The Flipkart story: a $20 billion exercise in smokes and mirrors

 (Photo: Unsplash)

(Photo: Unsplash)

After a few tumultuous weeks of playing the guessing game on who is going to seal a deal with Flipkart, news broke out last week that it would indeed be Walmart, the American multinational retail major that would be buying 75% of Flipkart for $15 billion at a $20 billion valuation.

Flipkart, in its decade-long existence, can be credited with bringing e-commerce to the average Indian consumer. Flipkart largely traced the path of Jeff Bezos with Amazon, starting out by selling books online in a fledgling market that was just waking up to the idea of e-commerce. Since then, the company never looked back, encapsulating the dreams of millions in India and inspiring startup clones, while firmly planting e-commerce as not just an alternative to conventional shopping, but a necessity in the times a-changin’.

On the financials and profitability though, the company always came up short. In all these years of focussing on gaining ground against its many rivals like Amazon, Snapdeal, and Paytm, Flipkart has never broken even and continues to bleed while its investors prop it up by pouring billions of dollars to keep the ship sailing. In the FY 2017, Flipkart declared a 68% rise in losses which stood at $682 million before interest, depreciation, tax, and amortization.

The company has raised multiple rounds till date, with even one down round in 2017 when it raised $1.4 billion at a post-money valuation of $11.6 billion to fend off foreign predators in the form of Amazon and Alibaba. Flipkart had to contend with a lot of flak from its investors as it leaked millions, while desperately trying to stem the rot by laying off its workers and by doing a management reshuffling in 2017.

But in all these years, what Flipkart has done exceedingly well is the way it ran from the inevitable - bringing in a positive bottom line. To an extent, it looks like Flipkart’s business model lives and dies with the largesse of its investors. Buoyed on by the growth potential of the Indian e-commerce populace and the presence of an investor pool ready to bail it out when pushed to a corner, Flipkart has grown as a company and made a veritable name for itself as one of the largest e-commerce players in the Indian ecosystem.

And now, enter Walmart with its $15 billion offering which the Flipkart management is expected to finalize in the following week. Though this looks to be a good gateway for Walmart into the burgeoning Indian market, questions arise on if Flipkart is really worth all that money.

First off, the company is privately held, making it difficult to ascertain public opinion on Flipkart's brand value and the extent of its infrastructure. Then again, it is quite evident that Flipkart does not hold huge inventories like that of Alibaba or Amazon, and can only be attributed to having created a well-oiled and functional platform that it has scaled up meticulously over a decade.

What Walmart probably does not understand is how fickle the loyalties of the Indian consumers are, especially with regard to e-commerce. Unlike in the U.S., where discounts on product listings are far and few, people in India flatly refuse to buy products unless a platform dangles discounts and pay-backs in front of them. “The Big Billion Day” sales that happen across all e-commerce platforms in India on exactly the same dates for no apparent reason other than the fear of losing out, is an example. If Walmart comes in and tries squeezing out margins, it surely would see a cascade in its market share as people who had bought on Flipkart for years would ditch the platform and move towards more attractive alternatives.

This mentality of the Indian consumers makes it impossible for e-commerce companies to see the light at the end of the tunnel. As things stand now, the norm has been about companies pouring in billions every year and hoping for a larger market share.

The idea is as fallacious as it sounds. With investors breathing down its neck, Flipkart founders sought the help of the government to regulate foreign-origin rivals like Amazon under the guise of nationalism, complaining that they divert in profits from the West into India to create predatory pricing that could sink home-grown companies without access to comparable financing. Though this reeks of protectionism, it also showed how desperate and helpless Flipkart was to turn the table and break even.

If the Flipkart deal goes through, Walmart would be left with a bleeding company - a company that probably would never be bailed out in the future if the tide dips. India would witness a battle between Walmart and Amazon, mirroring the rivalry that the two have in the U.S., as the companies continue to sink their profits into India trying to wrestle the other out of contention. Amazon clearly has the edge here, with an already established business in India and an experience in the e-commerce ecosystem that dates back to the dot-com ages.

Walmart could have done well for itself by looking at the niche that it does best - retail chain marketplaces. Reliance Retail is growing in strength in India, and would have been an adversary that Walmart could have taken on - rather than the tussle with Amazon, making it look like a fish out of the water. Nonetheless, in the perspective of an average Indian consumer, as long as the discounts persist, there are no reasons to complain.

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Vishnu Rajamanickam, staff writer

Vishnu is an engineer by education, with a couple of years experience in the construction industry. But he has long since moved on to work in different domains as an entrepreneur, copywriter and most importantly, as a journalist. He has also consulted for various travel, technology, and fashion brands as a content strategist and has considerable experience with covering tech startups, having interviewed dozens of CxOs over the course of his career as a technology journalist.