Old Heads

Binny Bansal Group CEO

HANDLED THREE ENTITIES: Flipkart, Myntra-Jabong, PhonePe WHO REPORTED TO BANSAL: Kalyan Krishnamurthy, CEO of Flipkart Ananth Narayanan CEO of Myntra-Jabong Sameer Nigam CEO of PhonePe Group Focus Growth at any cost, less focus on costs or profitability

The rest of the graph, if completed, would look equally spectacular. 2017: Flipkart raised nearly $4 billion. 2018: the world’s largest company by revenues, Walmart, paid $16 billion to buy 77 per cent stake — nearly $13 billion more than what it paid for Jet.com, its last major e-commerce acquisition; $5.5 billion more than its consolidated net income for fiscal 2018; $6 billion more than its capital expenditure on stores, e-commerce, technology and supply chain for the entire year; and $1.6 billion more than what it returned to shareholders through dividends and share repurchases during the year.

What did Doug McMillon, President and CEO of Walmart, foresee that other corporations did not?

Certainly not Binny Bansal, Co-founder of Flipkart, resigning within three months of the acquisition closing, after an investigation into allegations of “serious personal misconduct”. The investigation did not yield enough evidence but found “lapses in judgement, particularly a lack of transparency, related to how Binny responded to the situation”. This spooked some investors.

Edward Kelly, a Wells Fargo analyst, popped the question during Walmart’s third quarter earnings call on November 15. “Should we be concerned at all? Maybe any colour on the strength of the bench within that business?”

Dan Binder, Vice President of Investor Relations at Walmart, responded saying the company was disappointed with the situation. “We’ve taken actions to change the reporting structure and we feel good about the bench. I think it’s really important that when you look at a company like Flipkart, when you get to that size and that level of complexity, it’s not only about one person,” he said, and added, “Probably I wouldn't say much more than that at this point, but we’re committed to India. We still really love the business. We’re going to continue to push forward, but we felt it was appropriate to make the changes we did.”

Walmart has made some changes and will press for more. The question is how many. How will it change Flipkart, the growth-at-any-cost poster boy? Could Flipkart still be nimble under the watch of a $500 billion big-box retailer? And can Walmart help Flipkart compete better with Amazon, which is charging ahead in India? There is a near-term, mid-term and long-term answer to many of these questions.

We wanted to hear Kalyan Krishnamurthy, Flipkart’s CEO, answer these questions. The company, initially, agreed for a call at 10 am on November 21, but changed its mind. Krishnamurthy, Business Today was told, is travelling. Next, Flipkart agreed for an e-mail interview, but when the responses came in, they were from a “Flipkart Spokesperson”. Meanwhile, the company’s corporate communication executives, and its public relations agency, Edelman, called up the writers multiple times to understand what the story was about. BT had met three Flipkart executives in Bengaluru post the Walmart acquisition. Follow-up call requests were not entertained either. Communication executives from the company, who would regularly send WhatsApp messages to check on “the status” of those interviews, stopped responding over the past one week as well.

All this reinforces our belief that the company is perhaps confounded with the transition. BT’s narrative here is an outcome of what we saw, in regulatory filings, analyst reports, public speeches, and professional networks; of what we heard, from employees, former employees, the competition, lawyers, retail experts, and authors; and from what we experienced, when we visited Flipkart’s and Myntra’s headquarters in Bengaluru, a few months ago.

A New Flipkart

The milestones story on Flipkart’s website also misses the dramatic leadership changes that have taken place in the company. Sachin Bansal, who started the company with

Binny Bansal, was the chief executive till January 2016. Binny Bansal, the Chief Operating Officer, subsequently took over as the CEO, while Sachin Bansal became Executive Chairman. In a year’s time, it was time for change again. Binny Bansal was promoted as the Group CEO.

The Flipkart Group has many entities. Three platforms — Flipkart, Myntra, and Jabong — form the company’s core. The group owns the payments company PhonePe as well. Both Myntra and Jabong are fashion e-tailers; and Flipkart also sells fashion. Company executives are coy to say so in public but Flipkart Fashion competed fiercely with Myntra-Jabong.

When Binny Bansal took over as Group CEO, Kalyan Krishnamurthy, who had earlier worked in the company as Head of Category Design, was appointed CEO of Flipkart marketplace, in January 2017. Ananth Narayanan headed Myntra and Jabong and Sameer Nigam was the chief of PhonePe. Narayanan and Nigam both reported to Binny.

There was a reason behind the frequent changes at the top. Despite many milestones, Flipkart was wobbling. The rivalry with Amazon had started taking a toll and investors were turning aggressive. According to data from Venture Intelligence, Flipkart’s valuation dropped 24 per cent when it closed a $1.4 billion-funding round in March 2017.

Krishnamurthy steadied the ship over the next 17 months, fired non-performers, focussed on the key revenue categories of smartphones, fashion, and large appliances, while ensuring execution. Walmart has rewarded him with a step-up; one visible change, post the acquisition. Sachin Bansal, meanwhile, quit the company in May 2018, soon after the acquisition.

With Binny Bansal too quitting Flipkart, Myntra’s Narayanan would now report to Krishnamurthy, who in turn reports to the Flipkart Board. Krishnamurthy is like a Group head, although his designation remains the same and the payments business is outside his purview. Nigam would directly report to the Board. The idea is to house the trading businesses under one leader.

Meanwhile, Jabong, which Myntra acquired in 2016, has been integrated into one backend, including the technology platform, supply-

chain, marketing, and other functions. “Efficiencies will come in because everything will be managed by one team at the backend. As part of the process, some jobs become redundant. That is how efficiencies are brought in,” a source close to the developments, says. “Myntra remains an independent team and will run the business with the same strategy, maybe a more aggressive one,” he adds. About 200 jobs have reportedly been made redundant, but the company has not confirmed any number.

Govind Shrikhande, retail consultant and former Managing Director of Shoppers Stop, a department store chain, says that most of Flipkart’s growth is coming on the back of enormous loss. While a technology company looks at customer acquisition, a traditional company like Walmart looks at Profit & Loss (P&L) first. “Both Myntra and Jabong making losses doesn’t make sense as their customer base is almost similar. It is not possible for a large company like Walmart to not think about consolidation and rationalisation. They may not like to lay off, but when it comes to the company losing money, one has to save the company, than the individuals. If the company survives, more people will survive,” says Shrikhande.

Satish Meena, an analyst with Forrester Research agrees and says that Walmart will first change Flipkart’s mindset. “Flipkart, coming from a start-up mindset, looks for only growth. They needed to raise the next round of funding and needed to show GMV (Gross Merchandise Value) growth. That is going to change now,” forecasts Meena. “They will have a focus on growth but also profitability and cost reduction...things like Jabong merging into Myntra,” he adds.

A further indication of this is that the third quarter earnings call mentioned Flipkart 17 times and investor concerns included the impact on various line items in the P&L.

When the acquisition was announced, Walmart expected a negative impact of 25-30 cents to its financial year 2019 earnings per share (EPS). In FY20, the company anticipates an EPS headwind of around 60 cents a share. On May 9, after the acquisition was announced, Walmart shares fell 3 per cent with many investors sounding sceptical. The fact that Flipkart is a loss making company and that it won’t turn profitable any time soon played heavy on their minds. One analyst commented that “the only potential benefit to Walmart and its investors is that Walmart’s backing potentially makes Amazon’s fight for India more expensive”.

In the year ending March 2018, Flipkart’s two main entities, Flipkart India Pvt. Ltd and Flipkart Internet Pvt. Ltd, lost ` 3,226 crore, up from losses of ` 1,885 crore in the previous year, regulatory filings sourced from Paper.vc, state. This means that losses increased 71 per cent.

Amazon India, which operates many subsidiaries, appears to be burning double the money. Losses from just Amazon Seller Services Pvt. Ltd stood at ` 6,287 crore in the year ending March 2018, up from ` 4,831 crore in 2016/17. Amazon ascribed the losses to investments in “establishing infrastructure, opening new fulfilment centres, and technology advancement”.

Rule of Law

The second visible change in Flipkart is around compliance.

Since the Flipkart acquisition closed in August, Walmart has made four appointments. This tells us a bit about another short-term to medium-term priority — making sure that Flipkart is compliant with Walmart’s governance framework, ethics, and much more. Or fix its weaker processes.

Daniel De la Garza joined Flipkart as the Chief Ethics and Compliance Officer in October. He was earlier at a similar position in Walmart Central America. He is an attorney with experience in corporate law and anti-corruption. Grant Coad has joined as General Counsel at Flipkart and was earlier with Walmart Canada where he led a team of compliance professionals. Emily McNeal is the new Group CFO. In her earlier avatar, she was Walmart’s Global Head of mergers and acquisitions. Finally, there is Dawn M. Ptak, who joined as Vice President, Group Controller,

"AS AN ORGANISATION, WE HAVE ALWAYS PUNCHED ABOVE OUR WEIGHT. THIS HAS KEPT US AFLOAT TODAY. AND IT WILL KEEP US AFLOAT FOR THE NEXT 20 YEARS" SANDEEP KARWA/ Senior Director/ Flipkar t

in September, from Walmart China. Her LinkedIn profile talks of what she would focus on in India: “Lead process improvement initiatives and set the standard for strong compliance to internal controls”; “Ensure compliance to US GAAP & GAAP reporting... accounting policies”; “ensure financial statements are completed in a timely, effective, accurate, and efficient manner with strong financial controls and governance”, among other things.

Nigam, PhonePe’s CEO, points out that the focus on corporate governance has to do with Walmart preparing the Flipkart Group for an eventual public listing. “Walmart is not here to run Flipkart. Walmart is here to help shore up Flipkart and I think that is in terms of systems, compliance, audits... all things that are needed to be IPOready, to be able to respond to the market every quarter,” says Nigam, adding that this is a different world than what the group is used to. “That’s where the influence is being felt.”

Flipkart, in its official response to BT’s questions for Krishnamurthy, said something similar: “At Flipkart, we always believe that continuous improvement in processes and innovation is critical to create long-term value for stakeholders. Through continuous improvement in business processes, leadership and teams are working to make the company ready to execute its long-held aspirations for an IPO.”

It is, therefore, not a surprise that Walmart is in the process of implementing practices under the Foreign Corrupt Practices Act (FCPA), which deals with bribing of foreign officials and ensuring accounting transparency, a lawyer closely associated with Flipkart told BT. “Flipkart did not have such strict adherence (but) now Walmart will ensure that these practices are followed. Another part is the code of ethics, which will perhaps be strictly implemented,” he says.

It would, however, be wrong to conclude that Flipkart didn’t have strong processes, says an employee who didn’t want to be named. “Flipkart has great processes. The policies are people friendly. However, compliance is always about continuous improvement,” the employee says.

Flipkart, for instance, has in place a Prevention of Sexual Harassment Policy. During the year-ended March 2018, the company received three complaints of sexual harassment, which were then investigated, and two were disposed, according to the company’s annual filing with the Ministry of Corporate Affairs, sourced from Paper.vc. “In all the cases, the investigation was duly conducted and the matter was settled appropriately, by issuing warning letter(s),” the company discloses.

Globally, Walmart is a very compliant company, says a Partner of another prominent law firm that works with multinationals, but didn’t want to be named. “Because they are so much in the public eye, even a small thing gets blown out of proportion. I won’t be surprised if they overstaff the legal or the compliance function.” During the acquisition deal, Walmart proceeded with extreme caution, breaking up the legal work among three-four law firms “so as to maintain objectivity and get best advice. Most of the Indian law firms also had an overseas counterpart.”

It would be interesting to watch how Walmart deals with FDI related disputes. Flipkart, and other marketplaces including Amazon, from time to time have been accused of violating India’s Foreign Direct Investment (FDI) norms relating to e-commerce, primarily around ownership of stock and discounting. As per the central government’s Press Note No. 3 of 2016, FDI is not permitted in inventorybased model of e- commerce. The note also says that marketplaces aren’t allowed to influence the sale price of goods and services.

Walmart’s processes extend to other aspect of the business too. For example, its motto is ‘Every Day Low Price’. The company buys for less, operates for less, and then sells more. This is a productivity loop. Anything that doesn’t fit into the low-cost motto is unacceptable. Its employees are not allowed to accept gifts as that in-

creases the cost of doing business for the supplier. When executives can’t say no to a gift, for instance in a situation like an investment summit where they could be gifted a shawl, they drop it in an ‘ethics box’ in the company with a note. Executives don’t fly business class, because that’s incurring higher costs in operations and someone pays for it, which is ultimately the customer.

Walmart also has stringent compliance norms for suppliers. The supplier cannot use child labour, and has to pay workers’ wages on time. The workplace has to be safe. New suppliers initially find compliance difficult but over time, get used to the culture. Ditto for new employees or newly acquired companies.

The focus on ‘Every Day Low Price’ is where Walmart starts resembling rival Amazon in some ways. Or the other way round.

What McMillon Saw

Amazon’s strategy has three pillars — selection, convenience and pricing. It works at removing costs in its ecosystem, which then lowers the price of selling a product. Sellers are, therefore, empowered to offer a low price.

Amit Agarwal, Vice President and Country Manager, Amazon India, told BT last year that the e-tailer’s job was to bring the right kind of demand to sellers. “It is about finding a few moments in a year where there is a high propensity to shop. Republic Day or Diwali. We advertise to bring a lot more customers to the seller. Because on these events, the (number of) customers coming to the sellers are so high, they have to make lesser absolute rupee on every transaction. Our business model is based on systematically removing line item of costs in a business P&L,” he had said.

Flipkart, thus far, has followed a similar strategy and has been exceedingly successful at it. An analysis by research and advisory firm RedSeer Consulting found that Flipkart beat Amazon by a substantial margin in the Diwali sales of 2018. Flipkart accounted for more than half of the GMV for the entire industry during the sale period of October 9-14, 2018. The e-tailing industry raked in a GMV of ` 15,000 crore or about $2.3 billion. Amazon accounted for 32 per cent of this.

“WALMART IS NOT HERE TO RUN FLIPKART. WALMART IS HERE TO HELP SHORE UP FLIPKART AND I THINK THAT IS IN TERMS OF SYSTEMS, COMPLIANCE, AUDITS... ALL THINGS THAT ARE NEEDED TO BE IPOREADY, TO BE ABLE TO RESPOND TO THE MARKET EVERY QUARTER" SAMEER NIGAM CEO, PhonePe

Amazon disputed the numbers, questioning the research methodology.

Although Amazon started in India six years after Flipkart, in 2013, it grew fast. Forrester Research estimates yearly marketshare numbers: In 2017, the Flipkart Group (including Myntra and Jabong) garnered a GMV marketshare of 38.7 per cent versus Amazon’s 32 per cent in India’s nearly $20 billion e-tailing market.

If you dive into the key categories, the share of Flipkart in online fashion is disproportionally high at 55 per cent while Amazon is pegged at 17 per cent. But Amazon appears to be catching up fast in smartphone sales with a 39.5 per cent share in 2017 compared to Flipkart’s 47 per cent.

In the year ending March 31, 2018, Flipkart recorded a GMV of $7.5 billion and net sales of $4.6 billion, a growth of more than 50 per cent from the year before, Walmart disclosed during the acquisition announcement.

Flipkart has more than 150 million registered users and nearly 20 million people visit its site or app everyday (Flipkart did not confirm the number of daily visits).

This is what Walmart CEO McMillon saw — an Indian start-up that is a match for Amazon. Flipkart would add an edge to the company with its innovative culture, focus on exponential technologies such as Artificial Intelligence and robotics. This is what could play out over the long-term.

Walmart’s e-commerce business in the

US is no match to Amazon.com’s which commands a 48 per cent share of projected retail e-commerce sales of $526 billion in

2018, according to data from eMarketer. Walmart’s share is a tiny 4 per cent of all online retail spending, or about $21 billion. Nonetheless, Walmart’s ranking in the US pecking order has jumped to No.3 from No.4 in 2017. While it displaced Apple, Ebay holds on to its second position with 7.2 per cent share.

eMarketer’s Principal Analyst Andrew Lipsman says in a note that Walmart’s “e-commerce business has been firing on all cylinders lately”. He adds that “the retail giant continues to make smart acquisitions to extend its e-commerce portfolio and attract younger and more affluent shoppers. But more than anything, Walmart has caught its stride with a fast-growing online grocery business”.

Walmart, for many years, underinvested in technology and e-commerce. While Walmart.com started in 2000, its e-commerce strategy probably started falling in place only after its 2016 purchase of New Jersey-based Jet.com. Next, it formed an alliance with JD.com in China. Other e-commerce brands in its portfolio include hayneedle. com, shoes.com, moosejaw.com, modcloth.com and bonobos.com. Walmart has now started allocating more capital to e-commerce and technology, and less to new physical store openings.

Flipkart, feels retail consultant Shrikhande, is just one of the pieces in Walmart’s larger India game plan. The overall retail market in India is worth $700 billion and moving towards $1.1 trillion. “This is one of the biggest markets that is available. China is saturated, and Walmart hasn’t done too well in markets outside of the US. With no major big player in sight in India, there is scope for them to make it among the top four retailers from an omni-channel perspective. They already have Flipkart and as and when Foreign Direct Investment opens up (FDI in multi-brand retail isn’t allowed), they will acquire a few com-