Flipkart: The billion's in. Next up, innovate to stay ahead

Image: Amit Verma

When he joined eBay Inc’s international operations as its employee number five, in Singapore, Kalyan Krishnamurthy would never have imagined that he would be party to acquiring the American company’s Indian operations one day. But that’s exactly what Flipkart, India’s biggest ecommerce firm, where Krishnamurthy is now CEO, announced on Monday.

As part of a funding round, eBay Inc will get stock in Flipkart in return for $500 million and its Indian unit. The definitive agreement is part of a larger funding deal at Flipkart that brings in China’s Tencent Holdings Ltd and Microsoft Corp as strategic investors into the Bengaluru-based company. In total, Flipkart is getting $1.4 billion (around Rs 9,000 crore) in investments in the transaction that values the company at $11.6 billion (in 2014-15, it was valued at $15.2 billion).

The funding has clearly made Flipkart the front behind which all non-Amazon forces have begun to align. “Flipkart has emerged as the de facto leader, and it has the money now to put in all the elements it needs to consolidate its lead,” says Ankur Bisen, senior vice president of the retail and consumer products division at Technopak, a leading consultancy in the retail and ecommerce sector. “Now, we will clearly see two ecosystems evolving, one led by Amazon and the other led by Flipkart.”

And the biggest force to align with Flipkart may still do so, if SoftBank Group Corp succeeds in brokering a deal to sell Delhi-based Snapdeal to Flipkart or arrange a merger. In return, SoftBank will likely own a stake in Flipkart that could include a chunk it will purchase from the ecommerce venture’s largest investor, Tiger Global Management of New York.

“This proves the conviction of the investors in the Flipkart story,” says Bisen. The $1.4 billion funding has been contingent upon a lot of elements coming together. Some of those have fallen into place and the others will evolve as the Flipkart-versus-Amazon dynamic unfolds, he says. The market is pretty much closed for others, he feels. “The time of the small guys is now over. I don’t think anyone else will come in and say I will take on Flipkart and Amazon and build a marketplace.”

That means, SoftBank could do with Flipkart what it did with Alibaba in China—defeat Amazon and list the rival for a superb return on its investment. But there’s one telling difference—Amazon India has set up a well-oiled ecosystem to garner a big share of the Indian market, even as it lags Flipkart by sales volume, whereas in China it never really took off.

At Flipkart, Krishnamurthy, who had a seven-year stint at eBay, is widely credited with engineering a turnaround of sorts that culminated in the latest fund raising milestone and priming the company for its next phase of growth. At a technology conference in New Delhi on April 7, he told entrepreneur Deep Kalra of online travel company MakeMyTrip.com: “Ecommerce in India… it’s not even started.”  

By sheer user-base numbers, of the 300 million to 350 million internet users in India, the transacting base is still very small, he pointed out. If one were to remove payments, bill payments, and specifically look at people who buy products online, “it’s a very small base”. While it might look like a lot of market penetration has happened in India since Flipkart was started ten years ago, in reality, “if I have to guess, the unique user base that buys products every month, I would guess it’s still in single-digit millions,” said Krishnamurthy.

The second way to look at this is the category view. When Flipkart started in 2007-08, it followed a fairly global trend, the way ecommerce happens in the world—first books, then media, branded electronics, mobile phones, branded fashion and so on. “This is the easy journey,” said Krishnamurthy.

And then the difficult part sets in, which is selling appliances, television sets and so on. Then comes the even more complex ecommerce—the unorganised, unbranded clothing, unbranded footwear and so on. And then the final piece, “which is where the world is today, where everybody is trying to figure out groceries”.

In this context, if one were to look at India’s numbers, the penetration of books, consumer electronics and mobile phones is very high online—anywhere in the range of 20-30 percent or higher. In specific segments within a category, such as the Rs 10,000-20,000 mobile phones, penetration could be as high as 40 percent. In the case of apparel, footwear, jewellery, furniture and finally groceries, penetration ranges from about 1-2 percent to almost nothing.

Krishnamurthy added: “That’s another way to look at the potential of the country, right. Ecommerce is just beginning. All of these things have to be figured out. How do you get into the next customer segment, the bulk of the country, the belly of the market, the middle India?”

This is where Flipkart’s founders as well as its management argue that they have the edge over deep-pocketed Amazon, which has committed to spending $5 billion in the market.

Flipkart Chairman Sachin Bansal likes to talk about being inspired by India’s frugal, but world-class space-faring effort at the Indian Space Research Organisation (Isro), that has to its credit the cost-efficient Mars-orbiter mission and a rocket launch that recently placed over a 100 satellites in various orbits successfully.

Bansal said in November at a conference in Bengaluru: “If you want to beat Nasa, don’t try to become another Nasa, but try to be an Isro, which has done the same thing at much lower cost in a very Indian way.”

Mrigank Gutgutia, consumer internet specialist at consultancy Redseer Management in Bengaluru, agrees: “They need to continue to execute the way they have been doing in the last six months or so, and now they can do that on a much bigger scale.” Flipkart has returned to the basics, focusing on the most important categories, increasing the selection, the exclusives and enhancing the supply-chain service and not spending too much money on marketing, he says in an interview with Forbes India. “It has been a very focussed and targeted effort on their part, and as they enter categories such as groceries, if they put the right step forward with the right mindset, they can really keep the ball rolling. Right now they have a big momentum,” adds Gutgutia.
 
At the Delhi conference, organised by the entrepreneur network TiE, Krishnamurthy acknowledged that getting into the first set of categories was the easy part, and the difficult work starts now. “Solving for unbranded low-ASP (average selling price) categories is very difficult. All of us have to up the ante on this, a lot of innovation has to happen: This is where the difference between playing in the business versus solving for the business has to come in. All of this has to be solved for,” he says.

“This is a company which is growing from being a startup to a large company. And it’s not an easy transition to make. Not many companies make that, and that to me was the dominant feeling of where we were,” Nitin Seth, Flipkart’s chief operating officer, told Forbes India  recently. “We were going through that process and it’s going to be a difficult process, but if we get this process right, there will be no stopping this company.”

People at Flipkart love to talk about being “audacious” and so it was for Seth as well. He spent a long time working at McKinsey and Co; he had run its knowledge centre and then led Fidelity International’s Indian operations as country head. Joining a startup was nothing short of audacious for him, personally. He recalls making several trips to Bengaluru, when negotiating to join Flipkart, spending a lot of time with the founders. This was at a time when Krishnamurthy—who had had an earlier stint at Flipkart—hadn’t yet returned, and Binny Bansal was CEO.

“At the high level, what has defined Flipkart is a very intense entrepreneurial culture—with audacity, we take risks, think big and that’s really surprised me about these young people, a bias for action, being comfortable with failing. [There is] high velocity and a very intimate culture, people know each other very well, like a band-of-brothers culture,” recalls Seth.

That’s the kind of culture that Flipkart grew with, and when a company becomes as big as 30,000 to 35,000 people (if one were to include the supply chain contract staff) then the question is how does one scale that culture? Full-time Flipkart employees number around 8,000.

“You need more structure, more processes… you also need different type of people. The people who will give birth to something and somebody who grows it are probably two different types of individuals,” says Seth, who is himself a prime example of the type of professional leader who will run the company going forward. “So there is something about more structure, more processes, different type of leaders that you need to scale up—what got you here won’t get you there. The difficult bit is, how do you do that while retaining your DNA, because if you end up losing your DNA in that process, then who are you?”

“Our philosophy… we believed all the time in making products and services affordable to the bulk of the market, and doing that on the back of technology,” Krishnamurthy said at the Delhi conference. “This was a theme, which has been for several years. Now when we go into middle India, we still go in with the same philosophy.”

He pointed out that affordability is very different from pricing a product low. Today, Flipkart uses an exchange programme—offering a discount on the new purchase against the exchange of the consumer’s old product —and an on-the-fly finance option to make shopping on its site more affordable.

In specific segments, these options are very successful, Krishnamurthy said. Therefore, promoting a purchase today with a cashback three months down the line isn’t the way to do it, he says, but instead with the overall experience of how convenient the purchase can be. He acknowledged that Flipkart did lose its focus on customer service, which helped Amazon gain at its expense. The company starts each year with its top goals for the year and there was a time when service wasn’t one of them, because Flipkart was looking to chase other “audacious” priorities, so it was indeed a question of focus, he said. “Service levels did fall, we started course correcting and over a period of six months we were actually able to course correct, but the perception” can last longer.

There are two or three Indias as ecommerce companies see it. There is a premium segment that is probably about 5 million households, Krishnamurthy reckons, and then there are another 80-90 million households that will do some online buying. Concepts like speed of delivery are important purchase drivers for the first segment—also the most lucrative one. For the next segment, it is hygiene, which as long as it is present is okay. The difference between a day-and-a-half and two days may not be much for the second segment.

Seth points to nuances like what else is important to which segment. For instance, books on the whole may be far less important as a category versus say mobile phones, but for the top customers who make up that premium segment, books are very important. And Seth acknowledges that books are a big strength for Amazon.

That said, Flipkart’s leaders believe their local experience will stand them in good stead as they expand into the larger India. For instance, Flipkart is widely acknowledged for implementing cash-on-delivery. “It was a nightmare, but you did it,” MakeMyTrip’s Kalra said to Krishnamurthy at the Delhi conference.

In 2015, after a mobile-app-only experiment didn’t work out, Flipkart bounced back by building instead what is called a progressive web app, for which it collaborated closely with Google. With the necessary browser settings permissions, the web page behaves much like a native app. “If you look at all the meaningful innovations in retail and ecommerce in India over the last 10 years, I’m willing to bet that 100 percent of those came from Flipkart,” Krishnamurthy said. To which Kalra added that MakeMyTrip looked at Flipkart’s experience and adopted its progressive web app technology. “Your ex-design head is our design head,” he said in that chat with Krishnamurthy.

Flipkart has also made acquisitions. Myntra and Jabong gave it a dominant position in the online fashion shopping scene. PhonePe has given it mobile payments capability and Jeeves, the ability to send technicians to customers’ homes on demand. The thing about acquisitions, given the very high probability of failure, is that they have to be done when really necessary, Krishnamurthy said. And Myntra is “one of the most successful acquisitions in India”.

Jeeves today has a network of 300 nodal centres from where technicians can fan out and provide demonstrations, installations and so on. “Now we have the end-to-end capability in large appliances.” This all feeds back into the idea of making the overall experience for the customer an ever richer one at Flipkart, and that philosophy has been there “even before me,” said Krishnamurthy.

Specifically, “[In] 2014, this company was going like this,” Seth tells Forbes India, gesturing with his arm to mimic an arrow or an aircraft taking off fast. That year, the company had raised over $1 billion in funding. “In 2015, we in this entire audacity made a few decisions which, in hindsight, didn’t go well.”

There were a few business decisions like moving towards the marketplace model, focussing totally on the mobile app and “then we had this very heavy influx of leaders, with this whole mindset of what got you here will not get you there… we had a lot of people from Silicon Valley, Google, Amazon and so on.”

In hindsight, that was just too big a change for the company to absorb and, in 2016, it was clear that some of those bets had not gone well. This was the time when Seth had also joined and Binny Bansal had taken over as CEO. “We had to make a number of hard calls in terms of cost, our business model, our senior team and it was a very tough process,” Seth says.

The results of the painful change, however, are beginning to show. The quarter ended December 31, 2016, was one of the company’s best, with sales growing 60 percent over the previous quarter. “We brought our cash burn down very significantly, and we got our customer experience back up at a historic high,” Seth says.

Competition was intense and Amazon has been stepping up the ante quite aggressively. And “we were very happy that we were able to rebuild our lead in a very significant way. We’re still there, probably in the last phase of that transition, but it feels like we’re coming out of that transition… from a startup to a larger, more scalable and sustainable company,” says Seth.

In all this, as Flipkart underwent changes, including at the top, there have been many who concluded that essentially, Tiger Global, Flipkart’s top investor had taken charge and the investor’s man Kalyan Krishnamurthy was running the show. He had returned to Flipkart in mid-2016 and in January this year was named CEO, replacing Binny Bansal.

Seth disagrees: “There is always this association of Kalyan and the investor perspective, so I think we should decouple that. Very clearly, Kalyan is the chief executive of this company, and he’s probably one of the best qualified people in Asia to be doing this role. It just so happens that he has spent time with one of our investors, but we do him a disservice by constantly attaching the investor perspective.”

Krishnamurthy himself, with one small, but telling, contribution from Kalra, offered a more nuanced picture.
“I have certain unique, specific skills that I bring to the table. That’s the reason I came in to do a particular role. The company is 10 years old, and I’ve been associated with it for six of those. I believe I’m professional, but I don’t entirely qualify for the professional CEO [tag] as a complete outsider. I’ve been involved very deeply with the business since May-June of 2011.”

Kalra revealed that Krishnamurthy had told Lee Fixel, the head of Tiger Global’s private equity and VC business, “way back that ‘I would rather go and work with Flipkart than work at Tiger [Global]’”. “I think it gives us an inkling into where your heart is,” Kalra told Krishnamurthy.

The Flipkart CEO also seeks to downplay the idea that he calls the shots exclusively. “Do we [the founders and him] have beers together, yes, we are very involved, very engaged with each other, so it’s not that it was a founder-driven company and now its run professionally. It’s very much in the same zone it was. I was not a complete outsider, part of the family in some way… founders are still very much involved.”

And that engagement will be even more crucial now. The funding was perhaps the easier part, with the wide open, undeveloped market up for grabs by the best player.

After the latest funding round at Flipkart, “at least one company is standing out, and they have a chance to prove themselves and build a lasting company,” Mohan Kumar, a partner at Norwest Ventures, says in a brief phone call with Forbes India. Over the next two to three years, “if they use the money wisely and they really have a business model which is scalable, if they execute well, they can build a lasting company. Time will tell, because there is no guarantee on that”.

Krishnamurthy is only too aware of that. He recalled his induction programme into eBay in late 2004, where he sat through a session on the consumer internet of that time, which included a presentation on the biggest companies in various related areas. Among those were Yahoo and Lycos and not Google. “Some of these were $30, 40, 50, 60 billion companies. So I’m paranoid to that extent,” he said. “The time frame, if we are not watchful, if you miss the boat, if you don’t think about innovation like 25 times a day, it’s so easy to become irrelevant, it’s scary.” Every 7-8 years, a large number of big companies disappear. “It is the scariest thing.”

As long as that paranoia feeds into India’s most celebrated unicorn’s growth the right way, propelling it to churn out genuine innovations that can help it win the hearts and minds of its consumers, the road ahead could be one for Flipkart to lose.