Sachin Bansal and Binny Bansal
recently made it to Time magazine’s “100 most influential” list. The timing of this recognition could not have been more ironic, though.
Flipkart, the Indian e-commerce major founded in 2007 by the two friends, is going through what may be its roughest patch yet.
In the last few months, Flipkart has been in the
news for the wrong reasons: top-level exits, funding crunch, and
devaluation by investors.
The company has chosen to stay quiet about most of these issues. But
entrepreneurs and investors
have begun debating if the online retailer is still the ideal Indian
startup—or if it is fast becoming the perfect lesson in what not to do.
In an April 24 post on
Founding Fuel,
media group Network18’s founding CEO Haresh Chawla—now a partner at a
private equity firm—listed his reasons for considering Flipkart’s
strategies flawed. “Flipkart is in the middle of a storm of its own
making,” Chawla said. “The ignominy of squandering its first mover
advantage to Amazon will only heighten the crisis brewing inside.”
There is little doubt that Flipkart has been the
most successful Indian technology startup on several parameters,
including fund-raising, valuation, and employment generation. However,
it’s hard to look away from its troubles.
From bumper to bumpy
For Flipkart, 2014 was historic. It raised a whopping
$1.9 billion in three tranches, including a $1-billion Series G round in July—the
world’s largest e-commerce
deal that year. The investor list—Tiger Global, T Rowe Price, DST
Global, and GIC, among others—could shame many Silicon Valley startups.
In May 2014, Flipkart acquired online fashion retailer Myntra for
$300 million, marking the biggest consolidation in Indian e-commerce history. At the time, Flipkart was valued at
$2 billion. By December that year, Flipkart’s valuation had soared
to $11 billion.
Flush with funds, it sought
to double
its gross merchandise value (GMV)—total value of goods sold through a
marketplace—from $4 billion in February 2015 to $8 billion by December
2015. In September that year, Flipkart raised its
target for March 2016 to an ambitious $10 billion.
But none of that happened, perhaps because the targets were
not grounded in reality.
By February 2016, Flipkart’s GMV was still around $5 billion, according to a
report in the Mint newspaper. Analysts’ estimates match that figure.
2016 so far…
Several things have not gone Flipkart’s way since the beginning of this year.
Instability in top management: Churn seems to be the theme for 2016. On Jan. 11, the company announced its decision to appoint Binny Bansal the
new CEO,
replacing Sachin Bansal, who is now the executive chairman. Sachin had
been the CEO since Flipkart’s inception while Binny served as the chief
operating officer.
A month later, Flipkart announced the exit of two
of its top executives—Mukesh Bansal, head of the commerce platform and
Myntra co-founder, and chief business officer Ankit Nagori. Widely
considered Flipkart’s
CEO-in-waiting, Mukesh’s exit surprised many.
Flipkart’s star hire from the Silicon Valley was
the next in line. A former top Google executive, Punit Soni joined
Flipkart in March 2015. His appointment was much celebrated in the
Indian startup community, and Mukesh Bansal even called it “the next
stage of Flipkart.”
Earlier this month, Flipkart confirmed that Soni
had quit. Although there has been speculation over why Soni decided to
leave within a year of coming on board, Anindya Ghose, director of New
York University’s Center for Business Analytics, reckons it could be due
to a cultural mismatch.
Often the “top talent who come from the Valley
find it difficult to adjust to the culture in India, where things can be
less structured and more chaotic,” Ghose said.
Devaluation and possibility of down round: Flipkart has been devalued twice in 2016. In March, investor
Morgan Stanley trimmed Flipkart’s valuation by 27% to $11 billion. Earlier this month, another investor,
T Rowe Price, cut the value
of its holding in Flipkart by 15%. This means if Flipkart has to raise
funds anytime soon, it may be forced to go for a down round, where
investors purchase stocks at a valuation lower than during the earlier
round.
Besides, several
media reports
have suggested that the company is desperately trying to raise funds
but can’t find buyers at its preferred valuation. Discussions with over
15 investors have been unsuccessful,
the Mint reported.
Government regulations: In March, the Indian government inadvertently added to Flipkart’s pain through its
new e-commerce policy.
Now, online marketplaces—technology companies that act as facilitators between buyers and sellers—are
not permitted
to have more than 25% of their sales coming from one vendor. The
largest seller on Flipkart is WS Retail, a Flipkart subsidiary. While
the company does not disclose WS Retail’s share in sales, analysts told
Quartz it would easily be above the new 25% threshold.
The government also said that e-commerce
marketplaces will not be allowed to influence the selling price of goods
and services listed on their platforms. This potentially means
companies like Flipkart would be punished for offering heavy discounts—a
major driver of e-commerce’s massive growth in India.
No breakeven in sight yet:
Flipkart is nine years old but has not publicly shared any roadmap to
reaching break-even. Even though it is the largest e-commerce player by
GMV—a statistic that is also not shared by Flipkart but reported in the
media through sources—some believe that it may not be the best of
parameters.
“It’s never a good idea to rely on any one metric
as a golden metric,” said Kartik Hosanagar, a professor technology and
digital business at the University of Pennsylvania’s Wharton School. “To
gauge the health of a company, one needs to slice and dice the data in
multiple ways to get a complete picture. For example, it is important to
ask what is the customer lifetime value relative to acquisition costs.
It is important to ask about customer retention and frequency of
purchase.”
Moreover, Flipkart has been heavily dependent on
discounts so far. While that was a justified strategy in the initial
years, it may not be sustainable over a longer period.
Given India’s price-sensitive buyers, there are
high chances of online retailers losing customers once discounts are
discontinued. “If they do not offer deep discounts, Indian consumers
will switch back to offline retailers, which seem to be always on sale,”
Ghose of New York University said. “I do not think this cultural
behavior of the average Indian consumer will change even with a
substantial increase in the average disposable income in India.”
Catching up
The biggest threat to Flipkart comes from
Seattle. American e-commerce major Amazon launched its India website in
June 2013, more than five years after Flipkart’s inception. In less than
three years, Jeff Bezos’s firm has become Flipkart’s primary
competitor.
Amazon does not break down most of its metrics by
geography. However, the top three e-commerce players in India share the
number of items listed on their platforms. By that measure, Amazon has
nearly caught up:
Several independent data analytics firms have
said that Flipkart is ahead by market share. For instance, in December
2015, Flipkart’s app had a 47% marketshare among e-commerce apps in
India, according to
data mining firm SimilarWeb;
Amazon had 15.86% in December 2015, followed by Snapdeal at 13.84%. In
February this year, Flipkart became the first Indian mobile app to cross
50 million installs on Android Play Store, a company press release
said.
However, some data trends suggest Flipkart might be losing out. In recent months, the number of monthly active users on Flipkart has been “significantly declining,” according to New York-based data analytics firm 7Parks Research.
Over the last two years, Flipkart has toyed with
the idea of focussing solely on mobilephones. In fact, in May 2014,
Myntra shut its website for more than a year and was available only
through its mobile app. Flipkart also discontinued access to its website
from smartphones for a few months in 2015. The
move backfired.
During the time when Flipkart was planning to
pursue a mobile-only strategy, Amazon’s active user-base roughly
doubled, according to Byrne Hobart, lead internet analyst at 7Park Data.
“Although Flipkart still maintains a lead (21% of mobile users in India
use its app at least once a week, compared to 13% for Amazon), their
lead is rapidly shrinking,” Hobart added.
Flipkart and Amazon are also neck-to-neck in terms of the average minutes spent by users on their apps each week.
As Quartz wrote earlier, Flipkart isn’t the only homegrown e-commerce player in the
middle of a crisis. Snapdeal has also been lurching from one problem to another—inability to meet ambitious targets to employee protests.
But
these problems cannot be swept under the rug anymore because finally,
after years of pouring in money, investors have begun asking tough
questions of e-commerce companies.
Industry leader Flipkart needs to rethink its strategy if it wants to go down in history as the star of India’s online startups.
