My thoughts on the Flipkart fund raising

I got 4-5 calls from journalists and reporters wanting my feedback on the Flipkart funding news yesterday. I am biased, and I like the folks in the company a lot.

That said the main questions I got were: (NB: these were actual verbatim questions from reporters).

1. Does this mean game over for other “ecommerce players”?

2. Does this news mean that the “keep inventory model” will work? Is the snapdeal model better? Which one will “win”?

3. Why does this business need so much money?

4. Will eCommerce ever be profitable? Will flipkart ever be profitable?

5. If Amazon decides to come to India, will Flipkart’s first mover advantage still remain?

Rather than answer the questions one by one, I think I will set some context first and address the questions as I see the macro picture emerge.

Indian retail market is a ~$500 Billion market. It is large. Most of this ($350 Billion) is grocery. Unorganized retail (Kirana stores, small shops, etc.) make up 92%-95% of this market.

Besides grocery, the largest number of stores are called “fancy stores” – selling everything from pencils and books to tupperware and brooms. Jewelry stores are next (in terms of revenue they might be larger than fancy stores).

Of the organized offline retailers (totaling about 1500) , fewer than 5 (changed to 5% based on IBG data) are turning profit. Everyone else loses money. Why? High real estate costs and high payroll costs, compared to unorganized retail.

When Amazon started in the US (circa 1994), they were going after a 90% organized retail market. Fewer than 5% of US retail companies were unprofitable.

Amazon was going after big box organized retail in America.

Organized retail in India is a small part of the puzzle.

Flipkart is going after the 90+%, which we know as unorganized retail.

3 major trends that drive retail in India, for the next 10 years will be increasing urbanization, worsening traffic and higher commercial and retail real estate rentals. The fourth (if it ever passes, will be FDI). I am not holding my breath for that one.

The flipkart model will do well is my perspective, given their dense logistics coverage in urban areas and minimal rentals thanks to warehousing.

Amazon surprisingly will do well as well if and when they go direct in India. The market is very large.

I dont think its game over for other eCommerce players, just like many years after Amazon, came Etsy, Zaapos and others. In India, though those markets are currently small and will grow over time, so in a few years or a decade, things will change again.

The inventory model that is flipkart’s strategy seems to be working for them. That’s the reason to raise $200 Million.

The no inventory model for snapdeal seems to be working for them as well. Snapdeal will try to help many of the unorganized retail players compete with the organized players and flipkart.

I am not sure about whether the online players will actually get profitable over the next 5 years since the offline retailers have still not gotten there in 10+ years, but the online players have a better shot at becoming profitable.

23 thoughts on “My thoughts on the Flipkart fund raising”

  1. I don’t agree with point, fewer that 5 retailers out of 1500 among are turning profits. On top of my head, Myntra, Yepme, Lenskart, Craftsvilla are already profitable. I don’t have numbers but atleast 2% of start-ups will be profitable because not everyone are funded so that they could burn money in the name of customer acquisition

    1. Khaleel, please read carefully. Of the “organized offline retailers, fewer than 5 are turning profit. Not online. I think I can make it 5% and still be correct, but its a very *small* number.

  2. Good post Mukund : ). Really like Flipkart as well, but always fear them being blown out of the water by Amazon especially if Amazon decides to play the hard-long squeeze game. Interesting to see how that one pans out

  3. Good write up. My thoughts are even simpler. Flipkart’s journey, quintessentially, has come to an end. VCs who once funded millions of $$$$ into Flipkart hoping to hit a jackpot and make billions overnight, practically have run out of ideas. What is left right now is – either a hostile take over and sell off (which in this current market scenario in India ain’t happening), which means, VCs have only 1 option left – a further pump-in of cash and then exit in a few months with an over-valued IPO. Like MakeMyTrip, and all others before, this is my prediction; will get listed at X20 or X30 time “oversubscription” and then slide down to 1/10 or 1/20th of its valuation in 6 months. Owners & VCs will exit with millions of $$$$, common shareholders are the ones who will take the hit. In India, this is easy formula! 🙂

  4. Not sure about organized retail not being profitable. A few are listed – Future Retail (big Bazaar/Central stores), Shopper’s Stop, Trent – all of these are profitable (even after tax). Reliance Retail is profitable at operational level, at a 10,000 cr. turnover level. Spencer’s is supposedly on line to get profitable in 2013. The vertical retailers like Titan have been profitable for a while.

    Sure there are horror stories like Subhiksha, Lilliput, Vishal Retail or a tough play like Provogue. But large format retail has been quite profitable, even with debt on the books. An equity loaded player like Flipkart shouldn’t find it too difficult to get to profits and list in the Indian markets, one hopes.

  5. India is still research online buy offline model.The evolution is going to take some more time.Now it depends on smartness of store to convert the offline customer to online one…for me storing inventory or not is tactic for enablement/cost(and both may be right) and should not be the main strategy.

      1. I agree with Mukund, I know so many people who check stuff offline and buy it online for better pricing. I know some people buying groceries from, they sell stuff less than MRP at times. Makes more sense to spend online. Infact, I do the same 🙂

  6. It’s big cultural shift. The model which worked overseas may not work in exact way in India..(Similar to one where Shampoo and other thing sell for 1 Rs in India while in overseas we can’t think of) In India online mkt will also go through evolution. Wherever product is commodized and there is no feel -taste aspects, online mkt is picking up fast. Also one of important factor which will play role is GDP -Per capita income which was main difference between developed countries and India. It’s going to be interesting journey in eCommerce areas.

  7. Good summary. But, didnt Amazon just launch already, and is already in the market. is selling books and electronics today, and with near term plans of apparel (it is rumored).

    1. Ravi, amazon is doing the non inventory, non capital model (mostly like snap deal) model. They are building warehouses and infrastructure for India it is presumed.

  8. Any reason why they could raise funds outside their existing investors? Does the valuation of 1.5 Billion dollars by existing investors actually mean anything? I

    1. Amit, I think the $1.5 Billion is the enterprise value they believe they are worth, and the internal investors probably agree. Regarding why they got no outside investors, I think there may be several reasons including lack of investor interest, macro-economic conditions in India, Internet growth, etc. Any number of speculative reasons.

  9. I agree mostly! There is still some scope within flipkart to reduce cost and overheads before it spirals and goes out of control. A better technology back end will help them in many ways as well.

  10. But hasn’s Flipkart too moved to a marketplace place model instead of the inventory model? At least thats what mainstream financial papers ( ET, Mint ) have been reporting.

  11. Mukund,
    Not sure if you caught the bulletin about Flipkart changing over (dare I say “pivoting”?) to a maketplace model earlier this year – you might want to revisit some of your points.

  12. The US E-commerce model operates on 85% payments made through credit cards which means a sure as well as shorter payment cycle and money rotation but in India it is the reverse whereby closer to 85% orders are cash on delivery which although has made the E-Comm model rolling, has been eroding the bottomlines of these big players (order cancellation, non acceptance of goods) also where big money is getting stuck into receivables for quite a prolonged duration of time. It took Amazon close to 10 years to turn profitable on US based model and if we compare the multiples of 15% credit card payment in India to 85% in US (x5.67), one can imagine the time period it will take to earn profits and with the kind of margins these companies are operating on for selling branded products at such deep discounts, the profit model seems questioned and tapping the market/investors time and again just to meet the working capital requirements is somewhat concerning even for the promoters.

  13. Action must be taken by competition Commission of India or by some govt outfit against the online retailers who are using flaw in the law and playing a big GAMBLE to capture the entire market by selling below cost price for their initial years. When VC funding is not allowed in E-commerce these companies are registering offices in Singapore etc and routing the money for the same business. Is it not a mockery of our system ? when VC funding in retail is not allowed their is a daily news of $XX million funding to so and so e-commerce company. DUH! they are obviously not using funding just for their platform but to run business in losses to kill competitors and physical retailers.

    It’s like one sided competition by misusing the VC funding to sell below cost price and with huge operating losses by these handful of online retailers…

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