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.