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Home Magazine March 2014 The Birth of a Retail Giant

The Birth of a Retail Giant

Not everyone knows that entrepreneurship happened by chance, not by choice to the two founders of India’s largest e-commerce firm Flipkart. Alumni of the prestigious Indian Institute of Delhi, Sachin Bansal and Binny Bansal, were working in the Chennai centre of the world’s largest online retail firm Amazon.com where they often used to indulge in debating and discussing new business ideas over a cup of coffee. This is where the Flipkart as an idea had its genesis. The casual exchange among friends turned into one of the biggest business ideas ever known to be born in India.

BY Sandeep Soni | COMMENTS ( 0 ) |

As Sachin says, “We were a group of friends who used to discuss business ideas. During these casual brainstorming sessions, Binny and I realised that we thought along similar lines and had similar ideas about what we wanted to achieve and whom we wanted to target. It made sense for both of us to team up.”

 

The Right Opportunity at the Right Time: Bansals’ Biggest Strength

Bansals wanted to do something in the consumer space, and initially, landed on the idea of launching a price comparison site. Their initial research showed that there were not good sites in this field, and eventually, they stumbled across the e-commerce market, making a beeline for Indian consumers. Thus, they started thinking of setting up an online shopping site. The duo realised that there was a large population in India that loved shopping but did not have time; hence they forayed into the online space with a simple thought of making shopping easy and convenient for people through Flipkart in 2007.

 

Within a short span of around seven years, Flipkart, which started as just another technology start-up, surprised everybody by rocking not only the retail industry, but also the entire e-commerce market.

 

 Sachin and Binny, co-founders of Flipkart, probably faced the similar scepticism that their former boss Jeff Bezos (Founder and CEO, Amazon.com) also grappled with when he commenced operations in India around 2005. This was largely related to low Internet penetration in the country and consumers’ hesitation to shift from their traditional pattern of shopping to online buying. However, against all odds, Flipkart managed to scale up their operations and caught the attention of investors and consumers.

 

Today, the company is valued at nearly Rs 10,000 crore. This is something that Bansals (currently in their early 30s) and people of their age group wouldn’t have imagined few years back. What they have built is arguably India’s best known online brand.

 

Bansals started with books, as the absence of tax, low price and reduced danger of transit damage made books an easy entry point for online shopping.

 

“A lot of international book publishers were keen to explore the Indian market. However, there was not enough interest from retailers in India. We solved this problem by setting up a ‘Just in Time’ process, where once a customer placed an order for an international book, we got it for them directly from the international location within seven to ten days,” says Sachin.

 

Once the website started getting consumer traction and confidence and the reordering went up to 60-70 per cent, Bansals decided to move on to other categories, such as electronics and mobiles, in 2010. In 2012, the company added product categories like apparel, sports and fitness, footwear, toys and accessories. Currently, it also has home and kitchen products, baby products and travel gears among other offerings.

 

Investing in Growth

Sachin and Binny bootstrapped their venture with Rs 4 lakh as the initial investment, half of which was spent on purchasing computers and furniture. The two heavily depended on word-of-mouth marketing (through their college friends, peers) and on social media, etc. to attract customers given the tight budget they were operating on.

 

Since then, the two have been constantly raising capital for company’s expansion and growth. Flipkart raised initial round of funding for an undisclosed amount by Accel Partners in 2009.

 

“As a growing business, we are always in talks with investors and looking for opportunities to connect with like-minded people,” claims Sachin. Flipkart’s other investors include MIH India, a part of South African media company Naspers group, Iconiq Capital Llc and Tiger Global, which invested $200 million last July. The funds were allocated to improve and bolster firm’s technology capabilities along with strengthening the supply chain.

 

Furthermore, in October last year, it raised $160 million from another set of investors including Dragoneer Investment Group Llc, Morgan Stanley Investment Management, Sofina SA and Vulcan Capital Management Inc. The funds this time were again directed towards enhancing technology and supply-chain capabilities along with having a better talent pool and eventually improving the end-user experience.

 

All in all, the company has received around $550-million investment since 2009. The company has built this war chest to be more aggressive in acquiring more customers and keep the competitors like Amazon.com at bay.

 

“The investment depends a lot on how fast the market grows. If we see bigger potential, investments will go up. For example, if 4G takes off, we may also have to ramp up our expansion plans,” says Sachin.

 

On the other hand, organised retail market in India is still at its nascent stage. Massive geography of India along with sky-rocketing real estate cost in urban and semi-urban areas, lack of efficient supply chain or distribution network, lack of better storage facilities and lack of effective logistics in hindsight offer a high growth opportunity for an online retail company and a great investment opportunity for investors. Flipkart is that company for investors.

 

The strategy for Flipkart is to grow and scale instead of focusing on profits and being profitable. “E-commerce is a business model that gets profitable at scale. Talking about e-retailers firm trading negative is probably pre-mature at this point of time. If we stop growing, we may turn profitable today itself. But that’s not our goal. What is important for us is to scale and profitability is something that will happen eventually,” says Binny.

 

This becomes clear by the fact that despite the losses that they have been incurring, Bansals have remained focus on their growth by acquiring maximum market share and revenue growth. In the year ended March last year, Flipkart reported a loss of Rs 281.7 crore. This was much higher than the loss of Rs 109.9 crore that it saw in the preceding year, given the fact it had spent a significant amount to boost revenues. However as per the documents filed by the company with the Registrar of Companies, its revenue swelled to around Rs 1,180 crore from Rs 204.8 crore in the preceding year.

 

The Opportunities to Expand

The growth of smartphones is rapidly changing the rules of the game as they are becoming preferred medium to shop. It foretells that in future, e-commerce will be taking a giant leap and Flipkart has clearly got its numbers right.

 

A report published by Crédit Lyonnais Securities Asia (CLSA) Asia-Pacific Markets in November last year puts it precisely in the Indian context. It says, “‘Key drivers’ of the e-commerce market in India will be people outside the metros, leapfrogging PC-based access to mobile Internet coupled with the limited geographical reach of brick-and-mortar retailers.” Hong Kong-based CLSA is the largest and most highly rated independent equity brokers and financial-services groups in Asia Pacific.

 

“In next three years, m-commerce will take a giant leap, and Flipkart will be an m-commerce-based marketplace,” says Sachin. Mobile users now make up for a fifth of Flipkart’s sales and three out of four mobile shoppers access the site only through handheld devices.

 

Bansals had made their existence felt on Android and iOS devices by launching apps on both platforms towards the end of last year. Both apps facilitate users to navigate through Flipkart’s different product categories – books and entertainment, fashion products, electronics and accessories, toys and baby care, beauty and personal care. The menu slides out from the right hand side of the device. The apps also allow users to filter what they are looking for through their ‘Sort and Filter’ features based on relevance, popularity, price and discounts, type, brand, etc. The apps also let users place orders through either cash on delivery, credit/ debit cards, EMIs and NetBanking.

 

On the other hand, last year Flipkart shifted to a hybrid model through Flipkart Marketplace. This indicates that the company has evolved as being in the marketplace means more scalability with the scope of securing a larger market share. At present, the company has around 1,000 retailers selling their products directly to buyers. This in turn has helped these retailers to understand how bigger retailers position themselves in terms of pricing and discounts and how to compete with them.

 

The Challenges That Were

Over the last few years, even as more investors got associated with Flipkart and its valuation sky rocketed, it was difficult for investors to exit. India’s regulatory environment in the e-commerce segment is also responsible for this. These factors led Bansals to sell off Flipkart’s front-end operations called Flipkart Logistics to WS Retail Services, owned by Rajiv Kuchhal earlier in 2013.

 

Later, the back-end operations of the company were acquired by Flipkart Holdings Singapore (the Singapore-based entity started in February last year by Bansals because of the Indian Government’s law that doesn’t allow FDI in e-commerce firms). This indicates that Flipkart was looking for an IPO to give its investors an exit. However, it couldn’t happen as Indian regulations require a company to be profitable before it get listed on stock exchanges. Furthermore, the Bansals required additional money to sustain their operations.

 

As the consequence, around 250 employees were laid off in May last year. The last resort for them would have been the IPO and should have happened given that it had shifted overseas.

 

The government turning down FDI in B2C retail left investors with two options – sell off the company at the best price or sell off the risky part of the business (logistics and delivery) and move the profitable part to another country (which happened to be Singapore) with more relaxed regulations. Bansals wisely chose the second option.

 

Leading the Market Share

According to a recent report by management consulting firm TechnoPak, online retailing in India can grow more than hundred folds in the coming nine years, hitting $76 billion by 2021. The drivers for this growth will be massively increasing Internet users that shall comprise 180 million broadband users by 2020. India’s Internet user base – growing around 40 per cent year on year – is the third highest in the world next only to China and the US. In this current scenario, Flipkart is right on the top.

 

“Today, we have already captured more than 35 per cent market share and shall continue to gain more,” says Binny.

 

“As per Alexa Internet rankings, we are the most visited website amongst all online shopping sites in the country, and rank at No. 10 among all websites in India,” says Sachin. Alexa Internet is a California-based subsidiary of Amazon.com providing commercial web traffic data.

 

“According to the Nielsen Book Scan Retail Panel data, Flipkart holds an average of 40-45 per cent in terms of value when it comes to the organised books market in India. We are the market leaders when it comes to consumer electronics as well,” adds Sachin.

 

Future of Indian E-commerce Market

The e-commerce growth in the past few years has been driven by an Internet savvy population. The influence of such developments on those who predominantly shop offline is also taking root, and this trend will continue in the future too.

 

In addition, the virtual mall culture has spread to Tier II and III markets owing to increase in disposable income of consumers in these markets coupled with the restricted choices available offline for these shoppers.

 

“The difference between the revenue earned by the urban and rural market is thinning rapidly. An immense opportunity is waiting to be tapped in these markets, and the trends one sees in online shopping will come from these cities in the future,” says Sachin.

 

“The current scenario in e-commerce is very different from 2000. Today 15 per cent of Indians are online. We have added 60 million Internet users last year and will continue with the mobile Internet penetration especially in Tier II and III cities. The number of Internet users will grow from 150 million to 500 million in the next four-five years. That’s a huge market,” says Binny.

 

The Roadmap Ahead

Apart from mobile commerce that is going to be a focus area for Flipkart in coming years, the company will simultaneously look at improving the overall browsing experience by enhancing its payment, browsing and search capabilities.

 

“While we continue to expand our product range, on-site personalisation and customised recommendations will also start gaining importance in our scheme of things. Our aim is to continuously improve the shopping experience for customers and provide sellers with a highly scalable platform to do business,” says Sachin.

 

Although Bansals plan to go global but that will not happen in the near future. “India is keeping us busy, and we are betting big on that,” adds Sachin.

 

He, however, doesn’t seem much gung-ho about the IPO plans though it is still on the cards. “An IPO is definitely a part of our future business plan and something we will consider down the line. However, we are well-funded at the moment and on our way to achieve our business goals over the next few years,” concludes Sachin.

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