 "$7 bn question: Flipkart burns money every month. How will it take on Amazon?")
Funding and Flipkart have become almost synonymous. The e-commerce giant made massive headlines yet again when it raised $1 billion from investors making it the largest possible investment in the history of Indian e-commerce to date.
Co-led by existing investors Tiger Global Management and Naspers, Singapore’s sovereign wealth fund, GIC, Accel Partners, DST Global, ICONIQ Capital, Morgan Stanley Investment Management and Sofina also participated in this latest financing round.
While it is great news for the Indian e-commerce sector at large announcing its arrival on the world stage, this round of funding makes significant waves going beyond the billion dollar figure it has raked in. “It puts huge responsibility on Flipkart,” says Hemchandra Javeri, Co-Founder, Forum Synergies India PE Fund Managers and Leader, TiE Retail Special Interest Group (SIG).
While on the one hand, periodic investor confidence interest has skyrocketed Flipkart’s valuation to the range of $5-$7 billion according to media reports, the flipside of continuous investment with regard to the financial health of the company has raised eyebrows in the ecosystem.
Javeri points out, “The business model of Flipkart is fraught with risks, as it is driven by massive investments in the supply chain and even heavier spends on customer acquisition, marketing and discounting. Not only do they have huge accumulated losses, they continue to burn money every month. The strategy seems to be to make Flipkart the ’last man standing’ in Indian e-commerce.”
While Javeri does believe Flipkart can pull it off, he strongly feels the founders must focus on ensuring consumer loyalty and building a financial model that reaches operating viability within the next two-three years. “The Indian consumer is value conscious and may pull away from Flipkart if they reduce discounts/promos, which increases the risk,” he told Firstbiz in an email interview.
Amazon Effect
Beyond the balance sheet, Flipkart has a threat of rival Amazon looming large and the seriousness is obvious to all and sundry. “Amazon’s entry in India last year increased competitive intensity in the Indian e-tailing space. The global leader has invested in steadily adding on categories, increasing its vendor base and building back-end capabilities like logistics and warehousing. It has stepped up its pace through mass media campaigns and faster delivery services, thereby establishing itself as a serious contender in the Indian market and intensifying competition,” notes Pragya Singh, Associate Vice-President, Retail at Technopak Advisors, a market research firm.
“The business models of the two companies are quite similar. They will fight to obtain and retain consumers. The good news is that the Indian consumer will benefit from heightened competition,” says Javeri, adding that they need to deploy capital to build supply chain and reduce supply costs, build consumer loyalty and reduce cost of customer acquisition and discounts. “Lastly, they must enhance consumer experience from log in to payment.”
For Singh, Flipkart’s recent acquisition of Myntra has helped reinforce its leadership position in the market which it will look to defend going forward. The new funds, she said, can enable Flipkart to take a long-term strategic approach, continue to invest in all aspects of back-end and front-end and scale up the business rapidly. “The company has stated that this would help them step up their investments for mobile and technology which are important focus areas given mobiles will drive majority of sales going forward,” she added.