Bengaluru: After bringing about consistently strong sales growth since October, India’s largest online retailer Flipkart is pushing hard to cut losses as it seeks to prove it can build a profitable business.
Flipkart has set a target of breaking even at the gross profit (GP) level by the end of the financial year by reducing discounts, logistics and warehousing costs, three people familiar with the matter said.
Gross profit is a measure of total sales minus the cost of goods sold. Some internet companies account for discount-related spending at the gross profit level.
Tencent Holdings Ltd and eBay Inc. had demanded that the company show a so-called path to profitability when they, along with Microsoft Corp., agreed to put $1.4 billion into the company in April, the people said on condition of anonymity.
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The three people said it is unlikely that Flipkart will achieve its target given that it cannot afford to lose its No.1 position to Amazon India and that it generates a majority of its sales from smartphones, a money-losing category for online retailers.
The company also plans to introduce groceries and re-launch furniture within the next month—moves that will again lead to an increase in spending, the people said.
“There’s a lot of pressure to get to GP-positive but at the same time it cannot be that growth suffers. So it (the GP positive goal) may not be achieved this year," one of the three people said.
Many analysts have expressed doubts about the business models of consumer internet start-ups and of Flipkart, in particular. If Flipkart is able to move toward profitability and keep its No.1 position at the same time, it will greatly boost investor confidence in India’s internet business.
Flipkart is up against the odds in doing so. Flipkart has a monthly burn rate of $60-65 million, the people cited above said.
To slash the burn rate, the company will have to significantly reduce logistics costs and expand its nascent private label business. It has already pulled on most other levers to cut expenses—slashing ad spending, convincing many brands to fund some of the discounts on its platform, firing or easing out most of its senior leaders, and reducing hiring.
That leaves logistics costs. Flipkart is introducing more automation at its warehouses and trying to figure out how to reduce the so-called last-mile delivery expenses, the people cited above said.
“Very few e-commerce companies have managed to successfully build proper supply chains and cost-effective logistics. It’s a tough space to be in. I doubt if any of the top e-commerce companies can crack logistics," said Harminder Sahni, founder and managing director at Wazir Advisors.