E-commerce in India – Flipkart in Trouble? (Startup Series: Episode 5)

UPDATED: Facebook stocks slide further and now at the lowest ever. Shares of the No. 1 social-networking company ended the day down $3.14, or 11.7%, to $23.70, which not only notched a new low but also marked a nearly 40% decline from the company’s initial public offering price. (SOURCE)

I had recently written a blog post on the over-valuation of Dot.com portals in India; and their subsequent crash in the stock market when they desperately try and find an exit option; often leading to an IPO; whether in India or abroad. Once correction comes, they are flattened, with millions wiped off within weeks or days – in case of Facebook over-evaluated IPO.

India is currently witnessing a Dot.com boom. Dozens of B2C e-commerce portals popping up like wild mushrooms, left and right, selling this and that every month. Mostly, either powered by Angel / VC Investors; and a few being funded by their own Export / Manufacturing houses. Flipkart, Myntra, Yebhi, Yepme, FreeCultr, Fashion&You, Deals&You, Lenskart, Healthkart and others. There have been 69 deals in the ecommerce space in the last 18 months, says Venture Intelligence, a company which tracks venture capital. Will this continue or dry up soon? (Source: Why is ecommerce funding drying up?) In fact, the death of Taggle.com in 2011 definitely did raise some eyebrows… and then followed up by LetsBuy.com going bust. Neither of them had a solid business model in place; entirely depending on discounts, discounts and more discounts for luring new customers daily.

But the main issue is – none of the companies are profitable; in fact, all burning cash to stay alive; and with (negative) cash flows. In fact, the poster boy of Indian E-commerce portals, Flipkart.com, may soon be in trouble. As covered by TimesOfIndia, earlier today – “Flipkart needs big money to keep delivering“; it points out some of the main issues that Flipkart.com is currently facing.

BANGALORE/MUMBAI: Flipkart needs about $150 million from new investors in the next six to nine months even as bulge-bracket private equity firms remain wary of the online retailer’s initial public offering plans in the US—crucial to making handsome return on investments.

PE giants like Bain Capital and Kohlberg Kravis Roberts could look at potential investment deal but demand clarity on Flipkart’s ability to pull off a public issue, said bankers familiar with the matter. Two existing investors Accel Partners and Tiger Global are unlikely to pump more capital after $100 million follow-on investment earlier this year.

Flipkart would be running out of money unless big investors step in the next nine months. The poster boy of India’s latest e-commerce wave is limiting cash burn and improving profitability, but that alone won’t improve listing prospects.

“While there is appetite among US domiciled investors for high growth stories like Flipkart, recent negative experiences with offshore structures of Chinese tech companies will cause concern. Flipkart has to be a foreign domiciled (offshore structured) entity for US listing since Sebi regulations ask Indian companies to trade first on local bourses,” said Praveen Chakravarty, CEO, Investment Banking and Institutional Equities, Anand Rathi Financial Services.

Chinese e-commerce engines which took the foreign domiciled route to US listing have seen their valuations plunge in the past one year. Flipkart with revenue topping $350 million has had negative gross margins till recently, but just slipped into 2-3% profit margins after expanding product catalogue. It wants to boost operating margins to 8-10% in the next one year.

Indian market regulator stipulates profitability norms for listing on local exchanges. Flipkart, which invested heavily into backend logistics as a business differentiator, has started controlling runaway costs and letting go some employees. It has more than 5,000 delivery men servicing 45,000 orders daily.

“We are a privately held company and hence are unable to comment on investments, margins or ongoing discussions with investors,” said a Flipkart spokesperson in response to queries from his newspaper.

Last year, General Atlantic Partners walked away from Flipkart being unconvinced about the financial model. Promoters Binny and Sachin Bansal then turned to existing investors for a bail out deal. The absence of big PE investors in Indian e-commerce has been conspicuous with most firms managing to raise only follow-on investments from venture capitalists.

Bansals control about 37% of Flipkart equity, while the Accel Partners and Tiger Global together control 48%. Management holds the remaining 15%. This leaves Bansals with little room in discussing a large deal with PEs beating down valuation. Some bankers argue that Flipkart would opt for strategic sale with Amazon a likely acquirer if multi brand retail FDI is allowed.

“Most e-commerce start-ups follow ‘the last man standing’ approach in a potentially large and under penetrated market. But one cannot keep losing money on unit sales,” said K Ganesh, a serial entrepreneur with investments in smaller rivals of Flipkart. Avnish Bajaj, managing director, Matrix India, explained that e-commerce in India has a lot going for but most customers are coming in because of the low prices, there are no loyal buyers.

“Raising money for the big players won’t be an issue but it’s the smaller ventures which will find it difficult,” argued Bajaj whose fund has invested in Quikr. Anand Rathi’s Chakravarty avers that Flipkart’s fund raising hinges upon better clarity on its US listing plans.

Additionally, Forbes India had recently covered the woes of Flipkart.com; and the negatives and issues that it currently faces. Can Flipkart Deliver? 

Another significant aspect for an e-commerce portal to run, and survive successfully, is to pay close attention to improving unit level economics (margins per transaction). A company selling an item for $4 but bettering margins by $1 is better disposed than a company selling an item for $10 but with net margin $0.1 cents. Most e-commerce portals never pay attention to this; thereby suffer in the long run. Ideally, as pointed out in this article;

But conditions that will apply, even when VCs provide companies they have already funded, additional funding. Only those which show success on three counts will get an additional backing:
1.      Growth towards showing leadership in their verticals
2.      Improving unit level economics (margins per transaction)
3.      Efficient marketing proven by customer acquisition cost going down

Flipkart has already eaten up:

a) $31 million in VC funding
b) $150 million in another series of VC funding

TOTAL = $181 million and still operating in negative cash flows. An additional $150 million would be very difficult for Flipkart.com to raise; given market conditions; and depression in the EU. What this means – Flipkart will either try for an early exit option, or sell off the company; or otherwise result in massive layoffs; and re-structuring of current debt. It looks, the Indian poster boy of E-commerce world, Flipkart, is NOT a Superman, after all.

I remember reading an article, “8 reasons why the E-Commerce Balloon In India is gonna burst..” by  Alok ‘Rodinhood’ Kejriwal in Jan 2012. Had thought – wtf? Useless article. Read it once again last night. Every line rung so true this time. If Flipkart.com does go down eventually, it will be a big learning experience for the brands still out there.

> How to decrease costs?
> How to increase margins?
> How to create a ‘brand’ rather than an ‘aggregator’?
> Propose value creation rather than going the way of discounts, discounts, and more discounts.

And most importantly, how to create and preserve ‘brand loyalty’ amongst existing customers. The key lies in these questions, and as we can see, Flipkart.com couldn’t create any of these. Thus, practically not worth a dime as a ‘business’.

PS: My detailed blog post on HOW TO CREATE AND SUSTAIN A “BRAND ONLINE”.