Billion-Dollar Unicorns: Putting Flipkart's Struggles In Perspective

| About: Flipkart (FPKT)
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Summary

Flipkart's inability to contain losses coupled with Amazon's steady growth in the Indian market have led to markdowns in its valuation.

Flipkart expects its fashion business to turn profitable by the middle of fiscal 2017.

Flipkart is also focusing on private labels, which offer higher margins of about 60% to 65% compared to 35% to 45% on regular brands.

However, Amazon also is focusing on this high-margin segment.

Flipkart (FPKT) had a turbulent time in 2016 as it struggled with management changes and exits of top-level executives as well as against the might of Amazon (NASDAQ:AMZN). It started the year 2017 with yet another management change to focus on profitability and prepare it for going public.

Flipkart's Journey

Founded in 2007 by former Amazon employees Binny Bansal and Sachin Bansal, Flipkart originally began by selling books on their site, but it has now evolved into a full-scale online retailer with over 40 million products across over 80 categories.

Today, it has over 10 million daily page visits from over 100 million registered users, 100,000 sellers, 21 state-of-the-art warehouses, and the capability to ship over 8 million packages per month.

Flipkart Fashion, which includes Myntra and Jabong, claims to have 60,000 brands, 5 million styles, over 8 million listings, and over 100 million searches a month. It accounted for about 33% of Flipkart's gross sales in the September quarter.

Flipkart's Financials

Flipkart does not disclose the details of its financials. According to Economic Times, revenues shot up 50.3% INR 15,403 crore ($2.3 billion) in fiscal 2016 while losses jumped 75% to INR 5,223 crore ($780 million). Amazon India on the other hand posted revenue of INR 2,275 crore ($341 million) and losses of INR 3,571 crore ($530 million) in fiscal 2016.

Flipkart has raised $3.15 billion in funding so far from investors including Tiger Global Management, DST Global, Qatar Investment Authority, T. Rowe Price, Steadview Capital, Greenoaks Capital Management, Baillie Gifford, Sofina, Singapore GIC, Morgan Stanley, Accel Partners, Naspers, Iconiq Capital, Dragoneer Investment Group, and Vulcan Capital. Their last round of funding was held in May 2015 when they raised $550 million at a valuation of $15.5 billion, increasing significantly over the $1.6 billion that they were valued at back in 2013.

However, Flipkart is now finding it hard to raise funds at such high valuations. Its talks with Wal-Mart have failed as they were unable to settle on a price.

According to a Bank of America Merrill Lynch report, Flipkart's GMV market share is expected to remain largely unchanged at 44% until 2019. However, Amazon's share is expected to grow to 37% from 28% in 2016. Beyond 2020, Amazon will likely pose a much larger market share threat to Flipkart.

Flipkart's inability to contain losses coupled with Amazon's steady growth in the Indian market have led to markdowns in its valuation. Morgan Stanley values Flipkart at $5.58 billion while Vanguard Group values it at $7.34 billion. The growth fueled by deep discounts and horrible unit economics is considered unsustainable, and it is.

These markdowns have triggered the appointment of former Tiger Global Management executive Kalyan Krishnamurthy as its CEO, a year after Binny Bansal replaced Sachin Bansal as the CEO. Tiger Global and other investors, obviously, want a tighter rein on its operation and losses. The plan is to trim its monthly burn rate to about $20 million from about $45 million about six months ago. But the management churn continues as three senior executives including its head of logistics and chief marketing officer have quit the company.

Flipkart expects its fashion business to turn profitable by the middle of fiscal 2017. Flipkart is also focusing on private labels, which offer higher margins of about 60% to 65% compared to 35% to 45% on regular brands. However, Amazon also is focusing on this high-margin segment and has hired a former Myntra executive as part of these efforts.

If things go as per plan, Flipkart will want to go public in 18-24 months or go for a sale. Amazon was reportedly interested in buying Flipkart in the past for $8 billion, but its investors and founders wanted about $12 billion. Flipkart needs to clean up its act fast and also set some realistic expectations. Nonetheless, the Amazon ship has sailed. They will need to find another buyer, and if they start losing market share to Amazon, the valuation will come down further.

Flipkart, whatever happens in the future, remains one of the flagship efforts by Indian entrepreneurs to build an ambitious company in the Silicon Valley model in India. It has demonstrated good execution, and most importantly, has trained a whole generation of employees who will, likely, go on to become entrepreneurs in the future. Some have already started down this path. In the history of any ecosystem, not all high-impact players end up becoming market leaders. In Silicon Valley, at the very beginning of the Internet, Netscape was the highest impact company. Yet, for all its momentous contribution to the evolution of the Internet, the company got quashed by Microsoft's (NASDAQ:MSFT) Internet Explorer and other Middleware products from other major players.

Even if Flipkart gets overpowered by Amazon, we need to acknowledge Sachin and Binny Bansal as pioneers who dared. And that is worth a great, great deal.