E-Commerce in India

Brand Share % E Commerce India

Rising Internet Users in India
Increase of Smart Phones driving Growth in India

Home to the world’s second largest digital

population
ECommerce Market Size in India
Flipkart (A) – Transitioning to
a Marketplace Model
Case opening – The sandal incident
• Flipkart transitioned from an inventory-based model to a
marketplace model

• Sacrificing customer service quality / assurance for scale?

• Positive WOM was a key driver of early growth → how to deal with
negative WOM now?

• How to retain and build trust among customers?

Developing EC market in a developing country
• Tension between growth and profitability

• Tough decisions confronting a startup as it battles for dominance

• In the face of strong competition

• Indian context
• Infrastructural voids that need to filled by a company looking to create an
EC market
Indian Retail Sector
• Extremely inefficient due to the lack of basic infrastructure
• Supply chain inefficiencies
• High real estate rental costs
• Inefficient distribution channels
Indian Retail Sector
• Unorganized and fragmented retail market affected the presence
and availability of branded products
• Brands with national presence concentrated in a few consumer product
and lifestyle categories
• Affected the availability of branded products

• New customers from second- and third-tier cities → catalyst for

the industry’s growth
Online Retail can eliminate this friction
• People in smaller cities didn’t have access to these products

• This gap is being addressed by online retail

• By eliminating the friction in highly fragmented retail markets and

inefficient supply chains, e-tailing has the potential to offer
smaller local and regional players the opportunity to create
national brands
E-Tailing Market in India
• Highly competitive

• Has both horizontal and vertical players

• Horizontal → Sell products across various categories → Flipkart,

Amazon, Snapdeal

• Vertical → focused on niche products and specific categories →

Jabong, UrbanLadder, …
E-Tailing Market in India
• Land-grab mentality in a winner-take-all game

• Deep discounting to woo customers → price wars in all

categories

• Funded by VC (venture capital) money

Heavily regulated industry
• 100% FDI allowed in cash-and-carry wholesale trading firms
(example: Metro), B2B e-commerce and single-brand retail

• Only 51% FDI allowed in multi-brand retail

• E-tailing not permitted for companies funded through FDI, and

engaged in single- and multi-brand retail
Still there is tremendous potential for Growth in India
Market Growth over Time
Challenges during market development
• Build trust

• Pioneering company has to build the infrastructure

• Such as logistics

• Change consumer behaviour

Build Trust
• In the early stages, consumers are initially unwilling to shop online
since they are unsure if they would receive the product they
ordered

• Product returns were inherently difficult in traditional retail in India

• Made this scepticism even more prominent in consumers’ minds
Build Trust – How Flipkart solved this problem
• Flipkart instituted a 30-day return guarantee
• A first in India, a customer-centric move
• This policy can have significant impact on operations and profitability
• Reverse logistics is complex and expensive

• Focused on customer service

• Slowly built a brand that stood for trust and customer service
Build Trust – how Flipkart solved this problem
• Flipkart decided to buy and hold inventory of products in its
warehouses

• To ensure quality of products

• No fakes get shipped by third-party sellers

• Reliability of service
• No delay in shipping by third-party sellers
Payments
Share of payment systems in India
Payment
• Lack of payment options
• Low penetration of credit cards
• Consumers’ reluctance to pay up front
• Before receiving the product
• A significant challenge to jump start online retail

• Alibaba solved this problem through an escrow account

• Later became the Alipay system

• Flipkart created the “cash on delivery” to mitigate this concern

Cash On Delivery created different challenges
• A Courier has to collect cash from customers
• Deposit it to company’s account

• The cash handling process can be expensive

• Since the courier may have to visit the consumer several times
• if she is not home at the time of delivery
Cash On Delivery created different challenges
• COD also increases product returns
• Consumers may change their mind at the time of receiving the product
• True for impulse purchases
Logistics
Logistics
• Unlike developed markets like the USA, logistics systems in
emerging markets are extremely poor

• Especially a problem in large countries like India

• Where the cost of building a nationwide logistics systems can be quite
expensive
• Time-consuming
Logistics
• Once a company builds such a system, it gains a unique and
sustainable competitive advantage

• Flipkart has spent many years and significant resources to build

eKart
• boasted several fulfilment centres
• 450 hubs across the country
 What contributed to
Flipkart’s initial growth?
What contributed to Flipkart’s initial growth
• Positive word-of-mouth
• Spread due to their focus on customer-centric services

• Lure of the lowest price available online for its products

What contributed to Flipkart’s initial growth
• Backed by a clever communication strategy

• Creative ad campaign in 2011

• “No kidding. No worries”

• The ads leveraged the fact that children were associated with
qualities such as innocence and credibility → lent an undertone of
trust
What contributed to Flipkart’s initial growth
• Customer-centricity
• User-friendly and hassle-free design of website
• Made navigation simple and intuitive
• Dispatch services
• Delivered within a couple of days
• Irrespective of user location

“We will not compromise on Flipkart’s service experience and

threaten the very foundation of the business”
(Sachin Bansal)
Platform
• Flipkart is a two-sided platform
• Connecting buyers and sellers

• At the beginning, it is difficult to break the chicken-and-egg

problem

• In the early stages, the Bansals focused on a single category

• Bought books from a traditional retailer
• Shipped the product themselves
Platform
• Their focus in the initial stages was to build the buyer side of the
platform

• Later they grew the company by buying and stocking the products
in several categories

• It was only after they had a vibrant consumer side of the platform
that they started building the seller side
Business Model: Marketplace or Inventory-based
Inventory Hybrid Marketplace
Model Model Model

Flipkart Flipkart Flipkart

(early days) (at the time (in future)
of the case)
Why did Flipkart move to a
marketplace model?
Why Flipkart moved to a marketplace model
• Asset light
• Building warehouses and keeping product inventory is very capital
intensive
• Requires significant investment in real estate, technology and people to
manage such large-scale operation
• Flipkart needs to decide if it wants to be in logistics business or e-
commerce business
Why Flipkart moved to a marketplace model
• Asset light
• Logistics is high-cost, low-margin business
• Therefore, makes sense to spin out eKart as a separate business [before it
goes for IPO]
• “We saw the expansion of marketplace as a great monetisation, high margin
play, since we earned commission on every transaction done through our
platform without incurring any of the related inventory holding cost”
• Does this logic make sense in India?
Why Flipkart moved to a marketplace model
• Wider product portfolio
• In the inventory model, adding new product categories is slow
• Took Flipkart three years to add a second category to their portfolio
• A marketplace model makes it easier to add a large number of categories
and sellers
• Including the long-tail products (low volume unique products)
Why Flipkart moved to a marketplace model
• Wider product portfolio
• This wider selection can create stickiness among consumers
• The platform becomes the one-stop shop for them

• “It was important for us to provide our customers with a one-stop solution
for all their needs, even the infrequent and unusual ones”
(Sachin Bansal)
• This in turn could lead to higher sales volume
• (GMV of Alibaba vs Amazon)
Why Flipkart moved to a marketplace model
• Speed and Scale
• Faster and easier to scale than an inventory-based model
• Given the large and aggressive competitors in the market, this is a race for
dominance
• Strong network effects among buyers and sellers → winner-take-all
situation?
Why Flipkart moved to a marketplace model
• Speed and scale
• Because of strong network effects among buyers and sellers, scale and
speed are critical to success

• “It is easier to scale using technology, and we were seeing evidence of this
globally in the growth of pure platform companies like Airbnb and Uber. Like
them, we would become a core platform data-driven company and adopt an
ecosystems-based approach” (Sachin Bansal)
Why Flipkart moved to a marketplace model
• Legal
• Indian regulations require e-tailers to have a maximum of 51% FDI
• Since majority of Flipkart’s investments comes from foreign investors, it
may have no choice but to adopt a marketplace model
Advantages of the Inventory
Model
Inventory model has its own advantages
• Control
• Allows for greater control
• Over product quality, stock outs, customer service
• Difficult to manage millions of suppliers, and control their operations
• Especially when there are many mom-and-pop stores new to online
selling
Inventory model has its own advantages
• Control
• In the marketplace model, a company can regain partial control
• Fulfilled by Amazon
• Flipkart Assured
• The product is stored in Flipkart’s warehouse, but the company does not
take control of the inventory
• gives better control, without requiring to invest for the inventory
Inventory model has its own advantages
• Customer experience
• Control leads to better customer experience and stickiness
• Flipkart started the market development by building this trust
• If it loses consumer trust, it ends up in a price war with Snapdeal and
Amazon, with no clear path to profitability
• Fake and counterfeit products a major issue that draws the ire of branded
product companies
• Alibaba has long suffered from this problem
Marketplace vs Inventory
 Factors determining choice of model

Control Capital
Inventory Marketplace
Business Model
Model Model
Customer Capacity
Experience (Scale)
What is more critical for
platform growth?
What is more critical for growth of this
platform?
• Sellers or Buyers?

• Higher share of wallet of existing customers or new customers?

• Combined GMV of ~ 6 billion USD (case table)

• India has a smart phone user base of 887 million (projected 230)
• India has 747 million internet connections
• Annual active buyers for Flipkart is 200 million
Sellers and Buyers in three of India’s leading
platforms
 Choosing between Share of Wallet and New
Customers

Increase SoW? Grow Customer

Base?
Customer
Base
Share of
Wallet
What is more critical for growth of this
platform?
• If the priority is to increase share of wallet of existing customers

→ Flipkart must add new sellers and new categories to its portfolio
What is more critical for growth of this
platform?
• If the key priority is to grow the number of customers

→ Most of the new ones will come from tier-two and tier-three cities
→ Does not make sense to add a large number of niche products
and sellers
→ New customers are likely to start with mainstream products
(such as smartphones)
Path to Profitability
Path to Profitability
• While Flipkart continues to grow by adding buyers and sellers, does
it have a path to profitability?

• In a highly competitive market with price-sensitive customers who

are being trained to buy on discounts, how will Flipkart become
profitable?
Path to Profitability
• What happens when investors lose patience and demand that the
bleeding needs to stop?

• In spite of the tremendous potential, this can be a roadblock to

further investments
Types of Products
The Long Tail Distribution of Products
Head Products, and the role they played in
Flipkart’s portfolio
• Mobile phones, largest and fastest moving category

• Head products accounted for 50-70% of Flipkart’s revenue

• Heavy discounts by all major competitors + free shipping → these

products were unprofitable to the company

• Consumers can easily compare these standard products across

competitive sites → gravitate from the platform
Head Products, and the role they played in
Flipkart’s portfolio
• So, what purpose do these products serve?
• Primarily acquisition tools
• Attract customers to the site
• “Big Billion Day” another such activity to drive customer acquisition by
offering large discounts
Head Products, and the role they played in
Flipkart’s portfolio
• Flipkart needs to keep inventory of these fast-moving products
• To avoid delay in shipping from third-party sellers

• For example, Flipkart buys Samsung phones from several

Samsung distributors
• Aggregates this supply in its warehouse
• Sells it to consumers at a discount on its site
This undercutting by Flipkart creates a
channel conflict for Samsung
• Customers can easily compare the price of a Samsung phone in a
physical store and online → Flipkart needs to offer a lower price
on its site than a Samsung retailer can offer

• The traditional Samsung retailer needs to generate positive

margin, unlike Flipkart who is using this to acquire customers

• Creates a channel conflict for Samsung

• Retailers won’t be happy that Flipkart is undercutting the price
What should Samsung do?
• Control supply of its products to Flipkart
• Difficult, as Flipkart is buying the phones from Samsung’s distributors
• Unless Samsung has a strong control over supply (like Apple), it will be
difficult to control supply

• Void product warranty

• On products bought through Flipkart
• Samsung will find it hard to ignore the volumes in this channel → being shut
off the online marketplaces not an option for Samsung
What should Samsung do?
• Offer different products for online sites

• Avoid direct comparison of its products → protect its distributors

and traditional retailers

• A constant tussle between demands of online marketplaces and

traditional distributors
• Who gets which products (SKUs)
• When
With Flipkart growing, it will become trickier for
Samsung to limit its engagement with this channel
• With its wide reach, Flipkart can go to second-tier players like
Xiaomi

• In the past, Xiaomi would have faced a daunting and expensive

challenge to compete with incumbents like Samsung

• Now, instead of incurring the costs of developing its own

distribution network, Xiaomi can use the Flipkarts of the world
• Reach a wide audience at relatively low cost
• Build volume and brand awareness very quickly
How can Flipkart monetise the head of the
distribution?
• Heavy discounting will make it difficult for Flipkart to make money
from the margin generated by selling these products
• However, it may be able to leverage its large customer base for
some other related services
• Advertising can become a substantial part of its business in the
future
• Flipkart can also start using financial service and payment
products to leverage its large customer base
Long tail products, and the role they play in
Flipkart’s portfolio
• A brick-and-mortar store can only stock the most popular items

• An e-commerce platform can have infinite selection

• Includes long-tail or niche products
• Provides very low volume

• While each of these niche items generates small profit, the

cumulative profit from the large number of long tail items > the
profit generated from the head of this distribution
Long tail products, and the role they play in
Flipkart’s portfolio
• The long tail products consists of niche items
• Accessories
• Unique artisan products
• Not widely available
• Limited demand
Long tail products, and the role they play in
Flipkart’s portfolio
• Accounted for 15 – 25% of Flipkart’s revenues

• Flipkart expects margins on these products to be as high as 20%

• By aggressively building a marketplace of these small sellers,

Flipkart is hoping to generate significant cumulative profit from
these long-tail products
Role of Small Sellers
Activities performed by a Small Seller

Link with
Deliver –
Flipkart’s
Source Catalogue Market Stock Pack and
COD
Ship
system
Such a diverse set of activities is a non-trivial
change for small sellers
• While they had effective monopoly in their small neighbourhood,
they would face a large set of competitors online
• Requires them to be savvy in digital marketing
Such a diverse set of activities is a nontrivial
change for small sellers
• While Flipkart is offering many of its services (such as online
advertising), will the small sellers have the motivation to engage in
these activities?

• Even if they do, will they be able to generate significant

incremental revenue, and continue to sell on Flipkart?
Significant investments in educating the small
sellers
• Significant cost and time needs to be invested for educating these
small sellers to learn these activities
• Churn among these sellers is likely to be high
• if they do not see additional profit
• Competition from Snapdeal and Amazon will make the acquisition
of these small sellers expensive over time
• Flipkart will lack complete control on the quality and customer
service → potentially damage its reputation in the market
Role of the products in the Middle (Torso)
• Unbranded products, such as apparel
• Regional and local brands
• Many sellers of these products were likely to start as niche players
• Use their family members to pack and ship products
• As their businesses grew over time, their in-house capabilities
would not be able to cope with growth
• Flipkart Advantage designed for these sellers
Role of the products in the Middle (Torso)
• Under Flipkart Advantage, seller would stock its product in
Flipkart’s warehouse for a fee
• Delegate logistics (packing and shipping) to Flipkart
• A tag of FA (similar to Fulfilled by Amazon) would build credibility
and consumer trust
• Flipkart can help these sellers to build a brand
“We are going to democratize brand building in India”
Building a brand for Middle products
• “Earlier, the key pillar for building a brand was creative; now it is
data”

• Data on the purchase patterns of a large customer base is a

unique competitive advantage for Flipkart

• Not limited to domestic players only

• Xiaomi
• Build foreign brands that have limited awareness and recognition in India
To capitalize on these opportunities, Flipkart
needs to build new capabilities
• Currently strong in technological capabilities
• Talent consists of mainly tech-savvy engineers

• To be a brand- builder, needs to develop capabilities in:

• Traditional brand management
• Data analytics and machine learning