Flipkart must not squander its latest funding on discounts

It needs to reduce its burn rate

Flipkart, the homegrown e-retail major, has raised $1.4 billion from Tencent Holdings, eBay and Microsoft in its single-largest round of funding so far. This comes almost two years after it had mobilised $2.4 billion in three rounds, ending in July 2015. At its peak, Flipkart was valued at $15 billion. But, after it came to light that the Indian e-retail opportunity was not as big as initially expected and that Flipkart was still a long distance away from profitability, investors had started to mark down their investments. The most dramatic of the write-downs came when Morgan Stanley revalued Flipkart at $5.4 billion. That is why raising these funds is all the more creditable. The latest valuation is pegged at $11.6 billion and sends out the message that Flipkart has a viable business strategy in place.

In the past, Flipkart had unwisely used money raised from investors to acquire customers through deep discounts. According to some estimates, its burn rate was as high as $80 million a month in 2015, when the discount wars were at their peak. So long as the money was easy, there was nobody to question the strategy. But investors soon realised that giving discounts was like putting money into a bottomless pit. There were no gainers in this game, and everybody bled. Loyalty among customers was zero, and they were happy to move to another e-retailer if it offered more discounts. That is when the investors started to push for lower discounts so that e-retailers could focus on unit economics and become cash-flow positive. Loyalty was sought to be created by offering them a wider choice, exclusive deals and a better shopping experience. Indeed, Flipkart had told analysts late last year that its burn rate was down a quarter from the peak levels — or at around $60 million a month. Though this had impacted growth, it brought some sanity into its business model. That the earlier strategy needed a rethink was evident when Kalyan Krishnamurthy was appointed chief executive officer in place of co-founder Binny Bansal. Earlier, Binny Bansal had replaced Sachin Bansal, the other founder, at the helm. Many felt the change was imposed by Tiger Global, which has so far invested a billion dollars in the company — Mr Krishnamurthy was a Tiger Global appointee.

Flipkart would be advised to stay the course and not squander the money it has raised now on discounts even as it faces a formidable opponent in Amazon, which has earmarked a whopping $5 billion for India. Of the $1.4 billion Flipkart has received, analysts have said that $200-250 million will be used to acquire eBay’s business in India. The remaining $1.2 billion can finance its cash burn for 20 months. If it wants to utilise this money to expand its reach and acquire capabilities, it has no option but to reduce its burn rate. In an interview, Binny Bansal, the group CEO of Flipkart, indicated that the money would be used to scale up PhonePe, the digital wallet, expand into newer categories like furniture and private labels, and imbibe automation and artificial intelligence. Flipkart is reportedly in talks to merge Snapdeal into itself at the insistence of SoftBank, which has a huge exposure to the latter; if that happens, it will achieve both customers and supply chain capabilities.