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$200 million for Flipkart, a test for private equity

Will the private equity players who are now driving the company have the patience to see through the game plan?
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First Published: Thu, Jul 11 2013. 12 12 PM IST
The last few years have seen a rush of new entrants with hundreds players of players dotting the small though growing business of online buying in India.
The last few years have seen a rush of new entrants with hundreds players of players dotting the small though growing business of online buying in India.
Should we see the $200 million fund infusion that e-commerce start-up Flipkart has just got from its existing investors—private equity firms Tiger Global Management LLC, Accel Partners and Iconiq Capital, and MIH—as an endorsement of the business in India or as a last roll of the dice? The last few years have seen a rush of new entrants with hundreds players of players dotting the small though growing business of online buying in India. As rapidly as they came, they disappeared leaving behind tales of unfulfilled orders, poor delivery standards, defective products and of course massive losses.
Flipkart has managed to buck that trend despite setbacks. With its gross merchandise value at half a billion dollar, it has the momentum though not the profits. Revenue last year topped $100 million, not an inconsiderable achievement for a five-year-old company. The problem is the business itself: requiring an endless stream of investments, it is a test of a company’s ability to stay the course while continuously reinvesting. Simultaneously, it requires a cost structure flexible enough to run on razor-thin margins. In other words, you need to be an Amazon which last year invested over $3.5 billion back into its business.
The end-game for e-commerce players whether Flipkart or Amazon is to have lots of warehouses which allow them to offer same-day shipping on any product and compete with brick-and-mortar shops. It is a hugely expensive proposition and will need much more than the $200 million the Bansals have raised in this latest round. Amazon, of course, has deep pockets though how much of that depth will be available for expansion in India at a time when there has been pressure from analysts and investors in the US to start showing some meaningful returns to shareholders, remains to be seen.
Flipkart is just about beginning its journey. Its attempt to extend its reach to music through Flyte, a paid music download service, failed and it withdrew the service less than a year after starting it in February 2012. What’s more, for long touted as India’s answer to Amazon, Flipkart faces its moment of truth now that Amazon India is here. While still in its nascent phase, it comes with the backing of a parent which is doing all the right things at home.
Amazon recently entered into the highest streaming content contract ever, purchasing the rights to stream over 4,000 episodes of Viacom TV shows to go with the streaming rights to films from a huge array of producers that it has. It is also looking to expand its AmazonFresh same-day grocery delivery service. Of course, in India the e-commerce giant is still limited to books, movies and electronic products, but it will grow alright since globalization is a part of the company’s growth strategy. Already it operates in 10 countries worldwide. By contrast, brick and mortar giant Wal-Mart operates only in 15 countries after over 50 years in the business.
Nor is Amazon the only challenger for Flipkart. Advances in consumer choices are so rapid in this business that what’s a differentiator today is the base tomorrow. Already, 45% of Groupon’s North America transactions come from mobiles. With the rapid growth of smart phones in India, how mobile penetrated a retailer is, might well be the success mantra tomorrow. Experts say in the future successful retailers will be those that can marry social media, social commerce and e-commerce. Flipkart is still a long way off in addressing these trends and will need many more fund infusions for that. It is just about making its first tentative moves towards the marketplace model—where third party retailers line up their wares—which seems to be the preferred one in India. That of course, will allow the company to hedge its risk somewhat besides passing on a part of the costs to others.
But the key question is will the private equity players who are now driving the company have the kind of patience needed to see through the overall game plan? With pathetic long term returns and tolerance levels which would put a retail investor to shame, private equity in India has been mostly trigger happy. That constitutes the biggest threat to the fledgling business of online shopping in India.
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First Published: Thu, Jul 11 2013. 12 12 PM IST
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