Saturday, 28 May 2016

Flipkart issues

As Flipkart's valuations have been sliced by as much as 40 percent, and as the company hews to a new mantra and business model, this is a good time to look at how it ended up in this mess in the first place.
By Rajiv Rao for New Tech for Old India | May 26, 2016 -- 02:15 GMT (07:45 IST) | Topic: E-Commerce

The co-founders of Flipkart, Sachin (l) and Binny (r) Bansal

The bells of doom began to toll for Flipkart early this year when a few investment funds with small stakes in it began to downgrade their investments by as much as 40 percent, sending a high-voltage current through the spines of the tech community.

These haircuts didn't apply to only Flipkart of course. However, since it was the biggest ecommerce player out there -- helmed by founders perceived as arrogant who were constantly in the news trumpeting a gargantuan funding round or a big-ticket hire or some other imagined milestone instead of paying attention to bread-and-butter issues like customer satisfaction and product diversity -- its fall from grace was going to attract the most attention.

Naturally, Flipkart isn't going anywhere soon. It still has millions of customers, a sprawling infrastructure, capable senior management (even if they are all formerly misguided or deluded), money, and a commanding lead over its other domestic rivals.

The only problem is the ecommerce equivalent of a large, great white shark circling the company and its name is Amazon.

While revenue growth at Flipkart and its peers has slowed alarmingly, Amazon's has grown and its market share has accelerated enormously in recent months. Plus, its war-chest is brimming and seemingly bottomless.

Amazon is also equipped with a much sharper, savvier brain that has been honed by decades of combat in the industry. Right now, it seems like a no-contest between itself and Flipkart, especially when Flipkart's customer service reputation and brand image have taken a walloping.

Which is why this is a good time to take stock of where Flipkart went wrong and what it is doing -- primarily in reaction to the circling great white and of course the slump in its business model and valuations -- to right the listing ship.

Certainly not the only company to be guilty of this, Flipkart though was the embodiment of the madness of the ecommerce boom that swept India in the last few years. As Mint observed, Flipkart (along with its smaller rival Snapdeal) kept adding people to its rolls before they could even find them a suitable position. Even if you account for a shortage of talent in the country, this kind of excess was a sign of things to come.

Another obsession was to fill its ranks with mega-salaried Silicon Valley and ex-McKinsey hires rather than people with retail brains who would be able to translate their off-ground experience into the online world.

"There is a reason why Silicon Valley-returned managers (not techies) have a tough time settling in," said veteran investor Haresh Chawla in Founding Fuel. "They are used to dealing with homogenized audiences in the west and this is the first time they are coming in contact with the chaos that is India, the diversity that comprises its consumers and the work ethics that create its organisations," he added.

Also, these American transplants soon ran into stubborn walls of resistance embodied by existing local senior management and other stakeholders who were protective of their turf. Getting things done was a herculean task for them.

This was perhaps the Achilles' heel of Flipkart -- its reliance on Gross Merchandise Value alone as a metric that it would measure to gauge how well it did. If Flipkart sold a mobile phone for the equivalent of $100, that selling price was the GMV. In a normal world, an online retailer would make a sliver of that sale -- around $2 to $3 -- and book it as revenue. However, in Flipkart's case even this amount didn't materialise as they were selling most things for a loss and financing it via their VC injections, a popular practice known as "deep-discounting" that chased customers rather than profitability.

Much like in the last dotcom boom where even seasoned Wall Street analysts were resorting to absurd metrics to justify insane valuations, ecommerce players in India hung their entire business models on the hook of the total cost of goods regardless of how much money they were bleeding.

They constantly tried to one-up each other by pointing out that their individual GMVs were bigger than that of rivals. It was like boasting about the size of your truck engine in comparison to your neighbours' even though both engines weren't working and the trucks hadn't left their driveway in months. And when Flipkart's GMVs began to slump in the last 6 months, you know something was seriously wrong.

As Chawla points out in his now-infamous Flipkart takedown, if that wasn't bad enough, it turns out that over one half of Flipkart's GMV came from selling smartphones where the Moto series alone accounted for $500 million. The lack of product diversification leads to devastating consequences in terms of luring repeat customers and growing your overall business.

This is the next logical link to a lack of product diversity, according to Chawla. A healthy ecommerce business involves hawking a range of products and thus attracting a variety of customers to your site. This forces you to up the ante in terms of search functionalities and other user-friendly bells and whistles, giving your customer a more memorable experience. None of this was happening at Flipkart. In fact, Chawla said that the reviews and Q&As were at a whole different level on rival Amazon's site.

This is what happens when you flog phones to someone who is bargain hunting for just that one product for the entire year and will probably never come back to your site.

In an act of inspired lunacy, as I wrote about here earlier last year, Flipkart decided to abandon its mobile and desktop website and opt for an app-only strategy. Sure, Indians have by-and-large skipped the PC revolution for a mobile one, and this fact probably inspired the move. In addition, patchy internet connectivity across the country and the ability to completely own the customer experience within the portals of the app, feed him or her constant updates, and collect important customer-metrics may have been too tempting a rationale at the time.

Customer service and loyalty are the new mantras at Flipkart, replacing GMV

Either way it was bone-headed. Anyone could see that faster mobile connectivity was around the corner, that low-cost Android phones that were the pre-dominant kind used in India had tiny storage space and that you would lose a large chunk of people who simply preferred the mobile/desktop web browsing experience. Flipkart learnt the hard way and eventually abandoned this strategy, but not before it cost them.

Flipkart has now recalibrated their strategy and to the amusement and chagrin of many have arrived at a new mantra: Customer satisfaction and loyalty above all else, to be measured by a brand spanking new metric much-touted in the press. This is NPS, or Net Promoter Score. "NPS breaks down into what product selection is available, how fast it is available, whether it is available all the time, and at what price," CEO Binny Bansal told Mint newspaper.

It has also hugely reduced hiring to "a trickle" -- but even here it isn't winning any points. Itdeferred by six months the joining date for the 17 job offers it made at the premier B-School in the country, the Indian Institute of Management at Ahmedabad, which has attracted not just ire from IIM but a font of negative press as well.

However, that is nothing compared to the biggest worry plaguing Flipkart's as we speak -- namely, the great white shark known as Amazon cruising effortlessly in Indian waters, gobbling up market share as each day passes.

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