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Flipkart Looking at Alibaba as a Role Model

Posted on Friday, Sep 12th 2014

Nomura’s India Internet Research Report released last month projects the Indian e-commerce market to grow from $10 billion to $43 billion in the next five years. Other researchers estimate the Indian e-commerce market to grow to $76 billion by the year 2020. Within the market, Accel Partners estimates that revenues from marketplace revenues or product sales will grow from $2 billion in 2013 to $8.5 billion in 2016. The rapidly growing market is attracting a lot of interest with multi-billion dollar investments being made in the country. Recently, India’s e-tail giant, Flipkart received funding of $1 billion and Amazon also announced plans to invest $2 billion to capture a bigger share in the Indian market.

Flipkart’s Financials
Bangalore-based Flipkart is already seeing strong results due to this expansion. With a member base of more than 22 million registered users, 4 million daily visits, 5 million monthly shipments, and an annual Gross Merchandise Value (GMV) of transactions at more than $1 billion, Flipkart has definitely figured out the Indian market. Launched in 2007, Flipkart is forging way ahead of even their initial targets. The company had planned to cross the $1 billion GMV milestone in 2015, instead of this February. But there is still ample room for growth as Flipkart’s $1 billion translates to a mere 5% of India’s retail share.

Analysts estimate that Flipkart is recording growth rates of more than 60% each year. Mobile transactions too have been on the rise with nearly 50% of their transactions happening on mobile devices. But all of that is yet to turn into profits. As of last year, the company was still reporting losses and had ended the previous year with a loss of Rs 281.70 crores (~$46.3 million).

Flipkart continues to attract investors aggressively. They have received $1.8 billion in funding so far from investors including Digital Sky Technologies, Sofina, Singapore GIC, Morgan Stanley Expansion Capital, Accel Partners, DST Global, Iconiq Capital, Naspers, Tiger Global Management, Dragoneer Investment Group, and Vulcan Capital. Their latest and biggest round of funding was held in July this year when they raised $1 billion in a round led by Singapore GIC and Morgan Stanley Bank at a valuation of $7 billion. That is a significant increase over the $1.6 billion that they were valued at earlier this year.

The market may be waiting for an IPO, but founder Sachin Bansal is very clear that they don’t want an IPO right now and would evaluate the option in the next two to five years. For now, the company is focused on becoming a $100 billion company a la Alibaba.

Flipkart’s Growth Plans
They are looking to use the newly acquired funds to expand their product line-up and make acquisitions. They are looking to expand into the emerging trend of wearable technology and robotics. They plan to add to their research and development talent pool to help manage this vertical.

Within acquisitions, they are looking for companies within mobility to enhance their mobile shopping experience. Earlier this year, they had acquired India’s fashion e-commerce site Myntra. They have not disclosed details but are currently evaluating 20 companies as part of this acquisition strategy.

Flipkart is also working on becoming an online marketplace for other vendors. They already have 3,000 sellers on their platform and plan to grow to 10,000 by next year. They plan to use their funds to improve the overall supply chain management.

Flipkart may want to be another Alibaba, but it has a tough road ahead. Alibaba’s $150 billion valuation came after it processed 11.3 billion units, recorded 231 million members, 8 million active sellers and $248 billion in GMV last year. It doesn’t hurt that they also operate a profitable business model. But, profits aside, Flipkart has other concerns to address. The big one being India’s infrastructure. Even today, India’s delivery infrastructure is not world-class. The country’s road and rail delivery networks are unreliable and air delivery is expensive. For a parcel to reach the final destination on time, it needs to be directed to street addresses that follow unstructured naming. There is added concern of theft, which means that a package can’t just be left at the door. So far, Flipkart has managed the issue by investing in their logistics arm and building six warehouses across the country to minimize parcel travel. They have also tied up with third-party logistics partners who work together to help them deliver in more than 150 cities.

But for the next round, that much is not enough. Flipkart is now looking to grow their warehouse footprint. They recently leased 500,000 square feet of warehouse space and are now scouting for another 2 million square feet to lease by early next year. They plan to open these new warehouses in other cities that will help them provide better delivery SLAs to other parts of the country. They are also improving their packaging line so that parcels can be packaged in more transport friendly boxes. As part of its growth, Flipkart is rightly picking up inspiration from Amazon, which has forsaken profitability to invest in warehousing and packaging facilities in their markets including India.

Flipkart’s story also reminds me of Latin American etailer, MercadoLibre. Since 1999, MercadoLibre has dealt with infrastructure challenges to cater to a rapidly growing, young, Internet savvy population. Today it has become the leading e-commerce player in the region and brings in revenues of $109 million a quarter by processing sales of $1.8 billion. MercadoLibre also has the added advantage of a payments platform Mercado Pago that is growing rapidly. Additionally, MercadoLibre keeps adding newer verticals with the latest one being the addition of real estate listings. Flipkart has not yet ventured into real estate, but they keep adding to their verticals and recently announced plans to start selling furniture. India’s situation is a lot closer to Latin America’s than it is to China’s. Thus, a better comparable for the time being is MercadoLibre, not Alibaba.

Flipkart seems to be following the right path, but there is no denying that it is a long road ahead.

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