Is Flipkart losing out to Amazon? Haresh Chawla rings the warning bells for India's top e-retailer

According to an article by the India Value Fund partner, Amazon, through its efforts, is just 'months away from beating' its rival

Flipkart has been hit by a "storm of its own making", says India Value Fund Advisors Partner Haresh Chawla in a scathing article for Founding Fuel that meticulously dissects what ails India’s leading e-commerce company.

According to the signed article, which is being widely shared on social media, Flipkart is facing significant turmoil in terms of top-level management. Growth, the article adds, has been elusive since the “middle of last year”, while innovation has been absent.

For an e-commerce firm which saw its gross merchandise value (GMV) grow by "200% per annum for the past three years", the article argues, the current lack of substantial growth in GMV shows that the very "culture" which made Flipkart successful earlier is "hindering" it now.

 

"Flipkart is the market leader. But Amazon is snipping at its heels and Flipkart has no clue which way to go," Chawla warns in the no-holds-barred analysis.

The article argues that Amazon has been focusing on the fact that over half of Flipkart's GMV comes from sales of smartphones — an area the latter has focused on, according to the article, "to the exclusion of everything else".

Amazon, through its efforts, is just "months away from beating" its rival, the article adds.

We take a look at the key points Chawla raises that could be Flipkart’s undoing in the months to come.

1) The app gap

The article points out that in comparison to the user experience with Amazon's app, Flipkart's app is less than satisfactory. The "search is poor", says the piece, adding that the user experiences is non-intuitive. Additionally, difficult to find products are simply not available with Flipkart.

"I am sure everyone at Flipkart knows that this gap exists but the firm ignored it and was solely focused on pushing deals. Why?" asks Chawla.

Flipkart's drive to transform itself into a mobile-first platform recently suffered a serious blow with the exit of Chief Product Officer Punit Soni, who had been brought in from Google in February, 2015, on a million-dollar compensation package to push the marketplace’s mobile strategy.

In May, 2015, Soni had pushed for Myntra – the fashion subsidiary of Flipkart – to shut down its website on both desktop and mobile and function as an app-only platform.

The move drew flak from users and the industry, but the company had said that it didn’t mind dealing with the slight drop in revenues because it was building for the future.

Back then, Sachin Bansal, the then CEO of Flipkart, had said that the parent platform intended to do the same. However, the strategy was scrapped soon after.

While the app-only move might not have worked at the time, Flipkart did become the first Indian app to cross the 50 million mark on the Android platform.

2) Missing the woods for a tree called "GMV"

If GMV is treated as the only measure of success, Chawla argues, then smartphone transactions, which are "worth 10 times or more than the average e-commerce transaction size", might appear to be the most attractive bet.

However, selling heavily-discounted smartphones in a bid to ramp up GMV at the expense of all else has ensured that "other categories have suffered as has the product experience".

Chawla goes on to argue that if a valuation round is coming up, while signing up exclusive smartphone deals and then selling a few million smartphones by providing steep discounts might allow a firm to claim that it "will hit $10 billion faster than anyone else", the reality is quite different.

Incidentally, mutual fund management firm T Rowe Price, earlier this month, reduced the value of its stake in Flipkart by 15%, becoming the second investor to mark down the online retailer's estimated worth. T Rowe Price had participated in Flipkart's $700-million funding round in December 2014.

In February, Morgan Stanley, another minority investor in Flipkart, downgraded the value of its stock, cutting the company's valuation from $15.2 billion to $11 billion.

According to experts, the markdown can be attributed to growing competition from Amazon and Flipkart's inability to reach goals set by investors.

3) Innovation crunch and ill-advised moves

According to Chawla, the e-commerce giant has missed out on multiple innovation opportunities. Payzippy, he argues in the piece, could have given Flipkart a headstart in mobile payments and that "pulling the plug" on it was inadvisable. Chawla also points out that the Flipkart has yet to establish a loyalty programme or a mobile wallet.

Additionally, not all of its attempts at innovation were well thought out, says Chawla.

Ping, "a feature where consumers can buy together online", was misguided, according to Chawla, and the attempt to go app-only was too soon for the market and the company.

In fact, in February this year, Flipkart shut its on-demand grocery delivery service Nearby, which it was piloting in Bengaluru, weeks after Amazon fully rolled out its own version of the service, Amazon Now, in the city.

While Flipkart did clarify that the shutdown came because the pilot had run its course, Amazon seems to have stolen a march on it.

4) Myntra woes

The fashion-only platform Myntra came "with a great team and supplemented an important category for Flipkart", says Chawla.

However, his article adds that the attempt at going app-only, leadership transition, and "an excessive focus on private labels" has ensured that Myntra has become a loss making venture.

In FY15, Myntra had reported a loss of Rs 740 crore on revenues of Rs 758 crore, compared with a Rs 173 crore loss from Rs 427 crore in the previous year.  The fourfold jump in losses is due to increased spending on advertising and undercutting costs of products, Myntra said in a filing with RoC. Myntra is trying to scale up its operations, getting more users to download its app on their smartphones in the light of Reliance’s entry into the online fashion space with ‘LYF’, which it plans to launch alongside the 4G LTE services of Reliance Jio.

Despite this, according to reports from February this year, Myntra is looking to enter the online apparel and accessories market in the US and has set up a subsidiary — Myntra Inc, US.

Flipkart, for its part, has infused Rs 1,150 crore in Myntra since its acquisition in May 2014

5) Too big to succeed

Further, Chawla contends that "Flipkart has built a cruise liner, not an armada of nimble battleships".

A lack of frugality and a more than 35,000 workforce, argues the article, has made Flipart move away from successful models adopted by the likes of Walmart, Costco and Amazon.

Chawla ends the argument on an ominous note, asking, "We all know what happens to fancy cruise liners, don’t we?"

6) Leadership, or the lack thereof

At the end of the day, the article pins the e-commerce giant's woes on leadership issues.

The internal conflict between the founders and professional top-level managers, according to the article, along with management changes, are the primary culprits.

In particular, the top-level shuffling is evident by the recent loss of Soni, who is the latest in senior management exits. Myntra founder Mukesh Bansal stepped down just a month after the restructuring alongside Ankit Nagori, the company’s chief business officer who had joined it as a young engineer in 2010. Earlier this month, Manish Maheshwari who headed Flipkart’s seller ecosystem quit to take up the position as CEO of Network 18’s web division.