Flipkart taps smaller brands Believes e-commerce will reflect offline clothes sales trends; working with small entrepreneurs and weavers to bring them on board

Flipkart believes online retailing will reflect the offline trend of smaller apparel brands making up the lion's share of future sales.

The Bengaluru-based e-tailer has launched an exclusive Handloom Store for saris and related products and is working with small entrepreneurs and weavers to bring them on board.

"If you look at offline retailing of fashion products and apparel, branded goods are a small fraction of the market. A lot of sales comes from small entrepreneurs, manufacturers, and weavers," said Ankit Nagori, senior vice-president, marketplace, at Flipkart.

"With our fashion business scaling up so fast, it is important that we start replicating the offline mix," he told Business Standard.

India has close to 20 million small and medium entrepreneurs manufacturing products that can be sold through e-commerce. According to Nagori, only about 30,000 small sellers retail online.

Brushing aside concerns of quality of unbranded products, Nagori said Flipkart ran two levels of checks, proactive and reactive, to ensure consumers received what they ordered. Flipkart audits each seller before bringing it on board by checking capabilities and quality of offerings. It is building a system to predict seller behaviour. Higher than acceptable faults will result in action to protect consumer interests.

"There is no reason why unbranded products cannot sell online. Product reviews and ratings make buying decisions easier. Specific sellers will become brands on their own because they sell great quality for less," Nagori said.

Flipkart taps smaller brands

Believes e-commerce will reflect offline clothes sales trends; working with small entrepreneurs and weavers to bring them on board

 

 

In September 2014, Flipkart launched its exclusive Handloom Store, where it brought on board weavers from Varanasi. The company began with 20 sellers and is looking to expand to 100 soon.

Nagori said handicraft and hand-woven products would be cheaper online than at emporiums because of the exclusion of middle-men. He expects the descriptions and detailing of products on Flipkart's website to encourage consumers to buy them. Return policies will also reassure customers.

Flipkart is running several training programmes across the country to bring more small entrepreneurs on board. It is also partnering industry and government bodies to reach more sellers.

BEING INCLUSIVE

    A lot of sales comes from small entrepreneurs, manufacturers, and weavers, according to Ankit Nagori, senior vice-president, marketplace, Flipkart
    Flipkart aims at replicating this trend in online retail
    In September 2014, it launched its exclusive Handloom Store, where it brought on board weavers from Varanasi
    It is running several training programmes across the country to bring more small entrepreneurs on board
    To address concerns of quality of unbranded products, Nagori said the company ran two levels of checks to ensure consumers received what they ordered

Here's why Rakesh Jhunjhunwala is right about the e-commerce bubble

None of the e-commerce companies have managed to handle growth and profitability at the same time

 "Where is Flipkart's complete business model? Forget about valuation. I want to know Flipkart’s business model. I want to know how you will be profitable?" thundered Rakesh Jhunjhunwala in an interview to CNBC-TV18 with fellow investors Ramesh Damani and N Jayakumar.

The discussion was on irrational valuations of e-commerce companies. When Jayakumar asked if these valuations is similar to the 2000 dot com party, Jhunjhunwala smirked and replied ‘You have any doubt’.

So why are smart investors shying away from investing in e-commerce companies like Flipkart, while private equity players are willing to bet on them?

In the CNBC interview, Jhunjhunwala raised questions on the completed business model. A business model is complete only when the company posts cash profit and becomes self-sustaining. Flipkart and other e-commerce companies are surviving on private equity money. None of them are profitable and nowhere close to being profitable in the near future. Jhunjhunwala is right in questioning the astronomical valuations commanded by these companies.

Flipkart raised nearly $2 billion in 2014 with the final tranche of $700 million being raised at a valuation of $11-12 billion. Flipkart’s valuation had zoomed in 2014 among the private equity players. The company raised $210 million in May 2014 at a valuation of nearly $3.5 billion, its second funding of $1 billion in July 2014 was done at a valuation of $7billion and the last one in December 2014 was around $11-12 billion. Valuations have jumped 3-4 times in a span of one year.

During this entire period, the company has shown no signs of becoming profitable. However, to its credit the company has grown rapidly in terms of gross merchandise value (GMV). Between 2013 and 2014, Flipkart has grown five times in volume terms and currently does a GMV of $4 billion. The company intends to double this to $8 billion (Rs 50,000 crore) by December 2015.

But does it make money. The answer is a clear no. As per data from the Registrar of Companies accessed by Mint,  Flipkart India entities did business of Rs 3,035.8 crore and reported a loss of Rs 719.5 crore for the year ended March 2014. In FY13, these entities had posted a revenue of Rs 1,195.9 crore and loss of Rs 344.6 crore.

But for Flipkart, making losses was a conscious decision. In an interview to Business Standard (Read here), the company’s promoters said “Profitability is not a focus area. It’s a strategic decision. We can be profitable from today if we want. We can stop investing in one area and start making profits; it’s definitely possible. But we don’t want to remain as a small profitable company.”

This seems to be easier said than done. The company is now looking at tapping the equity markets for raising money and needs to tighten its belt and turn profitable. For this, the company has recently recruited Sanjay Baweja as its CFO. The former Tata Communications CFO has already got into the cost cutting mode to streamline its operations. In an interview he said that the company is moving in a cost containment mode where their fixed costs will become smaller. The aim being to make most of the cost variable.

A back of the envelope calculation based on the numbers with the Registrar of Companies and the GMV data shows that Flipkart earns around 10-12 per cent of the GMV as revenue. But it’s cost of handling these goods are around 15 per cent. Since volumes are only ensured by huge discounts and high advertisement cost, cutting costs will not be easy.

The company will need serious cost cutting just to turn profitable. As Rakesh Jhunjhunwala said in the interview, the real companies who have given returns to investors had been built by the cash flows generated by the business and not by spending investor’s money. Flipkart has a long way to go.

Unfortunately, none of the  e-commerce companies have managed to handle growth and profitability at the same time. The cash burn model of Flipkart is good to raise valuation in the opaque private equity market but in the real world (read equity markets), the company will have to show real profits and give returns to investors to raise more funds.

Since Flipkart’s model is a money guzzler, the real test of the company and the model will be post listing of the IPO. Had Flipkart been listed a few years back, they would not have been able to raise money as frequently as they did last year. Perhaps, we are nearing the doomsday when either the bubble will burst or we will have some rationality and fewer discounts in the e-commerce space. "Where is Flipkart's complete business model? Forget about valuation. I want to know Flipkart’s business model. I want to know how you will be profitable?" thundered Rakesh Jhunjhunwala in an interview to CNBC-TV18 with fellow investors Ramesh Damani and N Jayakumar.

The discussion was on irrational valuations of e-commerce companies. When Jayakumar asked if these valuations is similar to the 2000 dot com party, Jhunjhunwala smirked and replied ‘You have any doubt’.

So why are smart investors shying away from investing in e-commerce companies like Flipkart, while private equity players are willing to bet on them?

In the CNBC interview, Jhunjhunwala raised questions on the completed business model. A business model is complete only when the company posts cash profit and becomes self-sustaining. Flipkart and other e-commerce companies are surviving on private equity money. None of them are profitable and nowhere close to being profitable in the near future. Jhunjhunwala is right in questioning the astronomical valuations commanded by these companies.

Flipkart raised nearly $2 billion in 2014 with the final tranche of $700 million being raised at a valuation of $11-12 billion. Flipkart’s valuation had zoomed in 2014 among the private equity players. The company raised $210 million in May 2014 at a valuation of nearly $3.5 billion, its second funding of $1 billion in July 2014 was done at a valuation of $7billion and the last one in December 2014 was around $11-12 billion. Valuations have jumped 3-4 times in a span of one year.

During this entire period, the company has shown no signs of becoming profitable. However, to its credit the company has grown rapidly in terms of gross merchandise value (GMV). Between 2013 and 2014, Flipkart has grown five times in volume terms and currently does a GMV of $4 billion. The company intends to double this to $8 billion (Rs 50,000 crore) by December 2015.

But does it make money. The answer is a clear no. As per data from the Registrar of Companies accessed by Mint,  Flipkart India entities did business of Rs 3,035.8 crore and reported a loss of Rs 719.5 crore for the year ended March 2014. In FY13, these entities had posted a revenue of Rs 1,195.9 crore and loss of Rs 344.6 crore.

But for Flipkart, making losses was a conscious decision. In an interview to Business Standard (Read here), the company’s promoters said “Profitability is not a focus area. It’s a strategic decision. We can be profitable from today if we want. We can stop investing in one area and start making profits; it’s definitely possible. But we don’t want to remain as a small profitable company.”

This seems to be easier said than done. The company is now looking at tapping the equity markets for raising money and needs to tighten its belt and turn profitable. For this, the company has recently recruited Sanjay Baweja as its CFO. The former Tata Communications CFO has already got into the cost cutting mode to streamline its operations. In an interview he said that the company is moving in a cost containment mode where their fixed costs will become smaller. The aim being to make most of the cost variable.

A back of the envelope calculation based on the numbers with the Registrar of Companies and the GMV data shows that Flipkart earns around 10-12 per cent of the GMV as revenue. But it’s cost of handling these goods are around 15 per cent. Since volumes are only ensured by huge discounts and high advertisement cost, cutting costs will not be easy.

The company will need serious cost cutting just to turn profitable. As Rakesh Jhunjhunwala said in the interview, the real companies who have given returns to investors had been built by the cash flows generated by the business and not by spending investor’s money. Flipkart has a long way to go.

Unfortunately, none of the  e-commerce companies have managed to handle growth and profitability at the same time. The cash burn model of Flipkart is good to raise valuation in the opaque private equity market but in the real world (read equity markets), the company will have to show real profits and give returns to investors to raise more funds.

Since Flipkart’s model is a money guzzler, the real test of the company and the model will be post listing of the IPO. Had Flipkart been listed a few years back, they would not have been able to raise money as frequently as they did last year. Perhaps, we are nearing the doomsday when either the bubble will burst or we will have some rationality and fewer discounts in the e-commerce space.

5 things you didn't know about India's e-commerce industry

The Singles' Day sale was originally named because the date Nov. 11 has four singles (11/11)—was started as a joke between university students, but Alibaba.com later converted it as a day when singles can shop.

 

Late on Tuesday, Alibaba came close to generating double digit sales on Singles Day, clocking an impressive $9 billion (Rs 55,000 crore), and beating its own record of $5.9 billion last year. 

 

But to really put those numbers in context, consider this: India’s entire e-commerce industry was worth only $11 billion in 2013. Of this, a mere $2 billion was from sales of physical goods, whereas most of Alibaba’s $9 billion in sales came from actual goods rather than services.

 

In a report on e-commerce, however, broking firm Motilal Oswal says that this is just the start of a multi-year growth for the e-commerce sector in India. Indian retailers, therefore, do not have to be too concerned as despite strong growth in USA and China, e-tailing is still only 5-6% of total retail sales there.

 

Here are five interesting insights from the report.

 

1. India is almost 10 years behind China in the e-commerce space. China’s inflection point was reached in 2005 when its size was similar to India’s current market size. Thankfully for India the dynamics currently are similar to what existed in China then – growing broadband penetration, acceptance of online marketplaces, and lack of physical retail infrastructure in many places.

 

2. Forget the Flipkarts, Snapdeals and Amazons. Travel is where the real money in India’s e-commerce is. Online travel accounts for nearly 71% of e-commerce business in India. This business has grown at a compounded annual growth rate (CAGR) of 32% over 2009-13. E-tailing, on the other hand, accounts for only 8.7% of organised retail and a minuscule 0.3% of total retail sales. Even within sales of physical goods, books are a mere 7% of total book sales, mobile phones are 2% of all handsets sold, and fashion goods sold online are just 1%. Online jewellery sales account for only 0.2 per cent of all jewellery sold. Motilal Oswal, however, expects e-tailing to pick up with a focus on fashion.

 

3. Alibaba is an outlier when it comes to margins and making money in the e-commerce ecosystem. The Chinese company makes an operating profit of 40% compared to industry standard (US and China) of 8-10%. Travel sites typically make 2.3%. Amazon, the industry pioneer, is yet to achieve healthy profitability even after two decades of dominance. Indian players, the report points out, are not even thinking of profitability yet. It’s a game of market share and market penetration, causing all serious players to have a war chest ready for when the industry scales multiple times.

 

4. For every Rs 100 spent on e-tailing, Rs 35 is spent on supporting services like warehousing, payment gateways, and logistics, among others. Delivery costs a platform owner 8-10% implying significant burn. Though 50-60% of delivery logistics today are handled by large e-tailers themselves, this proportion may reduce going forward as the participation of lower tier cities picks up. Presently, aggressive pricing in India is leading to e-tailers making losses on every segment. For a Rs 100 sale of a book, the e-tailer incurs a loss of Rs 24, a loss of Rs 13 in mobiles, and Rs 8 in apparel. 

 

5. Demand in India exists across 4,000-5,000 towns and cities, but there is no significant presence of physical retail in almost 95% of these. High real estate cost is one of the main reasons why organised retail is unable to expand at speeds expected earlier. Real estate as a percentage of sales is 14 times higher than in the US. For large retailers in India, it is 7% of sales as compared to 0.5% for Walmart.