My analysis of Flipkart's existential dilemma in the article "Saving Private Flipkart" got an overwhelming response. There were some questions about the data I used for the analysis. I thought I should expand on some of them.
1. Conflicting market data
A lot of the current confusion around e-commerce market data is directly attributable to last year's Morgan Stanley report. We really shouldn't take these numbers at face value.
Morgan Stanley pegged the combined Gross Margin Value (GMV) market share of Flipkart, Snapdeal and Amazon at 83% (worth $13.8 billion in 2015) and Flipkart's market share at 45%. That adds up to a GMV of $7.4 billion (.45/.83*13.8) in 2015, way beyond what Flipkart actually delivered -- about $4billion. Even now Flipkart's run rate is nudging $5 billion.
The [Morgan Stanley] report peddled forecasts as actual performance data.
The report overestimated the numbers by 85% for a year-ago number (7.4 billion over 4 billion). Imagine when you extrapolate this error to the future. This has ended up muddying the waters, and misreporting the market share numbers. The report peddled forecasts as actual performance data. Shortly after the report was published, Morgan Stanley picked up a stake in Flipkart. I do hope, for their sake, that Morgan Stanley did not base their investment decision on their own rather dubious report!
2. Amazon's steady march
Amazon has grown 6X over last year in GMV on a run-rate basis and continues to grow. Now the run-rate difference in GMV between the two has actually come down to a few large exclusive smartphone OEM deals (at last count Flipkart had 15 such exclusive models). Amazon has signed up Moto and is signing up others. On overall transactions per- day, Flipkart is leading, but the gap narrows every passing week.
3. Traffic and installs
Many references are being made of traffic and app-install comparisons which are fed to the media by every e-comm player's PR department. Internet veterans know that at such scale, this data is useless--at best it is good to make nice investor presentations. What matters is how many people actually transact and buy repeatedly and at what cost--browsing and deal-driven traffic spikes are irrelevant.
Most online e-commerce market data is hogwash, with number of installs being substituted for usage, number of visitors for transactions and GMV for real revenues.
Sure, Flipkart has higher app installs. But installs can be purchased for ₹ 20-60 apiece as this link here points out. At ₹25 apiece, a million Android downloads would cost Flipkart only ₹25 million. That's just ₹ 2.5 crore -- a rounding-off error in Flipkart's annual customer acquisition spend which, including discounts, could be well over quarter of a billion dollars (₹1,700 crore). Are we really going to base our analyses of the state of e-commerce on these numbers?
Most online e-commerce market data is hogwash, with number of installs being substituted for usage, number of visitors for transactions and GMV for real revenues. Our tech journalists and news outlets would do well to exercise due diligence and look beyond what they are being told in company announcements.
4. The metrics that count
The context I was highlighting in the article was that if you push founders towards a single metric (GMV), it weakens the business on other fronts. In my earlier article, "Your Start-Up is Dying", I have discussed which metrics are more relevant than GMV. I have also discussed how unit economics in India is challenging. And for the uninitiated, here's a great guide by A16Z -- one of the top VCs in the world.
5. Why the pecking order will change
I fear the pecking order will change permanently because of the nature of capital backing Flipkart today. Venture capital with short-term investment horizon cannot compete effectively with strategic capital like Amazon in a business where the top player will end up with disproportionate market share because of network effects. I had mentioned this in my earlier pieces--here and here. The network effect phenomenon too has been covered here.
[I]f you push founders towards a single metric (GMV), it weakens the business on other fronts.
Let me quote an ex-Amazon employee from the USA who messaged me yesterday: "Jeff Bezos knows he can't risk losing India. So he's simply made the decision to NOT LOSE. It's that simple."
6. Why app-only was a costly move
The idea of going app-only has proved to be a big distraction for both Flipkart and Myntra. I would once again point to a simple experiment to prove this. Just open Flipkart and Amazon and add a few things to your shopping cart. The data here will be you.
Flipkart and others too realized this and have backtracked on their app-only strategy. Flipkart went app-only for its mega sale Big Billion Day last October day but realised its folly and reversed the decision for its Republic Day sale in January.
Here's what they said themselves (specifically, Peeyush Ranjan, head of engineering at Flipkart): "Websites push users to install the app. But only 4% of the people actually install the app. Flipkart doesn't have a mobile website. So we wanted to give the experience of a native application on a mobile website."
7. Why Myntra is struggling despite a 25% gross margin
Of course, Myntra enjoys a 25% gross margin. But so does everyone in online apparel retailing. In fact, Myntra enjoys an even higher gross margin in private label sales (over 40%). However, that gross margin is completely obliterated by two things:
a) Discounts: They are now a permanent feature since even offline retail now usually has a section that is always on sale or several consumers hold their purchases till products go on a sale. There is a huge cost to wooing consumers online in such a touch and feel category.
b) Returns, cancellations and misuse: A lot of apparel in India is not fitted for Indian body types (i.e., they are usually imported "fits"). Consumers, thus, don't have a clue what size will fit them. L in one label is an S in another. And even if the size is the same, the "cut" can be completely ill-fitting. That leads to curious behaviour. Say I want three T-shirts. I actually order five and then just return two for free. In some cases, even after using them for a few days.
My estimate is that over 20% of the merchandise finds its way back to the warehouse in bad shape...and poof goes your gross margin there!
There are horror stories of how bestseller saris come back after a week with the pallu sewn in. My estimate is that over 20% of the merchandise finds its way back to the warehouse in bad shape and has to be re-ironed, re-packed and is often discarded--and poof goes your gross margin there!
8. Wasteful expenditures
First of all, paternity leave was in ill-conceived example. My bad. To put it in context, my intent was to point out that fancy offices and business-class jamborees to global tech events are unaffordable in the tough business that retailing is and the "extreme" business that online retail is.
9. Too little on mobile payments
Sure, Flipkart has made recent acquisitions in the payments space. But they are not an adequate response to Paytm or Freecharge, or even for a company with ambitions like Flipkart. Let me offer another opinion here. The Unified Payments Interface (UPI) will take a few years to get established and this half-hearted effort at payments will not make any dent in the time horizon I am talking about for Flipkart.
In my view, Flipkart has been given breathing room with the government's new e-commerce policy--if the policy is implemented then the existing players' position will be solidified as a new player can't "buy" market share. For those interested -- you can read my earlier piece "Indian E-commerce Just Hit A New Normal".
10. Founders versus professionals
There is absolutely no debate in my mind here. Founders work 24x7 and professionals 9 to 5! However, the context seems to have been misunderstood -- the kind of professionals that Flipkart needs versus the consultants and analysts it has hired. The leadership switches Flipkart has seen, not just at the CEO level, but in the top management, have come about as the heat has been turned up by Amazon and Alibaba. If that's not a pointer to a leadership crisis, what is? Such situations make investors very nervous.
Every manager has two choices when confronted with reality: Deny and Die or Accept and Act. Let's see Flipkart pick the latter and win.
And finally, I have only one thing to say which I have stated earlier in response to a comment posted on the Founding Fuel website:
"I agree, this bad penny has two sides. The VCs have played their part in creating this froth. I am an admirer of Flipkart and that stays. If anything, this is a call for them to revert to what they were. But as organizations grow older, they lose their passion, become rigid or stupid and founders (due to a combination of early success and huge wealth) lose focus. That happens in every company. But e-commerce is unfortunately a ruthless market and you have no choice but to keep running, and running. I hope this piece is a wake-up call. Every manager has two choices when confronted with reality: Deny and Die or Accept and Act. Let's see Flipkart pick the latter and win. I will be rooting for them."
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