How smartphone sales revived Flipkart’s fortunes
Bengaluru: The ‘Like’ feature introduced by social networking platform Facebook in 2009 transformed the company. For Apple, it was the launch of the iPhone in 2007. At Flipkart, India’s start-up darling, that moment came in February 2014 with the sale of Motorola’s Moto G phones.
Sometime in the second half of 2013, Sandeep Karwa, who headed Flipkart’s smartphone business, reached out to two smartphone brands Motorola and Xiaomi to explore talks of launching their products in India. A former college mate of Karwa’s was heading Motorola’s business in India and Karwa had heard from him that Motorola, which was trying to recapture its glory days as a mobile phone icon, was planning to re-enter the Indian market in early 2014.
After discussions that lasted more than six months, Motorola struck a deal to launch the Moto G phones exclusively on the online retailer. It was an experiment. At that time, e-commerce in India was not mainstream. No major smartphone brand or brand of any sort had tried selling online on an exclusive basis, much less through just one e-commerce firm. What helped convince Motorola was that Karwa and his colleagues had given the company a guarantee that Flipkart would sell as many as 125,000 units of Moto G phones in six months.
At midnight on 6 February, Flipkart launched the sale. Within five minutes, the company had sold 10,000 units. In the next 20 minutes, Flipkart’s site had crashed just as it sold another 15,000 units.
“My first call to Amitesh (Jha, Karwa’s boss), that there’s been an attack on the site. This cannot happen. Within 15 minutes there was someone in my team who had created a banner saying ‘Thank you for the response. We are out of stock.’ We were breaking so many rules. You can’t just put up a banner on the site. It has to go through so many approvals. (But) we had planned a pan-India advertising campaign for the next day,” Karwa said.
By the end of the day, Flipkart had sold 100,000 phones, nearly as many as it had promised to sell in six months.
The Moto G extravaganza helped Flipkart reach the historic landmark of generating annualized sales of $1 billion that February, achieving its target one year ahead of plan. Flipkart became the first e-commerce firm to hit the $1 billion mark in gross merchandise value (GMV, or value of goods sold on the site).
And thus began India’s e-commerce boom in earnest.
“We learnt then (with the Moto G sale) that e-commerce is on a hockey-stick curve,” said Jha, who was then senior director, mobiles and electronics, at Flipkart. “That is when we knew that e-commerce had arrived and scale would come by itself. And that is what happened for the next two years. So our ambition became really big. That was the biggest learning. All the other e-commerce also learned that. Till then we didn’t know the reach was there. That changed the fundamentals of how we worked. That also allowed us to take bets in other categories.”
In July, Flipkart’s site again crashed when it held a flash sale of Xiaomi phones. Xiaomi was then a little-known Chinese start-up that was starting to make a name for itself by coming up with low-priced smartphones packed with powerful hardware running Google Inc.’s Android software. Despite spending little on marketing, Flipkart sold out the Xiaomi phones in seconds.
Between the sale of the Moto G phones and the first Xiaomi sale in July 2014, give or take a few days, Flipkart had raised more than $1.2 billion, becoming one of the most valuable Internet start-ups in the world. Flipkart’s fundraising, which was inconceivable before the Moto G sale, in turn helped kick-start the start-up funding boom of 2014 and 2015 that would make India one of the most prominent and promising Internet markets in the world. Those two sale events also gave Flipkart confidence to launch its annual sales event, Big Billion Days. Inspired by shopping festivals such as the Black Friday in the US and Singles Day in China, Flipkart launched the one-day event in October 2014.
That day again Flipkart’s site crashed even as it generated $100 million in GMV in less than 10 hours. That was nearly a month’s worth of sales.
For the company and its founders Sachin Bansal and Binny Bansal, while 2014 had proven to be a successful year beyond their dreams, it also showed them that they had consistently underestimated the potential of e-commerce in India. There were tens and possibly hundreds of millions of Indians who were itching to get their hands on quality products denied to them by the failure of organized retail to expand in the country. Macroeconomic factors had never been so favourable.
One of the most important data points for the Internet bulls was that smartphone sales were exploding. In 2014, some 80 million smartphones were sold in India, up from 44 million in the previous year, according to International Data Corporation (IDC). People who had feature phones were shifting en masse to smartphones, lured by the value-for-money products offered by the likes of Motorola, Xiaomi and others. And after the success of Moto and Xiaomi, it was clear that e-commerce firms, and Flipkart, in particular, were poised to be the biggest beneficiaries of that expansion. Online market share in smartphones jumped from less than 10% to more than 15% in the last quarter of 2014—such a leap typically requires decades.
Flipkart chased and secured exclusive smartphone deals that would bring a slew of brands such as Lenovo, Honor, LeEco, Huawei and others to India. The company also helped local brands such as Micromax and Lava reach new audiences and offered an alternative channel for premium brands such as Samsung and Apple.
“The perception outside with some brands was that India doesn’t have roads. How do you deliver products in 48 hours. And we were like, this is 2014. What makes you think India doesn’t have roads? That’s a taster of how conversations were initially,” Karwa said.
Flipkart’s strategy of signing up exclusives had changed the smartphone market. Launching phones exclusively has now become almost the default choice for many brands. In 2015, Flipkart consolidated its lead in smartphones, which contributed more than 50% of the company’s sales in many months. The growing popularity of the online channel also helped define the pecking order among smartphones. Xiaomi, Motorola, Lenovo (which owned Motorola) and others that had wholly adopted the e-commerce channel would consistently feature in the top selling smartphone brands in the country. For new brands entering the country such as OnePlus, e-commerce became the quickest, cheapest and most convenient to reach tens of millions of customers.
There were risks for brands adopting the online channel. The smartphone business is among the trickiest and most volatile—Nokia and Blackberry are proof of that. E-commerce had a tendency to amplify the volatility of the smartphone business. The struggles of the Chinese brand LeEco, which collapsed quicker than it rose, showed that e-commerce could easily lure brands into overestimating demand. The success of two other Chinese brands, Oppo and Vivo, had also shown that while it may take longer to increase sales by opening stores, it helped build customer loyalty. Even Xiaomi, which had started off online, slowly started expanding offline.
But regardless of the pecking order, it was clear that the online channel for smartphones had become mainstream. In 2015, India’s smartphone market increased to 103 million units, up more than 28% from the previous year, according to IDC. In the last quarter of 2015, when online retailers host heavily advertized sale events, the online share of smartphone sales soared to more than 37%, according to IDC. That’s an outlandish number. Other product categories such as fashion, furniture and large appliances had an online penetration of less than 5%. That’s how important smartphones had become for e-commerce in India. Analysts say it accounts for roughly half of all online retail in the country.
While the smartphone market grew by more than 28% in 2015, the growth rate had been slower than near 100% of the previous year. Still most analysts expected the market to increase by 30-40% in 2016 in the belief that feature phone users would shift to low-cost smartphones.
At Flipkart, executives weren’t that sure. Much had changed at the company by the start of 2016. Its three big strategic initiatives of 2015 had failed: the shift to the marketplace model, the excessive focus on the app and replacing its old leadership with experienced professionals from companies such as Google. These moves that were inspired by the extraordinary success of 2014 backfired on Flipkart, hurting its sales and gifting arch-rival Amazon India the platform to turbocharge its India expansion.
In January 2016, Binny Bansal replaced Sachin Bansal as CEO. A string of senior leaders were pushed out in the following months. Its peak valuation of $15 billion was marked down by its own investors. Flipkart’s image took a hit.
By then, the company’s smartphones team had changed. Jha had moved to Ekart, the logistics arm of Flipkart, and Karwa took up a role in the company’s product team.
Binny Bansal made more changes in his first five months, putting emphasis first on cutting costs and getting back Flipkart’s customer service levels to their standards of old. The leadership changes, the valuation markdowns and the 2015 shift to the marketplace model damaged Flipkart’s image with brands which came to see it as an increasingly unstable business partner. That along with the priority of cutting costs led to a lack of focus on the smartphone business. Flipkart lost key brands such as Lenovo, Motorola and Xiaomi; all of them shifted to Amazon on an exclusive basis.
In June 2016, the Flipkart board brought back Kalyan Krishnamurthy to the firm primarily to revive sales growth and stop the market share losses to Amazon. Krishnamurthy, who was a senior executive at Flipkart’s largest shareholder Tiger Global Management, had worked at Flipkart for 18 months until he left in November 2014 to return to Tiger Global.
Krishnamurthy made changes swiftly. He fired some senior executives in Flipkart’s smartphones and other businesses and brought back Jha and Karwa to the sales team. He put another executive, Ayyappan R., in charge of the day-to-day running of the smartphone business. By then, Ajay Veer Yadav, the former chief operating officer at the offline smartphone retailer The Mobile Store, had joined Flipkart as head of the smartphones business.
Winning back the smartphone category was Krishnamurthy’s top priority. Given the size of the category, it was the only quick way to claim back market share from Amazon. And the only way to do that was to strike exclusive deals with brands which had left Flipkart for Amazon. Krishnamurthy, Yadav and Ayyappan spent much of June and July on the road, meeting and rebuilding relationships with smartphone brands.
“Kalyan’s coming back and the change of strategy had a strong impact on how the market perceived us. Once Kalyan came in, a lot of stability happened. He met all our strategic partners. Then, the Flipkart issue was out of the window. Thereafter, the category steps in,” Yadav said.
Still, after recent events, brands were sceptical. “Brands would ask us: ‘Are you in for the long-term? You lost focus six months ago. What’s the guarantee it won’t happen again? The other guy (Amazon) is going to outspend you. So how do you plan to take them on? There’s a lot of churn. You guys keep changing leaders.’ The first few weeks were about building confidence with the brands. So we brought that back,” Ayyappan said.
“The clincher was that the number we were able to promise that if they were expecting “X” volumes, we can deliver 1.5X. And when the launch happened we were able to deliver 3X. So, on the day of the launch (Moto) was expecting to sell 30,000-40,000 units. We had imported stock of about one week which was 100,000 units. By 8 o’clock at night on the launch day, we were already out of stock,” he said.
First, Xiaomi returned to Flipkart, followed by Moto. Quickly, others such as Lenovo followed. It even managed to secure exclusive online access to the iPhone for the Diwali sale.
Flipkart had also changed its smartphone strategy. The company bet that the smartphone market wasn’t going to grow by much in 2016. Customer shopping patterns were indicating as much. The number of new e-commerce users was stagnant, which meant that feature phone users had for some reason stopped shifting in droves to smartphones. Basically, smartphone sales would be driven by people replacing their old smartphones.
“Some estimates were saying that 145 million handsets would be sold in 2016. Our estimate was, nothing more than 110 million. So we were betting that the smartphone industry growth had slowed and the market became a replacement market. The primary outcome of this is that ASPs (average selling prices) would increase. We figured out these two things much ahead of competition and of the market,” Yadav said.
To adapt to the change in the market, Flipkart introduced what it calls the “affordability construct.” It expanded schemes such as product exchange and no-cost EMI. If people wanted to buy new smartphones they would want to sell their old ones. And if people wanted to upgrade their smartphones they would want credit options. Apart from that, Flipkart significantly expanded its brand assortment and the price range it offered. It also tweaked its supply chain to ensure that smartphone delivery was the top priority.
Cumulatively, this brought about the elusive turnaround in sales. In the Big Billion Days sale in October, Flipkart outsold Amazon and created the platform to secure its next round of funds.
Amazon, which had looked set to overtake Flipkart for a large part of the year, was kept at bay for the time being. The resurgence of the smartphone business at Flipkart made the turnaround possible. Smartphones now account for more than 60% of the company’s sales, two people familiar with the matter said.
Flipkart’s read on the market also proved to be spot on. In 2016, there were some 109 million smartphone sold, registering an increase of just 5.2% over the previous year, according to IDC. In fact, the sluggish smartphone sales in part caused a slowdown in growth in the larger e-commerce market last year. Flipkart again expects the smartphone market to grow slowly this year.
In January 2017, Krishnamurthy replaced Binny Bansal as Flipkart CEO. His broad strategy for smartphones is: more of the same. Get as many exclusive deals with large brands, introduce products in unexplored price ranges and add more options in the “affordability construct.” Flipkart may even launch a smartphone of its own under the Billion brand, Mint reported on 15 June.
Amazon, however, has claimed its share of exclusive deals with Lenovo and Xiaomi apart from being the exclusive partner for OnePlus, another important brand.
But Flipkart claims it gets the biggest-selling products from smartphone brands. The company claims it has an online market share of more than 65% in smartphones. Amazon disputes this claim.
In any case, increasingly, smartphone brands are alternating between Flipkart and Amazon while giving exclusive deals.
Many key brands believe they need to be on both Flipkart and Amazon to maximise sales.
“We expanded to other partners in 2015 because our principle was that we need to be where customers are,” said Raghu Reddy, head of online sales at Xiaomi. “Having said that, the relationship with Flipkart is as strong as it can be. We are one of the largest brands on Flipkart and Flipkart is one of the largest platforms for us. Because we want to be where the customers are and we believe that customers are there on both the platforms (Flipkart and Amazon), it’s about having a meaningful and equitable presence on the two platforms. Both are strong with considerable traffic numbers.”
Flipkart’s main objective in the smartphone business is to expand the online market and grab share from offline stores.
“What engages us is how do you take the online penetration of smartphones from early 30s to 40% on a regular basis. We have initiatives in the pipeline that will do this. And not just initiatives but it’s also the brands that are invested in doing this. India is now a big enough market that brands are designing products specifically for here,” Yadav said.