For a long time, we have been told that the purpose of a business is to make profits. The neoclassical theories have taught us that the objective of a firm is maximisation of profits. But if Sachin Bansal and Binny Bansal were to write their autobiography, it could very well be titled ‘How to become a billionaire by running a thousand crore loss making business.’
Indeed, the story of Flipkart and their journey from a two bedroom apartment at Bengaluru to a firm now valued at $20 billion is an interesting case study for entrepreneurs. Both Sachin Bansal and Binny Bansal, who were batch-mates at IIT Delhi, started their career as interns in Amazon. In 2007, they dropped out of Amazon and started their online business of book selling with a modest capital of Rs 4 lakhs. Their business model comprised of taking orders for buying books online and delivering them to the doorstep on a two wheeler. Their big break came when the Venture Capital Fund Accel Partners invested $800,000 in seed capital in 2008 and followed it up with more than $100 million in subsequent rounds. Flipkart also got huge investments from Japan based Softbank, South Africa based Naspers, New York based Tiger Global, Ebay, Microsoft, Google and China based Tencent Holdings. The company eventually moved into electronics, mobiles, games, fashion, footwear, toys, music and movies and became a dominant player in all these categories.
Along the journey, they introduced innovative approaches like Cash-On-Delivery (COD), created a strong logistic and delivery network through Ekart and created excitement in the market through huge sales driven events like ‘Big Billion Day’. The company also made several strategic acquisitions like Myntra, Jabong, PhonePe and Ebay.in. All these strategic measures and acquisitions helped them to stay ahead of Amazon, Snapdeal and Paytm who also had big investor backings and aggressive approach in the Indian E-Commerce market.
Flipkart now boasts of 8.3 lakh square feet of central office space in Bengaluru and other offices in Delhi and Mumbai. The corporate office has shifted to Singapore. The consolidated revenue of Flipkart jumped to Rs 19,855 Crore in 2017 but the consolidated loss also jumped to Rs 8,770 Crore. It got a resounding appreciation for its success story when Wal-Mart picked up 77% of stake in return for $16 billion, thus valuing the company at $20 billion.
But the story of E-Commerce in India has been fraught with challenges. The E-Commerce Industry in India started getting traction when Sify bought Rajesh Jain’s Indiaworld.com for Rs 500 Crore in 2000 in a mixed stock-and-cash deal. Soon, we had several big bang launches like Indya.com, Rediff.com, Indiamart.com, Yatra.com, MakeMyTrip.com, Bababazar.com and HomeTrade.com. Most of them were engaged in grabbing eyeballs for their dotcom venture by giving gifts and lucrative discounts to customers. Some of them survived the long haul but many like Bababazar, Indya and HomeTrade either got closed down or were acquired by others.
Flipkart, coincidentally, started their journey in an interesting period. Mobiles were getting popular due to reduction in prices, the internet connectivity was getting better with introduction of 2G, 3G and 4G technology and cost of accessing the Internet was falling due to aggressive pricing by Reliance Jio. The number of mobile phone users is all set to cross the 800 million mark by 2019, out which half of them will be smartphone users. The number of Internet users is expected to cross 500 million in 2018.
Shopping through the Internet is also on the rise. The E-Commerce Market has seen transactions worth $55 billion in the last fiscal year. This market is expected to register a 30 percent growth in this fiscal year to touch $72 billion. In the long term, the Indian E-Commerce Market is poised to touch $200 billion by 2025.
Flipkart has been the dominant player in the Indian E-Commerce market with Amazon giving them a fierce competition. Snapdeal lost out their position due to funding problems and a spate of resignations at the top level. However, they are trying to make a comeback. Paytm, Shopclues, Infibeam and others are still fringe players who are battling it out to get business from niche areas.
With Wal-Mart buying out Flipkart, the Indian E-Commerce Market is sure to see some stiff competition. Wal-Mart has several advantages over Amazon and other online retailers. They have their own private labels which they sell at hyper competitive prices. With Flipkart in their kitty, Wal-Mart is both a physical retailer and online retailer thus having tremendous economies-of-scale. Wal-Mart also has the capability to take fresh farm produce through very sophisticated cold chains, which presently Amazon and the other online retailers do not have.
The entry of Walmart into online retailing is definitely a great news for shoppers as they will get great bargains from both Amazon and Walmart. But there are concerns that the small and medium scale producers and traders might end up suffering losses as Amazon and Wal-Mart both try to extract huge margins from them in order to give better discounts to customers. This is an area where the Government and Regulator need to keep a strong vigil so that the entrepreneurs in India do not end up closing down their shutters.