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.
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.
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, manag ...
