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My thoughts on Flipkart

Source | Flipkart : By Vivek Srinivasan

I should begin by clarifying that I am no expert on E-Commerce. I do not hate Flipkart, although as a once loyal customer, I hate to see what is happening to the company. I do not know any Flipkart employee personally, and these are my thoughts as an external observer.

I have worked in the consulting space for nearly 10 years, with startups and entrepreneurs for the most part. As I understand it, a successful startup finds a niche area and exploits that niche to achieve a commanding position before expanding into other areas and pursuing rapid growth.

Flipkart was founded with books as their niche. Why did they choose books? Maybe they were just copying Amazon, but books as a category made perfect sense. Books are a high margin product and fairly standardized, unlike, say, clothing, where size and fitting can cause much grief after the product is purchased.

Let’s rewind to 2007, an era prior to smartphones and tablets. An era prior to 3G. An era before Cash on Delivery. An era before same day delivery. The smartest phone at the time was a Nokia, and anyone found accessing their e-mail on a phone was considered super advanced.

Hardly anyone bought stuff online, (Indians have a trust issue: paise leke nahi bheja toh?) and those who did, bought from Amazon.com. The import of these products took forever, and the currency exchange was opaque so, one had no idea how much they would end up paying. Personally, I used to buy books from Amazon only when I could not manage to source it despite several requests at local bookshops.

Flipkart arrived in this market as perhaps one of the first online e-commerce portals in India. To overcome trust issues, they started offering books at deep discounts, sometimes even 40%. For those who understand the book business, books have quite a high margin, in some cases almost 60% if the seller is willing to purchase them in bulk. It was possible to earn a profit on a per transaction basis even after offering steep discounts. The discount incentivized people to take the risk, and sales started rolling in.

Flipkart was the first company to introduce Cash on Delivery, and all the associated pains for people handling operations. (Try speaking to an e-commerce player about the number of returns they see on COD orders.) Joy to the consumer, though: there was no reason to fear non-delivery post payment anymore. Add discounts to the mix, and orders began to pick up. Even your dad’s friend was suddenly recommending that you buy books on Flipkart.

Delivery was free above a very low threshold, so if one bought a couple of books, it would be delivered for free with Cash on Delivery. Indians were not used to this kind of customer service. They loved it and lapped it up.

Delivery Moat

The company would have known fully well, based on what was happening in the US, that it would be quite easy for others to set up a website like Flipkart and begin sourcing products. They saw the delivery side of their business as their biggest competitive advantage. They invested heavily to build e-kart, the delivery end of the business, to ensure that they had the most comprehensive coverage of India. This was to serve as their competitive advantage.

Even if Amazon was to enter the market, they would not be able to cover the country as comprehensively as Flipkart, potentially making the latter a great acquisition or a formidable competitor.

Enter Investors

Investors play to make capital gains. They do not seek to take a share of the profit home. They want to invest at a lower valuation and exit at a higher valuation. For a company that is yet to make profits, they use proxies such as Gross Merchandise Value or GMV (kitna maal bika?) or the number of users transacting on the platform. The assumption is that these users will become profitable in the future due to scale and market leadership.

Read On…

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