BackCan Flipkart hold its ground against Amazon?
Amazon, which launched an India site in June, could make things difficult for Flipkart, say analysts
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Bangalore/New Delhi: Flipkart.com is often referred to as India’s Amazon, and as the world’s largest online retailer grows its fledgling presence in India the Bangalore start-up has an opportunity to prove to the world at large that it can take on the company that dominates US e-commerce and which, in many ways, inspired its own business model.
Like Amazon, which burnt money in its early years, Flipkart, too, is going through cash at a rapid rate. On Wednesday, it announced that it had raised $200 million (around ₹ 1,200 crore) from its existing investors (Tiger Global Management Llc, Accel Partners, Iconiq Capital, and South Africa’s Naspers Group), less than a year after the same investors put $150 million into the company. An analyst told Mint soon after that the money would last a year or two and that the company would need more.
Wednesday’s deal, which Flipkart CEO Sachin Bansal touted as proof that the company’s model and, indeed, e-commerce in India works, also sets it apart from rivals such as Myntra, Jabong, and Snapdeal, and clearly in the sights of the company behind the world’s biggest online store.
This year, Flipkart will sell products worth more than $500 million. It isn’t clear how much it will lose, but Bansal said on Wednesday that profitability wasn’t a priority for the next few years.
That’s the Amazon model talking—the company was founded in 1996 but reported its first annual profit only in 2003. By then, it had accumulated losses of $2.97 billion, although its sales had grown to $5.26 billion from $15.75 million in its first year.
There are other similarities as well.
Sachin and Binny Bansal (no relation), Flipkart’s founders used to work for Amazon’s back-office in India. Like Amazon founder Jeff Bezos, they are criticized for micromanaging the company.
The two companies are similar “in the spirit of their business models" said Ankur Bisen, vice-president, retail, at consulting firm Technopak Advisors Pvt. Ltd. “They believe in gaining customers and growing revenue rather than focussing on profit. For both, getting the customer experience, such as on-time delivery, is very important."
Still, despite its initial success Flipkart may find it tough to take on Amazon in India, said analysts. The market, they added, is too small for Flipkart to establish any dominance, especially when Amazon is growing its business in the country.
India’s online retail market is valued at just $600 million currently, though it has the potential to grow to as much as $76 billion by 2021, according to a report published by Technopak.
By 2015, Flipkart hopes to sell products worth $1 billion on its site. The company uses this metric, also called Gross Merchandise Value, rather than the straightforward sales or revenue. Amazon ended 2012 with over $61 billion in revenue.
In contrast, it will be easy for Amazon in India, said a consultant. “Amazon has such a strong brand. The size of the e-commerce market in India is so small that I don’t think Amazon or any other global player would be under pressure," said Harminder Sahni, managing director of consultancy Wazir Advisors.
“In the worst case scenario, if it can’t catch up with Flipkart, it will have to buy out Flipkart. And really, how difficult is that for Amazon? That is anyway what the private equity players (backing Flipkart) are probably hoping for," Sahni added.
Amazon launched an India site selling books and electronics in June.
Flipkart changed its business model in February, moving to a marketplace model, in which third parties use its platform to sell products to shoppers. The marketplace model allows e-commerce companies to save on storage and other inventory-related costs as the products are held by the merchants.
Companies following the marketplace model also get access to foreign direct investment (FDI), which is banned in direct online retail.
Flipkart already has 500 third-party sellers and will have “a few thousands by the end of the year and a few tens of thousands of sellers next year," Sachin Bansal said on Wednesday.
Globally, Amazon gets around 40% of its business from third-party sales, but it launched the platform only four years after its launch. At the time, it was spending hundreds of millions of dollars on warehouses and building its logistics and supply chain network.
The company, which went public in 1997, funded that expansion spree by raising debt, while Flipkart is almost entirely using equity.
It’s a big advantage to get money through equity rather than debt, said Anand Ramanathan, associate director at consulting firm KPMG.
“Given that Flipkart is able to raise such huge amounts of equity shows they have their investors’ confidence and that the investors believe that the opportunity in e-commerce is huge and they want Flipkart to go and get as many customers as possible in the next few years."
That still won’t help when it comes to taking on Amazon, according to Sahni.
“It’s flattering for Flipkart to be compared with Amazon, but there is no comparison really. On the technology front, on size, scale."
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