Old Heads

Business Today - - COVER STORY/FLIPKART -

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,


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.


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-

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.