For over a decade, the country’s largest e-commerce player, Flipkart, has seen itself swerve close to the edge only to be pulled back by investors in time for another shot at life. Except that this time around, it has taken over two years for Flipkart to raise another round of funding though its co-founders have repeatedly spoken about how the company does not require additional funds as they are well capitalised.
Flipkart has raised funding every year from 2009 to 2015 and then on April 11 this year, it raised its largest tranche of $1.4 billion from Tencent, Microsoft and eBay. From the latest round of funding, the company expects to expand its product portfolio, rationalise costs and push towards profitability, a target which has looked more like a mirage. “It is interesting to note that this round sees the investment from strategic investors that will bring technology and market expertise that Flipkart earnestly needs, in contrast to the previous round of mostly financial investors,” says Sandy Shen, Research Director, Gartner.
However, a total of 11 rounds of funding worth about $5 billion has left an indelible mark on the entire structure of the organisation. The co-founders, Sachin Bansal and Binny Bansal, who started the company initially as an online book store in 2007, have seen their individual stakes reduced to single digits while giving away effective control of the company to their largest investor, Tiger Global, whose representative, Kalyan Krishnamurthy, is now the Chief Executive Officer. Sachin Bansal, who was the CEO of the company for the longest period of time, now sits on the board as the group executive Chairman while Binny Bansal is the group CEO.
Both of them have also seen their preferential stocks reduced to the bare minimum while the common stocks they hold places them on par with an ordinary shareholder. On such a nebulous platform, do the Bansals hold on to their company all because of a frenzied race for mopping up funds to remain the leader in an industry which itself rests on shifting sands. The valuation itself has tumbled over a period of time from a high of $15 billion to the post-transaction value of about $11.6 billion.
Expanding portfolios
The company has in its journey added quite a few ventures to its portfolio: fashion portals Myntra and Jabong; fintech companies ngpay and phonepe; and, eBay India among others and now perhaps, Snapdeal as well. It remains to be seen whether eBay India and Snapdeal will add value to Flipkart or turn out to be a drag on its finances.
Questions have been raised over the viability of the acquisition of Snapdeal as it may not exactly bring much value to Flipkart though it may strengthen its base in the North and North-East part of the country. The acquisition of Myntra and Jabong resulted in Flipkart getting a stronghold in the fashion space, its biggest money spinner so far. But acquiring horizontal players like Snapdeal, known as the poor cousin of Flipkart, and eBay India could pose problems in terms of cannibalisation of products. Also, weaker products more in terms of them being of lesser value, tend to get phased out over a period time.
According to Anil Kumar, CEO, RedSeer Consulting, extracting synergies and value from this acquisition of Snapdeal would be a challenging task for Flipkart, considering the physical distances, differing strategies and the different team cultures at both companies.
Snapdeal would have never be on the horizon of the Flipkart founders if they had their way because it doesn’t add much for the company. But Flipkart management doesn’t seem to have much of a choice as the only way for some of its existing investors to exit would be through another investor buying off their stake at higher valuations. This is where the Japan-based SoftBank steps in. It plans to merge Snapdeal, in which it has about 33 per cent stake, with Flipkart. In the merged entity, SoftBank plans to pump in a billion dollars or more which would result in the internet company buying off stakes of some of the existing investors.
Not all analysts are, however, against the Flipkart-Snapdeal merger. “If the post-merger integration is executed successfully, the deal could play out similar to Ola/Taxi For Sure acquisition in online cabs space, which gave Ola significant funding and capability firepower to hold off Uber in India. Something which would help Flipkart fend off Amazon for much longer,” points out Anil Kumar.
Signs of consolidation
According to Shen , even though India’s e-commerce market is still at an early stage, the market is seeing signs of consolidation as scale is a key success factor in the business. “Flipkart has been and will continue to make acquisitions to increase scale, and the next challenge is to strategise the path to a sustainable business model within a set time frame,” says Shen.
The biggest challenge, needless to say, comes from the cross-town rival, Amazon which has the reach and the width to keep one step ahead of the competition. It has all the blocks in place and has added muscle to its logistics play that has resulted in timely delivery and near-zero defects. The fact that it has access to near unlimited funds from the parent is in itself a factor which keeps Flipkart on its toes all the time. The often-repeated statement from analysts that India is too big a market and that there is room for several more players to co-exist is no longer valid as can be seen from the near collapse of Snapdeal. Flipkart may not be able to pull a rabbit out of the box every time Amazon comes out with a counter strategy, but what it can do is to steady its ship.
“The only way out for Flipkart is to tighten its belt and fight it out with Amazon where it must focus on getting profitable and slashing all costs down to a minimum except marketing costs to continue to be in the pole position,” says Rajeev Banduni, CEO of London-based online advisory services firm GrowthEnabler.
Banduni adds that Flipkart must adopt a flanking strategy to beat Amazon on home ground, just as Ola did with Uber picking up a few key features that are key to locals and gaining ground on those. The latest round of funding should actually boost the confidence of the management of Flipkart and this should help them to consolidate their operations and focus more on increasing the level of satisfaction among customers instead of looking over their shoulders all the time.
(With additional inputs from Sangeetha Chengappa in Bengaluru. The article first appeared in The Hindu BusinssLine.)