Flipkart’s multi-pronged growth strategy rests on four pillars

19th Jul 2017
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Early one blazing hot morning in May this year, a few empty trucks drove around Bengaluru, not aimlessly but along a designated route. They were on top-secret Flipkart duty–conducting a dry run for its soon-to-be-launched grocery vertical. In June, Flipkart’s employees started placing grocery orders to test out processes. August 2017 should see Flipkart enter this category, that too at scale.

Grocery is just one of the many pieces that make up the jigsaw puzzle that is the Flipkart growth strategy. Every company has that one seminal year that makes it or breaks it; some have multiple such years. For Apple, 2007 was one such year; that was when it launched the industry-defining iPhone. For Flipkart, 2014 was the year when it was catapulted to indisputable industry leadership thanks to its exclusive mobile phone partnerships. This year could be another ground-breaking one for the 10-year-old company as it unleashes a slew of innovations and focuses on a handful of key business verticals to power growth.

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Flipkart DNA

All the strategies are focused on dealing with Flipkart’s twin challenges. One, plug the leaky bucket—ensure that customers who have shopped once on Flipkart keep coming back. Two, convince more and more Indians to shop online in general, and on Flipkart in particular.

Chart 3: Flipkart has made multiple investments and acquisitions, all meant to help it gain strategic advantage

Everything for everyone

Flipkart, and other horizontal e-commerce firms like Amazon, keep adding more categories of products as a hook to get customers back on the portal. The idea is to be everything for everyone. However, smartphones make up for around 25 percent of gross merchandise value (GMV) for e-tailers including Flipkart, according to technology research firm Counterpoint Research. Fashion is another high contributor. Flipkart is now attempting to break dependence on these categories and is focusing on building up capabilities in primarily three categories.

We look at the market with a two-year view and a five-year view. The two-year view is to own the mobile phones and electronics category and expand the online lifestyle market (primarily fashion) where we are the dominant player. In the five-year-view, (the idea is to) take one category at a time and totally transform it. The next categories we are looking to take to the next level are large appliances, furniture and grocery,” says a Flipkart spokesperson.

Large appliances, a category that Flipkart re-launched in 2014, has already scaled up for the company and is now one of its top three GMV contributors, preceded only by mobile phones and electronics, and fashion.

A major share of credit for the success of the large appliances category goes to Jeeves, the after-sales services company that Flipkart acquired in 2014. Having an in-house after-sales team has helped Flipkart ensure super-fast installations of products like televisions, refrigerators and washing machines. The company is running a pilot to ensure installation at time of delivery of 70 percent of large appliances sold. Most offline stores are not able to offer this—installations usually happen 24 to 48 hours after a purchase.

Flipkart also built a separate supply-chain network to handle large appliances (details below). The company learnt its lessons the hard way when it launched this category in 2012. In fact, it was forced to shut it down in just a few months as customer experience was adversely affected due to bad delivery, installation and after-sales service.

Flipkart took those learnings to heart. Ever since the large appliances debacle of 2012—it was one of the fastest categories to be launched and to be shut down in the company’s history—Flipkart has followed a much more mindful approach to category launches. It has opted for soft launches, piloting with fewer products and smaller customer groups before scaling up.

Flipkartoffice sports theme
Each section in the Flipkart office in Bengaluru follows a unique theme, like sports, cinema and architecture

This is what it has done with furniture. It launched the category, almost quietly, in 2015 with only a few sub-segments and products. But the company has made its intention to grow the category in 2017 loud and clear.

At Flipkart, we pick up a category, understand what to do to survive and win in that category. The right way to win this industry is to solve supply and demand problems at scale for furniture. Scale comes automatically for Flipkart. Over the last year and a half, we have been figuring out how to use this scale to win. How do we build the right supply chain and backend capabilities, give the right product mix and value for money for the customers?” says Nandita Sinha, Senior Director –Home at Flipkart.

The company has entered into partnerships with big vendors in India and has also gone abroad to China and Malaysia to ensure quantity and quality as it sets about expanding the number of sub-categories it offers within furniture before Diwali, when the entire country goes on a buying spree. The furniture team too is using Jeeves for assembly and installation.

Flipkart has identified this as one of the key categories and it has a few very good reasons for doing so—larger ticket sizes, better margins, no true nationally established brands, few good offline options for customers and very limited online penetration. The online furniture market is projected to grow to $700 million by 2020, according to RedSeer Consulting, a research and advisory firm. The overall furniture industry in India is expected to grow to $35 billion in 2020, so the room for growth for online furniture sales is massive.

Similarly, grocery is an equally important segment for Flipkart due to the sheer size of the market. At a TiE event in Delhi in April, Flipkart CEO Kalyan Krishnamurthy pointed out that 80 percent of all units sold in India fall under the grocery segment, translating to a market size of $400 billion and $600 billion. So it is a no-brainer that the company would look at grocery.

A Flipkart spokesperson explains that for long-term growth, Flipkart needs to bring more segments from offline retail online. Only about 0.1 percent of all grocery sales happens online in India. The biggest player, BigBasket, processes just about 50,000 orders a day. While scaling up delivery of fresh produce is where the challenge lies, Flipkart sees the potential in catering to a national market at scale. “In staples, there is an opportunity of consolidating demand and doing what we did in mobile phones—growing the market because of our scale. We were able to introduce some mobile phones exclusively in India at a very different price point but with great quality. So a similar logic can be potentially applied to grocery,” the Flipkart spokesperson elaborates. He, however, declined to share specific details. According to a source with direct knowledge of the grocery strategy, Flipkart will launch the category in Bengaluru in August and expand to three more cities in the January to March quarter of 2018.

Bitter rival Amazon has a head start in this category, having launched its hyperlocal grocery shopping app Amazon Now in February 2016 and later its FMCG category Amazon Pantry in July that year. While Amazon Now is available in four cities, Pantry is available in over 25 cities.

Mrigank Gutgutia, Engagement Manager and e-commerce expert at research and advisory firm RedSeer Consulting, points out that the online market size for these categories is still limited. “How much business they can get in the short term is not clear, as grocery and furniture are difficult categories to get people to buy online. Online markets are still limited. This will be a long-term experiment,” says Mrigank.

Supply chain capabilities

Ekart, Flipkart’s in-house logistics arm, has been one of its most compelling differentiators. It has given Flipkart unmatched reach into the interiors of India with a coverage of over 6,500 pincodes. This helps Flipkart cater to 90 percent of its demand internally; the rest is fulfilled through other logistics firms. (India has close to 40,000 pincodes and the largest postal network in the world.) Ekart remains a key component of its growth strategy. “Supply chain is the key to developing these categories as large appliances, furniture, groceries are all are very delivery-challenge driven,” says the Flipkart spokesperson.

To understand how Flipkart uses its logistics arm as a smart weapon, we just need to look at the way they have executed growth in the sales of large appliances. Unlike a mobile phone or a piece of clothing, products like refrigerators, televisions and washing machines are bulky and can get damaged in transit if not handled properly. Hence, Ekart built a separate supply chain infrastructure for large appliances, with dedicated warehouses and staff. Flipkart is able to offer one-day delivery on over 70 percent of large appliances from its 10 dedicated warehouses.

What we have recognised is that customer needs in each category are different—it is speed of delivery for mobile phones, slotted delivery and installation for large appliances, freshness for grocery. Customer needs, speed requirements and cost implications are all very different across different categories. We already have a separate supply chain for large appliances. We find out what the customer needs in each category, and what are the needs in supply chain design. We have four to five supply chains that may use the same asset. But it is a very different philosophy that we are now driving,” says the Flipkart spokesperson.

Flipkart is applying its learnings from large appliances’ logistics to furniture, another category with bulky products. However, unlike appliances that mostly have standardised packaging, many pieces of furniture, like wingchairs for instance, need custom packing. Also, the more that furniture is ‘handled’ the higher the chances of damage and deterioration. Nandita says that for now, furniture is using the same supply chain infrastructure as large appliances, but a dedicated one is being built.

Bouquet of private labels

One of the goals that Flipkart has set for itself this year is to make progress towards profitability. Retailers—offine and online—have used the private label strategy to improve profitability. Margins for branded apparel, for instance, are typically under 20 percent. But margins for private labels are much higher, ranging from 30 percent to over 50 percent, depending on product category. Flipkart had attempted private label quite early in the form of DigiFlip, launched in 2012. This featured a diverse set of products, from pen drives to tablets, but the label was phased out in 2016.

The same year, Flipkart launched its umbrella private label brand Smartbuy, first with products in electronics and mobile accessories. It quickly expanded to 15 categories, including personal audio, home, small appliances and personal grooming appliances. The goal is to take this up to 50 categories. The company identifies market gaps in terms of product specifications, pricing and quality. While Flipkart’s team designs the products, it does not fully own the products. It works with manufacturers in India and China and has a consignment arrangement with them, wherein suppliers are paid only when a product sells.

Now, Flipkart is expanding its bouquet of private labels, especially in fashion. It launched its range of women’s ethnic wear, Divastri, earlier this year, and followed this up in July with Metronaut, its private menswear label. Like with Smartbuy, Flipkart has complete control over design, but selects sellers on the basis of their performance history, quality standards and manufacturing, as well as sourcing capabilities do the manufacturing. Under India's current Foreign Direct Investment rules, online marketplaces cannot own inventory; they can only be a retail channel. Hence Flipkart and other online retailers cannot ‘own’ their private labels.

Chart 4: Flipkart has tried numerous experiments. Some have failed; Graphics by Aditya Ranade

Sources say Flipkart co-founder Sachin Bansal is deeply involved with the development of private labels. Business newspaper Mint reported in June that he is overseeing the building of a budget brand, Billions, in categories like electronics, appliances and accessories. How this will be different from Smartbuy is unclear at this time.

Private labels also are an important means of bringing affordability, a key strategic objective for Flipkart. Affordability is especially important to get the next set of shoppers online. Rishi Vasudev, Head of Fashion at Flipkart, told YourStory in an earlier conversation that Divastri does not particularly have a lower average selling price (ASP) but is value for money. However, according to Rishi, prices will be much lower than in other brands or what you get offline.

According to Mrigank, “Focus on private labels is a good move as it improves the affordability index. Flipkart has been the pioneer of bringing low-price, high-quality products online, like they did with smartphones. In large appliances, the No-cost EMI scheme is working. Private label is a continuation—superior quality at affordable prices.”

Payments PhonePe

Flipkart has stumbled many a time in its attempts to have an in-house payment system. It launched PayZippy for merchant and consumer payments in 2013, but had to shut it down in 2014. The product was conceived as a layer on top of existing payment gateways. This linked performance directly with that of the underlying payment gateway. In 2014, it invested in mobile payments platform Ngpay, but that went nowhere.

In 2016, the company acquired PhonePe, started by former Flipsters, a term used to describe Flipkart’s ex-employees, Sameer Nigam and Rahul Chari. PhonePe is a mobile payments app built on top of the Unified Payments Interface (UPI). The UPI system facilitates instant transfers between bank accounts and also supports instant peer-to-peer (P2P) transfers over the mobile phone. It is regulated by the Reserve Bank of India.

With PhonePe, Flipkart finally seems to have a winner, even though it is early days. In May 2017, PhonePe saw 5.5 million transactions, which increased to 6.5 million in June. Over 40 percent of all prepaid transactions for Flipkart and its subsidiaries (Myntra and Jabong) happened on PhonePe during May’s Big10 sale. PhonePe has some ambitious plans.

Sameer, who headed Engineering at Flipkart when he resigned in 2015, says it is almost basic hygiene for a large horizontal marketplace to have a payments platform. Also, PhonePe users link their bank accounts to the app and do most of their banking-related transactions, even checking their account balance, on the app. “Managing money is almost a primitive or basic operation for a customer. So we are the habitual channel for the Flipkart Group. People associate their daily transactions, which is their checking balance, sending money to somebody, recharges, etc., with PhonePe,” says Sameer, who joined Flipkart along with Rahul in 2012, when their digital distribution platform Mime360 was acquired by Flipkart.

The goal with PhonePe, according to Sameer and Rahul, is to make users do everything related to money on the app.

PhonePe is not looking to just tap Flipkart’s users. As it is a need-fulfiller, PhonePe is going after users who are right now not transacting digitally. The P2P feature is especially useful for this. This works very well for Flipkart as it is looking to get more consumers online and PhonePe could well become a customer acquisition channel for it. Sameer and Rahul agree.

More people are used to remitting money, doing mobile recharges or checking balance digitally, (more than) than buying online. If everything works out well, by the end of this Diwali we should be processing more digital payments everyday than the number of transactions on Flipkart every day. The minute that happens, the access to transacting customers is higher (for PhonePe) than Flipkart,” says Sameer.

Flipkart has shot many arrows into the dark. What it hopes, of course, is that each of these arrows finds its mark.

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