Rearranging Deck Chairs On The TitanicBloombergQuintOpinion
As news of yet another reorganization at Flipkart came through and was being breathlessly dissected, it triggered a sense of déjà vu. The story seemed all too familiar and despite the better late than never candor in admitting past missteps, there appeared to be no fresh ideas on offer. It reminded one of reorganization exercises in MNCs (multi-national companies), where a few roles are combined, some roles are eliminated, a few senior executives win the political lottery, others lose and life goes on.
Unfortunately, Flipkart is not yet a MNC making dollops of cash so status quo is not an option. The company is clearly losing sales momentum (Gross Merchandise Value has been flat to down for the last 10 months), Amazon is close or has arguably over taken it market share and Alibaba is coming. Cash on hand, while reportedly around $850 million, is fast dwindling and more importantly, most investors are looking the other way. Only a very brave investor would step in with Amazon hitting them hard at one end and Alibaba’s potential entry looming on the other.
current Flipkart strategy of trying to out-Amazon
Amazon is ill-fated and ill-advised. Amazon has reached comparable scale in
India and Flipkart has no edge over it anymore. Amazon is willing to outspend Flipkart
on every parameter (discounts, marketing, logistics) and has superior business
processes and technology capability. Trying to beat it at its own game, that
too with inadequate resources, is a not-so-clever idea and is doomed to fail.
The E-commerce Business Model
Whether you look at Alibaba or Amazon, there are a few things in common. The main marketplace business runs on a break-even basis even at multi hundred billion dollar GMV’s. They have built businesses around the marketplace – advertising, cloud computing, financial services, media, loyalty (prime), consumer services; that leverage the platform (consumers, infrastructure, vendors) they use that to generate profits. Like all good retailers, they generate cash using the ‘float’ between when they pay suppliers/vendors (30-60 days) and when they collect from consumers (immediately). Hence, their cash flow profile is much better than their reported P&L profits and investors pay a lot more attention to cash generated. They are also making significant investments in marketing and technology which will pay off over time so that needs to be factored in the valuation exercise as well.
The other implication of the above business model is that companies can’t use price and/or sellers commission as a variable to drive profitability. They have to keep these low and comparable to others so that consumers and sellers prefer to be on their platform. This allows the virtuous cycle of retail to kick in and leads to opening up of other revenue streams like the ones mentioned above.
India is a large market (“the last big ecommerce market in the world”), which is open to all comers. It is already a multi cornered contest with deep pocketed players so two things can be surmised. One, it will not be a winner takes all market and two, profitability will be pushed out and positions taken for the long run.
Flipkart In Wonderland
There is a fundamental challenge for Flipkart. It started by modelling itself on Amazon and later started moving towards the Alibaba model. While it has tried to embrace being a true marketplace, that is really not its DNA. Hence, at every opportunity it tries to move back to its command and control model as evidenced by the current steps to reduce the number of suppliers and more tightly control consumer experience. It has raised the commission rate for most categories, and that too will have the effect of driving away the long tail of suppliers.
It has continued to focus on electronics (mobiles) and has doubled down on apparel by buying Jabong. There is a clear attempt to right the wrongs of last year by being sharper on prices (in select categories), improved delivery times and attempts to right size (that’s code for layoffs!) the organization. It has also jettisoned some questionable diversions like ‘Ping’ and grocery. There is an attempt to make Ekart an external facing organization which can handle the supply chain for other companies and even consumers.
The current strategy as articulated by the founders is to focus on improving customer experience (NPS), offering new financing methods (zero percent EMI), bringing in Flipkart Assured to counter Amazon Prime, spending $100 million to build a payments business, grow Ekart externally, focus on improving gross margin and become EBITDA profitable in the next 12-18 months.
As I will explain in the next section, all of the above make sense theoretically but are simply too diffused and Flipkart is being too naïve to counter the Amazon juggernaut.
Think JD.com, Not Amazon & Alibaba!
While the discourse in India is all about Amazon and Alibaba, the reality is that Flipkart most resembles JD.com, the #2 player in China. JD.com offers a contrast to Alibaba with a tightly controlled experience built on its own logistics and delivery capability. It focuses on electronics and in providing genuine products, a major issue in China. The company has Tencent Holdings as a strategic investor and has raised over $15 billion in capital but has never made money so far in its 18+ years of existence. GMV is forecast to be around $100 billion in 2016, about a fifth of Alibaba’s GMV and its market capitalization is approximately $38 billion, compared to Alibaba’s $238 billion. There are several lessons that can be drawn from JD.com which may be relevant to Flipkart.
First, let’s get real. There is no way that Flipkart can be profitable over the next few years. That objective is simply delusional and counter to the realities of a fast growing, hyper competitive ecommerce market.
Two, Flipkart will need more capital, oodles of it. Yes, it needs to become more capital efficient but raising capital has to be job #1 for the company. A pure financial investor is unlikely to bite (perhaps, barring a middle eastern sovereign fund) so the search has to be for a friendly, or not so friendly, strategic investor to lead the raise.
The market has already marked down its valuation so Flipkart might as well raise at whatever value it can. Capital is not merely a 2016/17 issue but given its scale and the burn that lies ahead, going too close to the end is not an option. It is also a very important signaling issue that the company is prepared to dig in for the long haul. Amazon may or may not care two hoots about it, but Alibaba certainly will. Its price of potentially buying Flipkart would have just gone up.
Flipkart needs to get back to the basics – selection, price, service, building
consumer loyalty and making it easy for vendors to do business. Anything that
doesn’t add to these directly must go.
Let me offer a few examples. There is no need to sink $100 million in the payments business. Flipkart is not a player in it at all and PayTM et al have run away with the mass market. Further, payment is not a major consumer pain point with cash on delivery (COD) and enough electronic options already available. The options will only get better with UPI (unified payments interface) and the roll out of services by payment banks. Creative alliances could be struck with other players to achieve the same objectives. The $100 million can be used to offer better prices and/or lower delivery charges which may be appreciated much more by consumers and vendors.
It is also questionable whether any money needs to be spent to make Ekart a consumer proposition. This too can be left for later and monies reinvested in the basics. Actually, the whole idea of Ekart being a source of cash is very questionable. Amazon is a logistics powerhouse globally and is going toe to toe with Flipkart in India. Amazon has embraced the complexities and is willing to build warehouses, deploy last mile delivery boys and pick up from suppliers. Not an obvious battle to win.
Consumer loyalty is perhaps a more controversial point where it can be argued that consumers care only about price and service has become hygiene. Flipkart with its high ASP (Average Selling Price) strategy of selling mobile phones and now consumer electronics (TVs etc.) is moving more and more towards one time purchases. It needs to get the discipline back and focus on categories with repeat purchases like books. High ASP products help with GMV but do nothing to build consumer loyalty as they tend to be price seeking categories.
Fourth, focus on the next 100 million shoppers. The next set of shoppers is likely to need more hand holding. Think languages (cleverly done, not just direct translation from English), videos, more content driven marketing, chat services and maybe even a call center to instantly resolve queries. Flipkart also needs to make the buying process easier by offering better filters and buying guides. A cursory comparison will show that the current filters are many times irrelevant and auto generated (hd, HD, “HD”!). Amazon is better on filters and its product display pages are far superior because of the deep content (reviews, Q&A). Flipkart needs to attack this weakness head on.
Fifth, target Amazon’s Achilles heel – it’s a U.S. company listed on NASDAQ. While it has shown an impressive ability to skirmish on Indian turf, it does have limitations on how fast and loose it can play with regulations. This is not an appropriate forum to talk more about this but suffice to say, Flipkart must figure out how to use its Indian-ness and hurt Amazon. No, it doesn’t sound fair but all is fair in love and war – and this is war!
Titanic or West Virginia?
I do not believe that all is lost for Flipkart. After all, in 2001, Amazon itself was on the ropes and the stock sank to less than $8 from a peak of over $105 just a year or so ago. There were concerns about potential bankruptcy and the valuation markdown was far more severe than anything Flipkart can even imagine. Yet, here we are now and Amazon is the world’s fourth most valuable company. Amazon went back to basics and one hopes so will Flipkart.
I get that Flipkart is full of smart people and they know all that I have written. They are also probably tired of getting unasked for advice from random strangers. But it is frustrating to see a true Indian internet champion seemingly lose its way. So Sachin and Binny – no hard feelings, take it all as one more well- meaning voice trying to help all of you!
Sarbvir Singh is an experienced venture capital investor in India and was the founding Managing Director of Capital18. The portfolio of companies that he has worked with include BookMyShow, Yatra and Webchutney among others.
The views expressed here are those of the author’s and do not necessarily represent the views of Bloomberg Quint or its editorial team.