After funding round, pressure grows on Flipkart to boost sales, cut costs
After securing $1.4 billion in fresh capital this week, Flipkart is under pressure to justify the funding by keeping Amazon India at bay and cutting costs.
Growing sales and reducing expenses at the same time will be one of the toughest tasks Flipkart has faced in its 10-year history. Currently, its monthly gross sales, on average, are ₹2,800-3,000 crore, while its monthly burn rate is between ₹250 crore and ₹300 crore, three people familiar with the matter said, on condition of anonymity. Gross sales don’t account for product returns. The numbers include sales at the two Flipkart-owned fashion retailers, Myntra and Jabong.
While Flipkart, which got $1.4 billion from Tencent, eBay and Microsoft this week, has seen a revival in sales growth since October, Amazon hasn’t let up. Mint reported last week that its gross sales jumped 65-70% in the first quarter, and the firm is running neck-and-neck with its Indian rival.
In an interview, Binny Bansal, Flipkart co-founder and group CEO, said the firm is trying to shift sales away from mobile phones, increase its high-margin private-label business and cut logistics costs to try and move toward profitability.
In January, Kalyan Krishnamurthy, a representative of Flipkart’s largest investor Tiger Global Management, took over as CEO. Under him, Flipkart’s dependence on phones, a lowmargin category that accounts for over half of all e-commerce in India, has increased. While that has boosted sales, it has also made it harder to cut losses.
Bansal said Flipkart will diversify by expanding three other categories—large appliances, fashion and furniture—and launching one, groceries.
“What we’re seeing is that the other categories are growing faster than mobiles. So, over the next two to three years, we see mobiles being a much smaller part of the portfolio than what it is now (with fashion, large appliances, furniture and groceries growing faster). Mobiles has a penetration of 30%. The other categories have a penetration in (the low to mid single digits). So, there’s a lot of room to grow,” Bansal said.
In 2015, spending on advertising was a major drag on Flipkart’s bottom line. But over the past year, Flipkart has significantly cut ad costs. Now, its two biggest expenses are discounts and logistics. “We’ll have razorsharp focus on costs across the board, whether it’s on supply chain or marketing or pricing or on the marketplace operations. We want to drive that with a lot more rigour going forward. Lastly, we are paying attention to working capital and free cash flow,” Bansal said.
It’s far from clear whether Flipkart’s efforts will yield results though.
Trying to cut logistics costs can hurt delivery speed and consistency, as Flipkart found out in 2015. And while it may want to reduce its dependence on phones, users may not take to other categories.
“I think balancing both growth and cost-cutting at the same time will be tough for Flipkart—if Amazon goes all out in terms of spending and acquiring more wallet share, Flipkart can’t afford not to spend,” said Satish Meena, senior forecast analyst at Forrester Research.