The Indian online marketplace is marked by a keenly contested battle between Flipkart and Amazon. According to RedSeer, Flipkart, including its online fashion acquisitions Myntra and Jabong, had a 46% share in 2018. Amazon which entered the Indian market in 2013 had a 30% share. But it has not been easy for Flipkart to maintain this lead. Founded in 2007, Flipkart had raised $7.3 billion in funding. How does the recently announced $16 billion acquisition by Walmart affect the Indian e-commerce sector, especially the startups?
Within half the time that Flipkart has been around, Amazon, backed by over $5.5 billion in capital from the parent company, has managed to build equivalent traction. According to RedSeer, about 35% of Amazon’s orders are coming from Prime members who pay INR 999 ($15) annually. Further, about 22% of the Prime members have not shopped on other platforms after subscribing to the service. This is what sets Amazon apart. The entry of Walmart into the picture could make the battle more interesting.
The deal will help Flipkart improve its technology platform and leverage Walmart’s global supply chain and operational expertise. It is also expected to help Walmart scale in the Indian market. Walmart entered the Indian retail space in 2007 and started operations in 2009. It operates 21 cash and carry stores in India under the Best Price brand, all of which are profitable at the store level. It plans to open 50 new stores by 2021 at an overall investment of over $500 million.
The Indian retail market at $650 billion is big and attractive enough for all.
However, there is one thing to be wary of. Despite the billions in funding, Flipkart continues to be in the red. For fiscal 2017, Flipkart reported revenue growth of 29% to $3.1 billion (19,854 crore INR). It had revenue of $2.3 billion and revenue growth of 50% in fiscal 2016. Losses in 2017 were up 68% to $1.3 billion (8,771 crore INR).
All this while, Flipkart ran the high risk of Death by Overfunding which the Walmart acquisition of its majority stake just eliminated. For the foreseeable future, the company now has a sugar daddy to go back to. However, the company is still a private company that is running huge losses. How much longer is that trend going to continue?
Who made how much?
Couple of years back when Amazon was rapidly gaining market share, Flipkart’s investors had marked down Flipkart’s valuation from over $15 billion in 2015 to $5.8 billion in 2016. Last year in April, Flipkart raised $1.4 billion in funding from Tencent, eBay, and Microsoft at a valuation of $11.6 billion. Softbank joined in later last year with an investment of $2.5 billion.
Walmart acquired a 77% majority stake in Flipkart for $16 billion at a valuation of $21 billion. By the time the deal closes, Walmart might also bring in other investors that could reduce its stake. Google’s Alphabet is expected to chip in with $3 billion for a 15% stake.
The deal is a huge sigh of relief for its investors who have been waiting for a good exit. Accel, which was one of Flipkart’s original investors, will get seven times its investment. Tiger Global, which has invested about $1 billion, will get four times its investment. Naspers, which had invested close to $616 million since 2012, sold its entire 11.18% stake for $2.2 billion. Softbank which has been invested for less than a year will be getting a return of 60%.
Such returns are bound to boost the confidence of investors in Indian startups. In fact, some Flipkart investors including Microsoft and Tencent will continue to remain invested. Co-Founder Sachin Bansal has also sold his entire 5.5% stake in Flipkart for $1 billion. Sachin has been a great role model for Indian entrepreneurs and we will hopefully see more from him, both as an investor and an entrepreneur.
What about new startups?
Following this deal, we can expect to see more investments in the e-commerce sector, although my thesis is that the logistics play in e-commerce is finished. Amazon and Flipkart will cover that. In my recent discussion with Kanwaljit Singh of Fireside Ventures, we highlighted the point that to build sustainable brands, an internet-first followed by omni-channel expansion strategy would be vital. Niche e-commerce would be the way new consumer brands would be launched in India. The logistics infrastructure for e-commerce is still in the evolutionary stages and this is where bigger players like Amazon and Walmart will play a crucial role.
The way forward for e-commerce startups is to come up with good, unique products rather than worry about logistics. They can use the infrastructure build-out by the bigger players to their advantage.
But the crucial differentiator going forward would be branded products with clear differentiation, be it in fashion or in food.
And, in the next phase, I would like to see Indian entrepreneurs come up with global brands using the e-commerce infrastructure that is already in place and maturing every day. My Vision India 2020 book is a good read for ideas for those of you looking to start an e-commerce venture going forward.