Fundraising done, Flipkart now under pressure to boost sales and reduce costs
Bengaluru: After securing $1.4 billion in fresh capital this week, Flipkart is under pressure to justify the funding by keeping Amazon India at bay and cutting costs.
Doing the two things—growing sales and reducing expenses—at the same time will be one of the toughest tasks Flipkart has faced in its 10-year history.
Currently, its monthly gross sales, on average, are Rs2,800-3,000 crore, while its monthly burn rate is between Rs250 crore and Rs300 crore, three people familiar with the matter said, on condition of anonymity. Gross sales don’t account for product returns. The numbers include sales at the two Flipkart-owned fashion retailers, Myntra and Jabong.
While Flipkart, which received $1.4 billion from Tencent, eBay and Microsoft this week, has seen a revival in sales growth since October, Amazon India hasn’t let up. Mint reported last week that Amazon’s gross sales jumped by 65-70% in the first quarter, and the company is running neck-and-neck with the local online retailer.
In an interview, Binny Bansal, Flipkart co-founder and group chief executive officer (CEO), said the firm is trying to shift sales away from mobile phones, increase its high-margin private-label business and cut logistics costs to try and move toward profitability.
In January, Kalyan Krishnamurthy, a representative of Flipkart’s largest investor Tiger Global Management, took over as Flipkart’s CEO. Under Krishnamurthy, Flipkart’s dependence on mobile phones, a low-margin category that accounts for more than half of all e-commerce in India, has increased. While that has driven a resurgence in the firm’s sales, it has also made it tougher to cut losses.
Bansal said Flipkart will diversify by expanding three other categories—large appliances, fashion and furniture—and launching one, groceries.
“What we’re seeing is that the other categories are growing faster than mobiles. So, over the next two to three years, we see mobiles being a much smaller part of the portfolio than what it is now (with fashion, large appliances, furniture and groceries growing faster). Mobiles has a penetration of 30%. The other categories have a penetration in (the low to mid single digits). So, there’s a lot of room to grow,” Bansal said.
In 2015, spending on advertising was a major drag on Flipkart’s bottom line. But over the past year, Flipkart has significantly cut ad costs. Now, its two biggest expenses are discounts and logistics.
“We’ll have razor-sharp focus on costs across the board, whether it’s on supply chain or marketing or pricing or on the marketplace operations. We want to drive that with a lot more rigour going forward. Lastly, we are paying attention to working capital and free cash flow. That’s a big area of focus and we are working to improve that as well,” Bansal said.
It’s far from clear whether Flipkart’s efforts will yield results. It faces a series of roadblocks.
Trying to cut logistics costs can hurt delivery speed and consistency, as Flipkart found out in 2015. And while it may want to reduce its dependence on mobile phones, users may not take to other categories.
The e-commerce market grew sluggishly in the first quarter after nearly stagnating last year. Amazon’s relentless expansion in India is the biggest worry. Unlike Flipkart, Amazon is advertising heavily and is now playing the leading role in expanding the market, which means new online shoppers will probably make their first purchase on Amazon rather than Flipkart. Its Prime service is becoming increasingly popular with customers, especially in the top cities.
“I think balancing both growth and cost-cutting at the same time will be tough for Flipkart—if Amazon goes all out in terms of spending and acquiring more wallet share, Flipkart can’t afford not to spend. Having said that, Flipkart would have learnt from the mistakes of 2014 and 2015 and will be much more rational in their approach. The key challenge for them after this fund-raise will be not concede further market share to Amazon,” said Satish Meena, senior forecast analyst at Forrester Research.