There were other interesting facets to the deal. For instance, it was mainly Flipkarts old investors who had yet again turned on the taps. When they let $1 billion flow out of their reservoir, they are sending out a message that they are sure of the companys past, present and future, says Mohit Bahl, head of retail practice at management consultancy KPMG India.
Many also saw the development as Flipkarts resolve to fight it out with global giant Amazon that has made no bones about its ambition to be the leader in Indias fledgling $2-billion online consumer retail market. Lending credence to the theory that the countrys largest online retailer and the worlds largest are getting ready for a war, came a declaration from Amazon founder Jeff Bezos himself that he will be pumping $2 billion into India.
Amazon entered India five years after Flipkart had established itself. Yet, it has built a business as big as that of Flipkarts in terms of logistics, sellers, products and categories. Its decision to invest $2 billion in India is a straightforward message that it has what it takes to win the game, says Mahesh Murthy, a serial investor and co-founder of venture capital fund Seedfund.
For their part, Flipkart and Amazon have maintained that their new investments are aimed at strengthening their presence in a market that is set to become one of the worlds largest.
Big fish in growing pond
India is on the threshold of a digital revolution this has been the refrain of every Internet entrepreneur and analyst in the country for the past one decade. Yet today, less than 20 per cent of the population has access to the Internet. While only 243 million Indians are online today, the new government has strengthened the hope of a turnaround by bringing the Internet to the centre of its governance model. The promised broadband highways, the adoption of social media for public communication, increasing thrust on e-governance and, above all, a large young population that lives its life online are factors that have inspired companies such as Facebook, Twitter, Google, Amazon and eBay to lavish attention on the market even as it remains constrained in terms of revenue potential. For instance, e-commerce (or gross online transactions) in India amounted to only around $12 billion in 2013 against the USs $224 billion, Chinas $210 billion, Australias $30 billion and Brazils $19 billion.
At $2 billion, online consumer retail (or e-tail that involves retail buying) represents a small fraction of e-commerce. Given that the entire e-tail market is two-thirds the size of the investments proposed by Flipkart and Amazon combined, the question is: is Indian e-tail a pond big enough to accommodate such a massive fund flow After all, of the 243 million Indians online, only 40-50 million make purchases over the Internet and more than 70 per cent of their transactions involve air or rail ticket or hotel bookings rather than purchases of fashion accessories, gadgets or consumer products.
Its the chase for the potential. Like two-and-a-half decades ago, investors and companies were chasing growth potential in Indias physical economy, today, they are pinning their hopes on the digital economy, says Bejul Somaia, managing director, India, Lightspeed Venture Partners, a venture capital firm that has invested in several e-commerce companies such as Asklaila, Dhingana and Fashionara. While making long-term strategy, one doesnt look at the current scale but the future trajectory. Indian e-tail market is set to grow at least five times its current size in the next two, three years.
Experts point out that being an integral part of every consumers life, retail as an industry will only grow in the future. Industry estimates peg the total size of the retail transactions in India at around $500 billion. Organised retail comprises only around 6-7 per cent of this and online retail is less than 10 per cent of the organised retail. Even a 30 per cent conversion of the total retail pie of $500 billion represents a huge potential of the online retail market, says Rachna Nath, executive director at management consultancy PricewaterhouseCoopers India.
Flipkarts co-founder and CEO Sachin Bansal is hopeful that half a billion Indians will be online in the next four or five years and a lot of commerce and shopping will move online with that. Amazon India believes a majority of new users will accessing the Internet over smartphones. Both Bansal and Amazon India country head Amit Agarwal say that a lot of their investment will go into firming up delivery models, logistics, payments, packaging, supply chain innovations, launching new product categories and overall making online transactions an easy, pleasant experience for both sellers and buyers.
Message and objective
In the first seven months of 2014, several venture capital and private equity investors have pumped $1 billion into about 10 e-tail companies. This excludes the $1 billion raised by Flipkart last week. Clearly, India is a happening market when it comes to e-tailing but some observers see a different story unravelling when it comes to the big-bang announcements made by Flipkart and Amazon.
Amazon has been speaking of acquisitions in India since even before it set foot here. Amazons rival eBay chose a partner in Flipkarts rival Snapdeal. Murthy of Seedfund says Flipkart was hoping it would get lucky with Amazon. According to insiders, Flipkart is currently 90 per cent owned by its investors with the Bansals holding the rest. Murthy argues investors had been scripting an exit strategy for long.
If you look at Flipkarts journey so far, you will see the company became Indias largest online retailer on the back of several acquisitions it made over the last few years. It cant be a coincidence that all the companies it acquired, beginning with music content business of Chakpak, Letsbuy and Myntra, which, in turn, had bought fashion brand Sher Singh, were backed by two of Flipkarts largest investors, Accel Partners and Tiger Global, he says. Murthy says all these acquisitions were made at the behest of these investors. They were essentially consolidating their own investments and Flipkart became the largest e-tailer in the country in the process. The same investors, along with a few more, invest yet another $1 billion and the companys valuation shoots up. What does it mean It means the investors were looking at exiting with handsome returns but such a high valuation made Flipkart rather unattractive.
He argues that Amazon could see through the plan and it walked away from the stage. Was it a coincidence that Bezos announced a $2 billion investment in India just the day after Flipkarts announcement No. He sent out a message that he was not interested in the marriage, says Murthy.
Not everybody buys Murthys arguments. KPMGs Bahl says the new funding from investors was meant to send out a message to Amazon that Flipkart was not up for sale. They made the cost of buying unattractive for Amazon, he says. Since Flipkart has not made any profits so far, it cannot list on the Indian bourses and Bahl sees the company going for a listing in the US sometime soon.
With the possibility of acquisition out of the way in either scenario, Flipkart will now have to compete with Amazon in India and that, according to most observers, is going to be a challenge (see chart). Even as the rest of the industry experiments with business models, products and services, for those competing for the leadership, success will depend on three things vision, capital and execution, says Lightspeeds Somaia.
Murthy believes that with the benefit of experience, global exposure and much deeper pockets, Amazon is in a far superior position than Flipkart.
Meanwhile, in the fight between the two Goliaths, one clear winner is the Indian consumer. Says Kishore Biyani, the doyen of organised retail in India and the promoter of Future Retail: A large part of the money flowing into e-tail business is going into subsidising products for consumers. Deep discounts will become deeper as the competition heats up. Maintaining that physical retail is a different business model and cant be compared with online retail, Biyani agrees that the price wars will influence physical retailers, too.