Homegrown Flipkart aims to give Amazon a run for its money.
By Jason Overdorf
GlobalPost - September 1, 2011
NEW DELHI, India — When rumors of Amazon.com's pending entrance into the Indian market began circulating earlier this summer, insiders from India's e-commerce industry weren't surprised.
Since the disastrous dot-com bust of 2000 shuttered as many as 1,000 Indian e-commerce sites, the business has quietly clawed its way back to prominence, with Indians expected to spend as much as $10 billion online this year, according to the Internet and Mobile Association of India.
And even though the bulk of that money goes to travel sites like MakeMyTrip.com and the Indian railways' booking portal, venture capitalists have already pegged the value of the country's most successful e-retailer, Flipkart.com, at a whopping $1 billion, according to reports.
So has Indian e-commerce really arrived? Is Flipkart an Amazon slayer? Or does the investor feeding frenzy signal nothing more than the beginning of yet another Indian internet bubble?
“E-commerce in India is in a very nascent stage, so while there is a big chunk of demand, it hasn't been fulfilled in the manner it should have been by now,” said Ravi Vohra, Flipkart's vice president of marketing.
“We think Amazon's entry will give further boost to the momentum. We see the pie expanding with the entry of more players.”
The e-commerce business is indeed growing rapidly — with the size of the market increasing nearly 50 percent this year, from around $7 billion in 2010 to an estimated $10 billion by the end of 2011.
But the retailing of manufactured goods from books to cosmetics, which so far only accounts for around $450 million, according to Vohra, may well be poised for an even steeper growth curve.
The reasons are simple. Plane and train tickets have already assuaged customer anxiety about buying online. Flipkart and its leading competitors have licked the problems with delivery that plagued the first wave of Indian e-retailers. And even as shopping malls mushroom across the country, India's small-town consumers are gaining in wealth and sophistication at a much faster rate than physical stores can expand to reach them.
The book business is already feeling the heat. According to an executive who has worked with publishers and distributors, e-retailers like Flipkart can offer deeper discounts on books than the stores located in high-rent areas like malls and airports — though low-margin Mom-and-Pop retailers can still compete. Already, the executive says, many customers are just browsing in the mall or airport, and then going home to buy the title online.
“I prefer buying from Flipkart because their library is extensive, website efficient and delivery process prompt and painless,” said Tushar Burman, a Mumbai resident. “I do not buy books offline anymore, unless I happen upon an interesting one, on one of the rare visits to the bookstore.”
Founded in 2007 by Sachin and Binny Bansal, two Indians formerly employed at Amazon, Flipkart has succeeded by adjusting the e-commerce model to fit local conditions.
With credit-card penetration low, and the postal service and couriers notorious for lost and delayed shipments, the company pioneered a cash-on-delivery payment system and an in-house courier system that covers almost one-fourth of the country. Now selling music, movies, games and software, mobile phones and electronics, as well as books, the company reportedly does $6 million in sales per month.
Flipkart's market cap is only about a hundredth of Amazon's. But with the upstart's growing sales, the Bansals' former employer will need more than a slick web interface to knock them off the mountain. But is Flipkart worth $1 billion?
According to a July report by VCCircle.com, that's the value set by a pending $150 million stake sale to private equity firm General Atlantic Partners.
Vohra refused to confirm or deny that valuation. But according to data collected by Venture Intelligence, rising prices have not deterred investors from placing ever larger bets on India's e-commerce companies — even though none of them has yet turned a profit.
Investment firms have pumped $140 million into e-commerce startups over the past six months, compared with just $48 million in 2010 — while the valuations of some startups soared four to six times, according to a recent article in Forbes India.
“The valuations … do look a bit stretched to me, even though there is strong consumer growth and adoption,” said Alok Mittal, managing director of venture capital firm Canaan Partners.
Currently, equity stakes in many startups are going for prices that value them at more than 10 times their gross sales. And even if those sales take off, the business model that Flipkart and others have pioneered to cope with India's supply chain challenges and wary consumers — free shipping, cash-on-delivery and deep discounts — suggests that at least some players may be boosting their losses with every new sale. Factoring in the whack for shipping, discounts, COD and returns, for instance, Forbes India estimated that a typical book might sell for almost 15 percent less than it costs the e-retailer to deliver it.
Of course, that's exactly the sort of thing people said about Amazon — which is set to begin operations in India by the beginning of next year. And some local booksellers say that Flipkart's numbers do add up.
“Discounts in the book business are very complicated to understand from outside. But there is a logic to it which Flipkart does understand,” said a Mumbai-based executive in the book-distribution business, who explained that most retailers only offer deep discounts on certain titles, where the price cut can be passed on to the publisher. “At worst, they are only as vulnerable as large-format retailers.”
Praveen Kurup in Mumbai contributed to this report from Mumbai.
