Flipkart's funding reveals appetite for India's retail sector, consumption story

In the last two weeks, India’s e-retail story just got bigger. Flipkart, the biggest player in the sector, bought out its rival Myntra for about $300 million and in two days it also raised $210 million in a fresh round of investment led by Russian billionaire Yuri Milner’s fund DST Global.

The Indian e-retail sector has been buzzing with activity over the last two-three years due to the increased internet connectivity and rising purchasing power of the middle class. Various new players have sprung up and investors have also shown their keenness for the nascent sector. For instance, Flipkart is estimated to have received an aggregate $780 million from various investors. (The company refused to verify the information.)

As serial entrepreneur and ex-founder of online tutoring company TutorVista, Krishnan Ganesh says Flipkart’s latest round of funding from DST Global demonstrates the appetite for India’s retail sector and consumption story in the coming decade.

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“The traditional organized retail is dysfunctional and broken with exorbitant retail rental costs, poor infrastructure in terms of roads and parking, and low margins. This makes it impossible to make money from organized retail as well as to give customers a great shopping experience and choice,” observes Ganesh.

He is an angel investor and promoter of India-based internet companies like online jeweller Bluestone.com, e-grocer BigBasket.com, and a travel packages and content company MustSeeIndia.com, among others.

“India is going to be the third biggest e-commerce market in the world and anyone who wants to build a large e-commerce company will need capital. Raising funds and having money in the bank gives us the flexibility to take optimal decisions as and when opportunities come up,” Sachin Bansal Co-Founder and CEO Flipkart said in an e-mail interaction with Firstbiz. This, he added, could include investing aggressively in supply-chain or making more acquisitions.

Bansal said the primary reasons for raising investments was to have a buffer of funds in the bank to meet demands of a capital-intensive industry like e-commerce.

Need for capital

Even though skeptics feel Flipkart may be surviving on funding alone, Ganesh says the large amount of capital infusion does not come as a surprise given that horizontal retail needs the money and execution capability to pull it off.

“The same phenomenon happened in China, Hong Kong and Brazil. People who were able to build and establish businesses early on and were able to execute well got disproportionate market share, mind share and great valuations. In India, the leaders are already emerging and are finding backers worldwide who want to own a piece of the India action. These investors will back winners or leaders and want to participate in large sectors. I am not surprised that there is a strong interest in companies like Flipkart, Snapdeal, Quickr, BigBasket et al,” he affirmed.

Organized retail, Ganesh added, would need 10 times the capital to reach the same revenue or serve the same number of customers. Reports around fresh funding suggest that the deal size is likely to touch $500 million. However, Bansal dismissed these talks as ‘speculation’.

There is no doubt Flipkart has caused quite a stir in the e-commerce sector and most developments have been rife with speculation- a popular one being if the e-retailer is gearing towards taking on global giant Amazon.

Ganesh feels otherwise. “No, it is not about Amazon but being one of the category leaders in a market of over 1.3 billion people, in a country where the basic infrastructure is broken and where people have started valuing time and convenience over cost,” he points out.

More M&As at Flipkart?
An acquisition-led strategy, Ganesh notes, is a move in the right direction and anticipates more mergers and acquisitions at Flipkart especially in domain-specific areas that need a different DNA and culture to build. This will happen once exponential growth starts flattening and all major categories have been covered.

Speaking on further growth plans on their radar, Bansal said hiring will be aggressive going forward. The current manpower stands at 10,000. “With our plans to scale up, our talent needs are going to be extensive. We are also actively looking at acquisitions across spaces - supply-chain, technology, and seller enablement,” he said.

Over and above capital, Bansal said working with a visionary like Milner gives them a distinct advantage coupled with the fact that DST is one of the best investors given their sharp focus on technology.

“They bring a global perspective into each of their Internet and technology investments. They also have a great network of founders and companies we are hoping to interact with. We feel that is going to give us access to a lot of global best practices going forward,” he shared.

Flipkart hit a run rate of $1 billion in Gross Merchandise Volume (GMV) one year before target. The e-retailer offers over 15 million products across over 70 categories. It has 18 million registered users, 3.5 million of daily visits, ships 5 million shipments per month, and has 3000 sellers on its platform.