In its quest for numero uno status in India’s etail war, Flipkart is transforming itself from within
In January 2016, Binny Bansal is named CEO heading all units.
Saikiran Krishnamurthy was at Mumbai airport on Monday after a warehouse inspection ahead of Flipkart’s flagship sales event when a security guard noticed his T-Shirt and asked if he worked at the company. “Travelling across the country before the sales event in a Flipkart T-Shirt, you feel like Amitabh Bachchan,” said Krishnamurthy, head of Flipkart’s logistics unit Ekart.
The former McKinsey consultant replied ‘yes,’ and asked the guard in Hindi if he had bought anything from Flipkart before and what he planned to buy this year. The guard replied he had bought a power-bank and a Bluetooth headset in the past, and for this year his eye was set on a mobile phone. “Do you have an SBI card? You can get an additional 10% discount then,” Krishnamurthy advised him. “Yes I do and I will definitely buy the mobile phone,” the guard replied.
Saikiran Krishnamurthy promptly informed the other Krishnamurthy at Flipkart—Kalyan, the head of the company’s commerce and advertisement platform— the he had potentially sold one of several million mobile phones India’s largest online marketplace plans to sell during its ‘Big Billion Days’ sales event scheduled for October 2-6.
Krishnamurthy’s pitch to the security guard falls right in the target zone ofBinny Bansal. The Flipkart chief executive’s primary obsession is to sell high-value products even to customers at the bottom of the pyramid by making these purchases easier on their pockets and implementing tough quality measures to win their trust. It’s his main strategy to revive sales growth.
The biggest problem for Flipkart, still the poster boy of Indian online retail, is not fundraising, management changes or the ever aggressive Amazon, but has to do with the more fundamental issue of sales growth.
Flipkart’s gross merchandise value, or GMV, a proxy for gross sales, has inched back to $4.5 billion-$5 billion in recent months but had been stagnant at $3.5 billion-$4 billion for most of the past yearand-half. The recent growth was driven by exclusive smartphone partnerships with Motorola, Reliance Jio, Apple, Lenovo and Xiaomi—some of which it lost earlier this year to Amazon. Growth in fashion sales from its Myntra unit and the recently acquired Jabong also helped.
Affordability has become Flipkart’s big bet to revive sales. It is doing this through initiatives such as low-interest monthly payments, stringent quality checks through Flipkart Assured, exclusive partnerships, exchange programme on smartphones, and sales of its own brands or products. Flipkart has also abandoned its focus on GMV and switched to customer loyalty as a measure of its progress.
Whether these bets will revive sales is to be seen. “If the pie gets bigger then market share will not matter,” said Kartik Hosanagar, professor at The Wharton School. “For Flipkart to excel, they will have to come up with something new. But history suggests that is super hard.”
A senior Flipkart executive conceded this was somewhat true. “We were just randomly burning money… we haven’t really innovated in the last 18 months,” this executive said, asking not to be identified.
Amazon India, the domestic arm of the world’s largest online retailer, has been closing in on Flipkart, the gap in gross sales between the two narrowing to 15-20%. Amazon CEO Jeff Bezos in June announced his decision to increase investments into the India unit to $5 billion from $2 billion. For Amazon, India has become a must-win market after losing China to Alibaba. Its aggressive spending, coupled with the slowing in India’s ecommerce market, has allowed Amazon to snatch some market share and customers from Flipkart and Snapdeal.
Performance during the festival sales will be critical for Flipkart to maintain its lead over Amazon and maintain its contested $15.2-billion valuation. Mutual fund shareholders have marked down Flipkart’s valuation to $9 billion, but the company still attracts some of the world’s biggest retailers.
Chinese ecommerce giant Alibaba held investment talks with Flipkart earlier this year and America’s Walmart is in discussions for an equity partnership.
Till last year, Flipkart’s market leadership was undisputed as the industry was growing. Its innovations such as the option for payment or cash on delivery, flash sales of smartphones, and heavy discounting financed with $3.2 billion of funding helped open up India’s online retail market between 2010 and 2014.
But some key moves in 2014-2015 misfired for Flipkart. One major mistake, according to some experts, was its decision to move to a marketplace model from its inventory-led model, emulating Alibaba. The other was the company’s plan to become a mobile-app only platform, with all discounts during the flagship sales event in 2015 moved to the app. Some high-profile hires such as that of former Google executive Punit Soni, who launched the now-discarded social shopping feature Ping, also didn’t work out.
Flipkart reversed these decisions this year after Binny took over as CEO from cofounder Sachin Bansal in January. But these mistakes gave Amazon India the opening it was looking for, allowing it to overtake Flipkart in desktop traffic in December. “Ping was a good-to-have but selection is a must-have,” said another senior Flipkart executive. Flipkart offers about 40 million products to select from, about half of Amazon India’s 80 million.
In his first six months at the job, Binny cut down the company’s cash burn rate by 40%, oversaw three management reshuffles, ramped up the advertisement unit’s revenue and monetized the company’s logistics infrastructure. He also bought PhonePe, a startup founded by former Flipkart executives, to build a payments platform.
But as Binny focused on fixing internal issues and setting up the basic building blocks, Amazon gained more market share. There were fears that while Flipkart focused on winning the battle of driving internal operational efficiencies, it was losing the war with Amazon.
That’s when, in June, Flipkart brought back Kalyan Krishnamurthy, who was a managing director at its largest shareholder Tiger Global, to lead its commerce and advertising business.
Krishnamurthy, who had worked at Flipkart between 2013 and 2014, has been key in bringing back aggression within the firm to fight Amazon. He is leading the charge for the ‘Big Billion Days’ event.
One of Krishnamurthy’s first moves was to ramp up the company’s digital marketing budget. He has been instrumental in Flipkart getting back its edge in smartphone sales, which account for at least half of the company’s online commerce sales.
“Kalyan is very result-oriented. When he sets targets, he expects managers to either promise meeting them 100%… Even an 80% probability doesn’t work with him,” a Flipkart employee said. “We call him ‘The Closer’ since he has directly led all top business tie-ups for Flipkart and brought us back even stronger.”
Flipkart has started making deeper cuts to reduce cash burn. In May, it deferred the joining dates of IIM graduates and in July began laying off around 700 employees. The company’s culture has significantly changed as it gets into a street-fight mode to take on Amazon. At a recent meeting, Binny Bansal drilled it down telling employees that Flipkart was not a place for the light-hearted anymore.
With its push on affordability, Flipkart is trying to align itself with the reality of the consumption economy in India, seen as very different from that of China. India’s Urban Middle, defined as those earning about $11,000 (Rs 7 lakh) a year, was estimated at about 27 million people, as compared to China’s 157 million, between 2002 and 2012, according to a Goldman Sachs report. “Most of the new generation of India’s youth will first fall into Urban Mass, a cohort that is 129 million people today, earning over $3,200 on average.
The expansion of Urban Mass, both in size and income level, will be the key driver of India’s consumption story in the coming 5-10 years,” Goldman Sachs said.
While Flipkart’s aim is to grow the market with affordability initiatives that can nullify any threat of it losing market share, its past innovations, both CoD and flash sales, have been adopted and executed well by rival Amazon India.
The first senior executive mentioned above said that if Flipkart was the one growing the market and its gross sales difference with Amazon was about 10%, the company wouldn’t be bothered by it. “But if they are growing the market and we are not then I will be worried.”
He added: “Overall, Amazon is spending 3-4 times of Flipkart. Even after spending this much, there is no market growth.”
Amazon India is not as worried about growing the market. “At this point of time, we are very focused on figuring out how to add selection, add sellers and deliver things fast and reliably at scale,” country manager Amit Agarwal said in an interview this month. “These three elements have a disproportionate impact on how customers will adopt than many other innovations, in my opinion.”
Going forward, Flipkart is looking to build its two other business—payments and logistics. Flipkart has started converting digital wallets users across its platforms to PhonePe, to which its transfers payments for returns.
PhonePe has been built on the new government-backed payments platform, Unified Payments Interface, and is chasing an aggressive target of 10-12 million users by the end of this year.
Digital payments, which is expected to reach $500 billion by 2020, according to a Google-BCG study, is seen as a bigger market than online retail, which is expected to reach $60-100 billion by 2020, according to various reports.
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“This is a long-term strategic bet for us, and we believe PhonePe could become as big as Flipkart one day,” Binny Bansal told ET in July. He has started spending more time with the unit after Kalyan Krishnamurthy took charge of the commerce business. As for Flipkart’s logistics unit, a potential investment from Wal-Mart could bring Ekart back in focus as the two companies look to leverage the US retailer’s global supply chain to take on Amazon India and potentially Alibaba when it begins operations in the country.
An investment by Wal-Mart, even for a minority stake, will also ease pressure on Flipkart to find exit options for its investors. “A primary investment in Flipkart will be followed by partial exits by some investors, which are likely to happen at a discount to the new valuation,” said an investor in Flipkart, indicating how a strategic investor such as Wal-Mart could build a meaningful minority stake.
As Flipkart enters its main sales season this year, some executives are saying the company has got its mojo back. Maintaining this will be critical, reckon experts, as the company looks to close a fresh financing round by early next year.
“If (Flipkart) becomes number two, it will be very difficult for them to raise money as they are still burning a lot of capital,” said Hosanagar. “As long as they are the market leader there is money to be raised in such a large market.”
For Flipkart, 2016 has been an eventful year. A timeline:
► Binny Bansal is named CEO heading all units and Sachin Bansal is elevated to Executive Chairman to focus on lobbying and fundraising
► Binny begins monetizing logistics unit Ekart’s excess capacity, starts pilots with Madura Garments, Shopclues, Paytm. Infuses $100 million in the unit
► Flipkart’s commerce platform head and Myntra founder Mukesh Bansal and chief business officer Ankit Nagori quit
► Flipkart holds talks with Alibaba for potential stake sale
► Flipkart’s valuation is marked down 27% by Morgan Stanley, pegging it to be worth $11 billion, down from $15.2 billion
► Acquires PhonePe for push into payments business using UPI, to invest $100 million in the business
► Begins working closely with top 100 sellers to improve customer experience
► Chief product officer Punit Soni quits
► Starts aggressive push to monetize advertisement revenue, launches brand stores and consumerfacing courier service under Ekart
► Binny Bansal says to abandon GMV to focus on net promoter score, a measure of customer loyalty as main metric
► Flipkart decision to defer the joining dates of IIM graduates to December raises a storm; company offers students Rs 1.5 lakh compensation
► Tiger Global executive Kalyan Krishnamurthy returns to Flipkart as category management head
► Flipkart starts talks with Wal-Mart for stake sale
► Starts laying off about 700 employees
► Flipkart re-launches desktop website with new design
► Launches F-Assured product quality check and fast shipments to win customers
► Sachin Bansal says in a townhall that he was replaced as CEO because of performance issues
► In Flipkart’s third major restructuring, Krishnamurthy becomes head of commerce and advertisement units
► Company crosses milestone of 100 million registered users
► Announces ‘Big Billion Days’ sale from October 2 to October 6; signs up Apple for sale of iPhone 7