It is important for India that Flipkart succeeds

For Scroll, 31 July 2014

“We believe that India can produce a $100 billion Internet company in the next five years and we want to be that company,” said Flipkart chief executive and co-founder Sachin Bansal, as he announced on Tuesday that Flipkart had secured $1 billion in fresh investments, the largest venture capital investment in an Indian internet company so far, and amongst the largest in the world. A company founded by two Bansals who are not brothers, and who met at the Jwalamukhi hostel of the Delhi branch of the Indian Institute of Technology, is now valued at $7 billion.

For those currently wandering around the hostels of India’s colleges, the Flipkart story makes it possible to dream of doing something big within India. It tells them that meaningful entrepreneurship can happen here, that the oligarchs of India Inc are not going to be able to capture every emerging opportunity just because they have the advantage of capital. Today, as big, organised retail companies such as Future Group and Reliance seek a part of India’s retail sector, they have this new kid on the block to compete with, Flipkart.

It is true that Flipkart isn’t the first such case. There was Infosys in the late ‘90s, created by a group of founders who shared their wealth, owning very little. You could say Flipkart is the next generation-Infosys.

Yet it’s been much more difficult for Flipkart than it was for Infosys. Infosys flourished as an information technology services company because it was in a new field serving offshore customers, which meant that the sector had no regulation. Flipkart suffers from arbitrary regulation even today.

Infosys had relatively minor infrastructure problems to solve. It produced its own electricity and trained engineers from second-rung colleges. India’s infrastructure deficit is so huge for Flipkart that it can’t even be compared to Amazon. Like China’s e-tailer Alibaba, Flipkart has had to take care of warehousing, delivery, payments, everything on its own. It has had to reinvent the wheel, paving the way for others. That has meant high operating costs. It had to make customers trust online shopping, fight competition, offer cash on delivery to get around low credit card usage – all of this has meant burning money.

When the information technology services boom took place, the government encouraged the industry through tax breaks and easy policies. Yet in e-tail, the government does not even permit foreign direct investment in direct selling, only in the back-end process. It is bizarre that the Indian government has allowed 100% foreign direct investment in single-brand retail and 49% in multi-brand retail but is not allowing FDI in Indian e-tail companies. It seems as if the government is trying to save the small mom-and-pop stores from Indian e-tail, while exposing them to foreign retail. This can be good news only for big retail.

A flawed business model?
Flipkart’s critics may have gone silent after the fresh funding, but they won’t go away. Sceptics say Flipkart’s business model is flawed, because it actually loses money in most of what it sells.

Flipkart started with books but its $7 billion valuation today comes from what is already its biggest selling item: smartphones. Every tenth Indian has a smartphone today. In just a few years, this will be one in every two Indians. Online retail in India, today, is believed to be only $2.3 billion, or 0.4% of the retail industry. Estimates of the size of the e-tailing industry and its projected growth vary widely, but there is consensus that it is going to explode.

The infusion of a billion dollars makes Flipkart too big to fail. To succeed, it must make profits. It has 22 million registered users today, and says it will look at making profits after it crosses 100 milion customers, by which time it hopes to have figured out its business model and have stable control of a majority of the market-share.

Except that Amazon announced on Wednesday that it would be pouring in $2 billion. Expect price wars, which would mean even more discounts for customers. In other words, these investments are indirectly coming to us!

It is not going to be easy for Amazon in India, given how much it lags behind Flipkart, and given that even in the United States it isn’t doing well. Amazon hopes India will be its big driver for growth, but Flipkart’s big advantage is the trust of Indian consumers it has won, becoming a household name.

Two years ago, Forbes India magazine argued in a cover story that the Flipkart bubble would burst. After the $1billion announcement, the writer of the story tweeted, “As Twitter mea-culpas go, I guess now’s a great time to admit my 2012 Flipkart story was, shall we say ‘off the mark’, on its future :-)”

Flipkart’s critics have genuine reasons to be skeptical, but it is in India’s interest that they are proved wrong.

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