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Flipkart’s size allows it to leverage economies of scale & scope- Sumanth Raghavendra


By Sumanth Raghavendra

The Indian startup world was abuzz yesterday about a blog post by Haresh Chawla outlining what he saw as problems with Flipkart proffering advice on how it could “save” itself. The post was entertaining — using the literary device of re-purposing quotes from “Saving Private Ryan” and applying them to Flipkart. The post was long — covering a myriad spectrum of aspects related to Flipkart.

All of this would have been fine if not for one little thing. The post was completely unfounded and plain wrong.

So here is my 2p response outlining why Haresh has generally missed the forest for the trees — like Haresh, I am also taking the liberty of borrowing quotes from “Saving Private Ryan” to embellish my riposte!

Contention: “Amazon is snipping at its heels and Flipkart has no clue which way to go.”
Private Reiben: You want to explain the math of this to me?

Surprisingly, Haresh offers zero data for this contention— which one would assume to be required at a minimum when you write a 2,000 word essay on the said topic.

Incidentally, all publicly available data puts Flipkart far ahead of Amazon. For instance, a recent Morgan Stanley report claims that Flipkart’s market share is 4 times as much as Amazon’s. So unless Haresh offers any credible data demonstrating that Amazon is “sniping at Flipkart’s heels”, it is difficult to believe his base proposition that Flipkart is in trouble and “has no clue on which way to go”.

Contention: “Amazon is just months away from beating Flipkart to the No 1 position”.
Private Jackson: Sir… I have an opinion on this matter.
Captain Miller: James, earn this… earn it.

The second part of Haresh’s core contention is that Flipkart is on the verge of “squandering its first mover advantage to Amazon” and that Amazon is going to “ permanently” change the pecking order in Indian e-commerce.

I am not sure what the “No 1 position” refers to — market share, GMV, traffic, brand? Haresh never actually specifies this. But again, as far as I am given to understand, using publicly available data, Flipkart is far ahead of Amazon in every metric from market share to GMV to traffic to brand equity.

If Amazon is indeed “months away from beating Flipkart”, it shouldn’t have been a big challenge for Haresh to demonstrate this using data around any of these metrics. So unless Nostradamus anointed Haresh as his one true heir in terms of making predictions from thin air, there is little reason for us to take his contention at face value.

But let’s leave that aside for a moment and assume that Amazon will indeed overtake Flipkart along one of these dimensions at some point in time. What would be the impact of that eventuality?

Firstly, I am not sure why Haresh claims that this rank will be “permanent” — after all, competing in a market like this is not the same as running a race where the contest is over once you cross the finish line. Just because Amazon crosses Flipkart on one competitive dimension at one point in time doesn’t mean the lead is permanent. Even if such a thing comes to pass, nothing stops Flipkart from regaining its lead at some point of time in the future. Ranks are good as stock checks but are meaningless in a flow system that is dynamic.

Secondly, even assuming that Amazon takes an insurmountable lead over Flipkart, that hardly amounts to being the end of road for Flipkart. Flipkart is a real business with vast resources and great strengths and none of this will change — beyond the media hype around figuring out who “the Amazon of India” is, it means little in terms of actual business.

Contention: “Flipkart has GMV-instilled myopia”
Private: [when setting the German soldiers on fire] Don’t shoot! LET THEM BURN!

Haresh advises Flipkart to not “waste money chasing a vanity target” like GMV and to “find new metrics”. Curiously, he makes no mention of what these new metrics ought to be. Discussing GMV is like opening Pandora’s box — while it is undoubtedly true that it is not a perfect metric, it is erroneous to completely disregard it. For better or for worse, GMV is a widely-used metric in e-commerce world-wide.

But if you believe that GMV is not a good metric simply because it can be manipulated then you are giving investors and market observers far less credit than they deserve.

The market recognizes GMV as a broad metric but applies suitable discounts and premiums when it evaluates the quality of a firm’s GMV. For instance, here is a simple example — the market valuation of Snapdeal, as marked in it’s last funding round, is less than the last GMV figure it bandies about! Unlike Flipkart, where the valuation is 1.5–2X the reported GMV. While there are multiple reasons for this, the primary driver is that the market recognizes and rewards Flipkart for having “higher quality” GMV than Snapdeal.

Also, there are enough signs to demonstrate that Flipkart is already more than cognizant that it needs to go beyond discount-driven GMV as its raison d’être — for instance, notice how all the recent Flipkart TV advertisements are about trust and reliability rather than about discounts and offers.

Contention: “Flipkart has missed the bus with things like the app-only strategy”
Private Jackson: I wouldn’t venture out there fellas. This sniper’s got talent.

Firstly, Haresh neglects to mention that the “app-only” strategy was attempted for Myntra and not for Flipkart itself. Like I mentioned at that time, the app-only experiment was a bold moonshot that only Flipkart could afford to take (since it was the only e-commerce company that had the hedge of two top apps). You have to give credit to Flipkart for attempting this in the first place as it would give them a great competitive moat if it had succeeded as expected. The fact that they didn’t succeed as much as one would have hoped is not because of the move itself but because the execution was poor — the mobile app didn’t have any compelling native features that would have convinced users that the install was worthwhile. Ideally, Flipkart should have instrumented Myntra with such features before making the move. Be that as it may, I would much rather see Flipkart attempt bold experiments like this rather than rest on its laurels.

Contention: “Flipkart’s acquisitions like Myntra are yet to pay off”
Medic Wade: We stopped the bleeding! We stopped the bleeding!

This point is a continuation of the one above. Is Myntra a failed/failing acquisition? Did the app-only move kill its top position? The answer to both is no.

Firstly, in contrast to Haresh’s contention that “Myntra now loses money hand-over-fist”, Myntra has always had positive gross margins and great unit economics. Unlike other categories and companies, where margins are in the low single digits, Myntra has enjoyed gross margins well above 25%. The reason it is not profitable is because it has been investing in growth and scaling up. It also has a clear path to profitability and as per public statements, this is the target for the next fiscal.

Secondly, despite the half-baked app-only move, Myntra continues to reign supreme as far as online fashion is concerned in India. While competitors like Jabong have floundered, Myntra continues to go from strength to strength both in terms of revenue and mind share. The chart below provides a quick demonstration of the latter:

Contention: “Flipkart’s size makes it unwieldy and it needs to become more frugal and spin off eKart”
Private Reiben: It doesn’t make any sense.

Firstly, Flipkart’s size gives it the ability to leverage economies of scale and scope that it’s competitors don’t have — so I am not sure why Haresh is recommending they give this advantage up.

Secondly, citing “paternity leave” as an unnecessary perk that Flipkart needs to do away with is horribly sexist and disregards the fact that frugality, as practiced by the likes of Amazon, is not an exemplar HR practice any which way. While Amazon is a role-model in many ways, it has been widely panned as being the worst employer in the tech world and working there has been described as a soul-crushing experience. Rather than advocating that Flipkart follow this template, we should applaud its progressive HR policies and recognize that every company has its own unique culture. Life is not just about top and bottomlines — Flipkart wants to be a great place to work at and this is a laudable goal.

Finally, this point about spinning off eKart makes no sense whatsoever — having a core asset like logistics in-house is far more valuable to Flipkart both operationally and financially.

Contention: “Flipkart has a leadership problem”
Sergeant Horvath: Soldier, you are way out of line!

While it is seemingly true that there have been leaderships changes galore at Flipkart recently, there is zero evidence to say that this is necessarily a bad thing. Once an organization has grown to the size of Flipkart, both organically and through acquisitions, there is bound to be some organizational matrix challenges. The best way to combat these problems is not by brushing problems under the carpet but by rationalizing the command chain and cleaning up the stable. Mukesh’s exit and Binny’s elevation now makes the chain of command clear to everyone at Flipkart and beyond. While Mukesh may well have been a natural leader, the true ethos of a company resides in its founders — time will tell if Binny can do the things expected of him but given how far Sachin and Binny have come from where they started, who can say that they don’t deserve a fair chance?

Also, leadership churn is natural and all but inevitable in most large organizations. If leaders leaving is a sign that the company is in trouble, then one can contend that Amazon India is in deep trouble too given than two out of its top three executives have recently moved back from India to the US!

Contention: “Payments is a bugbear”
Private Reiben: I got a bad feeling about this one.
Captain Miller: When was the last time you felt good about anything?

It is probably justifiable to attest that Flipkart pulled the plug on Payzippy prematurely — I suspect this was done partly because Flipkart didn’t feel that it was worthwhile to tackle the thorny regulatory issues around online payments itself at that point of time and possibly because industry “experts” would accuse it of not having focus by trying too many things at the same time!

However, this is not to say that Flipkart is not doing anything in the payments piece. Apart from the Ngpay investment, Flipkart has acquired PhonePe to ride the coming UPI opportunity.

Contention: “Flipkart needs a bunch of solid, experienced, execution-oriented professionals with years of retailing experience under their belt.”
Upham: So where are you from, Captain? What’d you do before the war?

It always tickles me pink when experts opine that startups who have broken out in some meaningful manner need to hire “suits” to power their journey thereafter.

Firstly, this contention glosses over the fact that the founders would have perforce come in with some original & unique insight that would have enabled them to originally make their mark and disrupt/advance an industry peopled by “experienced professionals”. This is that startup’s unique strength and other than the rarest of the rare cases, the founders are the ones best equipped to carry the company forward until it reaches a steady state, at which point of time other leadership options could be considered.

Secondly, it is particularly intriguing that Haresh makes this claim given his own experiences with professionals taking over companies like ABCL (which went bankrupt) and Network18 (which has Rs.1,400 crore in overhang debt when the hired professionals exited the company). I hope this isn’t an unwarranted ad hominem (apologies in advance if this is misconstrued that way) but I wonder why Haresh didn’t offer any sage advice to Homeshop18, the now-forgotten e-commerce wing of Network18, when he was a part of the management team. Equally, it seems rather hollow when Haresh pontificates about corporate governance ideals to Flipkart and others given Network18’s own well-publicized Byzantine accounting standards and corporate structure.

Last word
Medic Wade: F&%$! Just give us a f&%$ing chance you S&B!

Flipkart is a totemic company — a once-in-a-generation startup that already serves as an inspiration to millions of Indians. Is it perfect in all regards? Absolutely not. There are a ton of things it could do differently or better. But the point is that the founders are the ones who are best suited to take those calls — after all, they were the ones who managed to take this startup to heights barely imaginable three years back.

Of late, it has become fashionable to rant on Flipkart — many of these rants are uninformed and/or malicious opinions that are heavy on rhetoric but light on real data.

While everyone is entitled to an opinion, it is uncharitable in the extreme to believe that Sachin and Binny are dummies that have no clue on how to run their business and therefore require “advice” of any sort.

To such worthies, I dedicate the following quote:
Sergeant Horvath: You don’t know when to shut up; you don’t know HOW to shut up!

Disclaimer: Nothing that I have said above should be misconstrued as a response from Flipkart — I have no affiliation to Flipkart and have never met or spoken to its founders. I do confess that I am an unabashed fan of Flipkart’s and am backing it to be the e-com bellwether it is meant to be.


Crossposted with permission from the author. Read the original post here.

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