India-First-Global-Insights-Analysis -Sharing-PlatformIndia-First-Global-Insights-Analysis -Sharing-Platform

My thoughts on the Flipkart fund raising

, July 17, 2013, 2 Comments

I got 4-5 calls from journalists and reporters wanting my feedback on the Flipkart funding news yesterday. I am biased, and I like the folks in the company a lot.

That said the main questions I got were: (NB: these were actual verbatim questions from reporters).

1. Does this mean game over for other “ecommerce players”?

2. Does this news mean that the “keep inventory model” will work? Is the snapdeal model better? Which one will “win”?

3. Why does this business need so much money?

4. Will eCommerce ever be profitable? Will flipkart ever be profitable?

5. If Amazon decides to come to India, will Flipkart’s first mover advantage still remain?

Rather than answer the questions one by one, I think I will set some context first and address the questions as I see the macro picture emerge.

Indian retail market is a ~$500 Billion market. It is large. Most of this ($350 Billion) is grocery. Unorganized retail (Kirana stores, small shops, etc.) make up 92%-95% of this market.

Besides grocery, the largest number of stores are called “fancy stores” – selling everything from pencils and books to tupperware and brooms. Jewelry stores are next (in terms of revenue they might be larger than fancy stores).

Of the organized offline retailers (totaling about 1500) , fewer than 5 (changed to 5% based on IBG data) are turning profit. Everyone else loses money. Why? High real estate costs and high payroll costs, compared to unorganized retail.

When Amazon started in the US (circa 1994), they were going after a 90% organized retail market. Fewer than 5% of US retail companies were unprofitable.

Amazon was going after big box organized retail in America.
Organized retail in India is a small part of the puzzle.
Flipkart is going after the 90+%, which we know as unorganized retail.

3 major trends that drive retail in India, for the next 10 years will be increasing urbanization, worsening traffic and higher commercial and retail real estate rentals. The fourth (if it ever passes, will be FDI). I am not holding my breath for that one. The flipkart model will do well is my perspective, given their dense logistics coverage in urban areas and minimal rentals thanks to warehousing.

Amazon surprisingly will do well as well if and when they go direct in India. The market is very large. I dont think its game over for other eCommerce players, just like many years after Amazon, came Etsy, Zaapos and others. In India, though those markets are currently small and will grow over time, so in a few years or a decade, things will change again.

The inventory model that is flipkart’s strategy seems to be working for them. That’s the reason to raise $200 Million.

The no inventory model for snapdeal seems to be working for them as well. Snapdeal will try to help many of the unorganized retail players compete with the organized players and flipkart. I am not sure about whether the online players will actually get profitable over the next 5 years since the offline retailers have still not gotten there in 10+ years, but the online players have a better shot at becoming profitable.

About author
Mukund Mohan helps startups at the Microsoft Accelerator and is a seasoned entrepreneur. He founded and sold BuzzGain, a leader in Do It Yourself PR, to Meltwater in January 2010 and he also founded and sold 2 Silicon Valley startups in the Internet & Enterprise software markets. Mukund has held executive, management & technical roles previously and worked with Hewlett Packard (Mercury), Cisco Systems. ...more
  • Hari Rastogi

    Action must be taken by competition Commission of India or by some govt outfit against the online retailers who are using flaw in the law and playing a big GAMBLE to capture the entire market by selling below cost price for their initial years. When VC funding is not allowed in E-commerce these companies are registering offices in Singapore etc and routing the money for the same business. Is it not a mockery of our system ? when VC funding in retail is not allowed their is a daily news of $XX million funding to so and so e-commerce company. DUH! they are obviously not using funding just for their platform but to run business in losses to kill competitors and physical retailers.

    It’s like one sided competition by misusing the VC funding to sell below cost price and with huge operating losses by these handful of online retailers…

    -Hari Rastogi
    A common retailer
    A faculty Member of Many prestigious B school,
    A patriot

    • Ezilarsan Pkp

      you have a very valid point -selling at lower cost to beat the shit out of the competitions. you can shed more light about this , as your in the same business — and its healthy to read all the perspective of any challenge faced by us.