of a crisis of its own making, but it’s not too late
to change its strategy. Millions of Indians are first-time buyers online.
Flipkart needs to capture them earlier in their journey.
Innovation to boost sales?
India’s top e-commerce companies have introduced habit-changing
offerings to customers in the past three months, but they are still struggling
to find the products and services that will expand a nascent market that has
worryingly declined since the start of the year.
Three months ago, Flipkart announced a “no-cost” equal monthly
instalment (EMI) scheme, under which customers can buy higher-priced products
such as premium smartphones, televisions, home appliances and other electronics
via monthly instalments without paying interest. Flipkart also launched a
Prime-like programme, Flipkart Assured, earlier this month.
In July 2016, online marketplace Amazon India launched its well-known Prime membership
programme in over 100 Indian cities, offering one-day and two-day delivery on
lakhs of products for an initial fixed price of Rs.499. Subsequently, in
an attempt to make product discovery easy for consumers, Amazon has now extended
the Amazon’s Choice programme to India. Amazon Choice will recommend a specific
product based on the needs of a shopper. This shall simplify product discovery
for items on which buyers end up spending a lot of time researching. Snapdeal
responded to its larger rivals Amazon and Flipkart that launched Amazon Prime[3]
and Flipkart Assured[4] respectively
as their premium services recently, by introducing its own loyalty service,
Snapdeal Gold, towards the end of August 2016.
None of these services, however, addresses the core problem facing online
retailers: the e-commerce market, in terms of the number of users, simply
hasn’t grown so far this year. The last big innovations that expanded the
market in a big way were the launches of high-quality, low-cost smartphones by
Motorola and Xiaomi on Flipkart in 2014 and as well as its annual shopping
event, Big Billion Day.
A long way to go?
Back in 2007, when Flipkart was launched, e-commerce industry in
India was taking its baby steps. Flipkart's founders Sachin Bansal and Binny
Bansal, who were working for Amazon.com had an idea to start an e-commerce
company in India. Both of them, who are alumni of IIT Delhi, left their jobs in
Amazon to start their own business. In the first few years of its existence,
Flipkart raised funds through venture capital funding. As the company grew in
stature, more funding arrived. Flipkart repaid the investors’ faith with
terrific performances year after year. In the financial year 2008-09, Flipkart
had made sales to the tune of 40 million Indian rupees. This soon increased to
200 million Indian rupees the following year. The revenue figures of the online
marketplaces should not be confused with the price of products sold (GMV[5] or
gross sales); their revenues come from commissions these online marketplaces
get from sellers or listing fees that they charge to list the products on their
site. Their last round of fundraising had increased their value to $ 15
billion, however as of February 2016, their estimated value stood revised at
$11 billion.
While in May 2015, the three leading e-commerce market places in
India along with other smaller online e-commerce companies had clocked a
combined GMV of $9 billion, that number had inched up to just about $10 billion
at the end of May 2016, translating into an 11% annual growth. Flipkart has
seen its GMV stall at about $4 billion for almost a year now, What's worth
noting is that Flipkart had notched up a 400% growth the year before (FY 2015),
when it's GMV zoomed from $1 billion to $4 billion, post which the numbers have
remained flat.
Flipkart, to its credit, since its inception has grown rapidly in
terms of gross merchandise value (GMV), but the company has been showing no
signs of becoming profitable. As per data from the Registrar of Companies Flipkart
did business of Rs.3,035.8 crore and reported a loss of Rs.719.5 crore for the
year ended March 2014. In the previous fiscal FY13, the company had posted a
revenue of Rs.1,195.9 crore and loss of Rs.344.6 crore; indicating the rise in
its losses year on year. Interestingly, in an interview way back in July 2013 to
Business Standard Flipkart’s promoters had said “Profitability is not a focus
area. It’s a strategic decision. We can be profitable from today if we want. We
can stop investing in one area and start making profits; it’s definitely
possible. But we don’t want to remain as a small profitable company.”
The cash burn model of Flipkart has so far proved good to raise
valuation in the impervious private equity markets but in public equity
markets, the company will have to show real profits and give returns to
investors to raise more funds. Companies who have given returns to investors in
the equity markets had been built by the cash flows generated by the business
and not by spending investor’s money.
Based on the numbers with the Registrar of Companies it is further understood
that Flipkart earns around 10-12 % of the GMV as revenue. But it’s cost of
handling these goods are around 15 %. The company will therefore need serious
cost cutting just to turn profitable. However, since volumes are only ensured
by huge discounts and high advertisement cost, cutting costs will not be easy.
As of now, Flipkart ships about eight million units a month. It has
set itself an ambitious target:
- Ship one billion units a month by 2018
- Serve 100 million customers by 2018
Flipkart,
it appears, clearly has a long way to go.
Disclaimer / Caveat: Whatever I have stated is publicly available information and does not represent the view of the firm I work for.
(This post is not copyrighted and may be reproduced freely with appropriate attribution of source)
[1] Flipkart is
an e-commerce company founded in 2007 by Sachin Bansal and Binny Bansal. The
company is registered in Singapore, but has its headquarters in Bangalore,
Karnataka, India.
[3] Amazon Prime is a paid service ($99 per year, plus a free 30-day
trial or $10.99 per month) that gives Amazon shoppers a few distinct
advantages. Members of Amazon Prime are eligible for free one- or two-day
shipping on most items, among several other perks. It is a membership program
that gives customers access to streaming video, music, e-books, free shipping
and a variety of other Amazon-specific services and deals.
[4] Triggered by the launch of Amazon Prime in India, Flipkart has
launched a revised version of its earlier loyalty program, by introducing
Flipkart Assured. Under Flipkart Assured, customers get free delivery within
2-4 days on Flipkart Assured products above Rs 500. The products also go
through stricter quality checks and a delivery assurance in any case of any
mishaps or defects in the order.
[5] GMV is overall sales on an online marketplace, excluding discounts
and returns which are an integral part of the e-commerce market.
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