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Posted by: Shrey Kumar Sao on Wed, Mar 18th, 2015

The Clash of E-commerce Titans

Up to five years ago, e-commerce did not figure in largest logistics companies list of top five verticals. Today, it is the largest vertical and demand is far outstripping supply. The e-commerce business has moved so fast that the law has barely been able to keep pace with it and the brick and mortar retail Industry, whose party has been spoiled by the rise of e-commerce are left complaining and contemplating to offer a suitable defense. There is hardly any doubt that this industry is going to grow faster and bigger in times to come. What is under the veil is, who will be the leader? The leader would be the one who would be able to offer widest range of choice, lowest prices and reliable delivery rolled together into value and convenience for customers.


In 2009 Flipkart, the first e-commerce business in India started by selling books and gradually brought a lot other products under its umbrella. It initially operated with an own inventory model till 2013, which changed to a market place model. The recent corporate reorganization saw Flipkart Holdings Singapore, the parent company, which has the backing of US investors like Accel Partners, Tiger Global and South Africa's Naspers, acquire the back-end technology company and divest the front-end operations. This left Flipkart with no shareholding in the Indian operations company WS Retail (it that accounts for 75% of the sales that happen on Flipkart.), it employs more than 5,000 staff and has a licensing deal to use the former's brand and technology in the domestic market. Flipkart has one significant subsidiary in terms of revenue and profits, a 99.9% owned is Flipkat India Pvt Ltd(a B-to-B business cash & carry wholesale entity), with revenues of Rs. 2846.13 crore with loss of Rs. 400 cr in in FY1. It owns 0.61%  in Flipkart Internet Pvt Ltd, the company had sales of 179.1 cr (which manages its portal) with a loss of 316 crores in FY14. For the year ended 31 March, 2014 the losses of various Flipkart India entities amounted to Rs.719.5 crore on revenue of Rs.3,035.8 crore, according to data from the Registrar of Companies. These entities reported sales of Rs.1,195.9 crore and losses of Rs.344.6 crore for the year ended 31 March, 2013. The company is presently valued at $11 billion or Rs. 69000 crores. Flipkart had 1,000 sellers by feb 2014. The company is increasingly outsourcing its order deliveries to external logistics firms. Currently, a majority of Flipkart’s deliveries are handled by WS Retail Services Pvt. Ltd, which is the company’s largest seller and logistics provider. The company is planning an IPO in next 18 months and plans to list in the US, with a total valuation of $25-35 Billion. It plans to raise $5 Billion.


Even though Amazon had started thinking about India back in 1998, when it bought Junglee Corp, a price comparison platform, for an estimated $200 million, and integrated Junglee’s core technology into its own services. The Junglee brand stayed dormant till February 2012 when, as a precursor to its entry into the country, Amazon launched, a price aggregator and selection website. In April 2013, Amazon formally entered India. Within a span of little over one year Amazon crossed $1 billion in sales. Amazon is investing heavily in logistics and has already created two large fulfilment centres in Mumbai and Bangalore, these fulfilment centres take care of logistics for sellers that opt for this service, in return for a fee. The listing fee for first year is waived off as a part of a promotional offer to attract more and more sellers. The promotion is for a year, and to benefit from it, seller must sign a two-year contract. In the second year, Amazon charges Rs 499 a month as fees. Sellers get nationwide reach. It had 2,300 sellers by feb 2014. Amazon has tied up with Indian post, the largest logistic network, it has tied up with future group India’s largest retailer and is in talk to by 75% stake in India’s largest private logistics company Blue Dart’s India operations. Amazon has reduced its customer acquisition cost significantly by tying up with the largest potential customer base of IRCTC. Amazon Seller Services posted revenue (commissions) ofRs169 crore and losses of  Rs.321 crores in FY14.What Flipkart did in six years, Amazon has done in little over an year. They have done that with one-tenth of the money that Flipkart has spent.


For Flipkart, the present largest player with 75% concentration of sales from WS Retail, the source of funds and significant dependence of delivery in house can become constraints. If WS Retail is operating on an inventory owned model, then significant investment in working capital can drag prospective returns and if it is acting as a market place then getting multiple seller registrations would be a challenge. The Flipkart model will turn out to be capital intensive for every rupee of sales expansion.  If that sales expansion comes with discounts, its leaves a much smaller margin and much lower return to the capital providers. This is the risk in Flipkart’s financial strategy.


Amazon has been losing far less money than Flipkart. It is also under no pressure from external capital providers who are keen to seek profitable exit. It can keep investing money without worrying about profits. The investment in logistics is likely to earn a better return on capital for Amazon, and its ability to focus on the margins than on sales is an advantage arising out of the way it is funded.


To sustain its business, Flipkart will need an initial public offer, which they plan to do in next 18 months. Going by the present holdings 59.4% of the company is owned by VCs and barely 17.4% is held by the founders. It would be interesting to see how much of the IPO proceeds go to the company and how much to the VCs to offload their lots. Significant in-house logistics would cost them way more than Amazon. The key to sustainability in this battle is not in the sales growth numbers, but in capital utilization. When Flipkart’s strategic ownership moves from one set of hands to another, a good chunk of the value will vest with early investors than the company. What Flipkart does with the money it is left with, and if that is adequate to meet the challenge from Amazon is what investors should watch.

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