Flipkart racing to cut expenses, earn gross profit

Flipkart is racing to cut expenses and earn a gross profit ahead of the festival season starting in September, when demand for big discounts will renew the fractious battle to dominate the country's online retail market.

The drive to build a self-sustaining business, being led by Flipkart's new chief executive officer Binny Bansal, includes a series of measures from capping salary increments at 10% to giving category heads six months to become profitable at a unit level.

All this while the company reduces the amount of money used to expand the business - termed the burn rate - by half, according to several people aware of the company's strategy.

"Increments have largely been capped at 10%, barring some technology teams where it is driven by variable targets," said one person.

At the same time, clear sales and customer experience targets - to be met by September 2016 - have been set for all category heads as the Tiger Global-backed company closely evaluates the long-term potential of each business unit. "The next six months will see new developments, including some categories being shut down," said another source.

A Flipkart representative declined to comment for this story.

This aggressive drive towards profitability, which contrasts with the earlier model of expansion at any cost, comes at a time when money is becoming scarce for India's top venture backed online retail companies - Flipkart, Snapdeal, Paytm and Shopclues - which have soaked up about $5 billion in risk capital since 2014.

The online retail market, Goldman Sachs estimates, will be worth $36 billion by fiscal 2017.

Valued at about $15.2 billion in its last round of fund-raising in July 2015, Flipkart has been quickly reducing its burn rate this year, helped along by the lean season for retail sales.

People aware of the details told ET that currently Flipkart has an estimated burn rate of about $50 million a month now, down from about $ 80 million in the last quarter of 2015.

"The idea is to bring down the burn rate by another $10 million a month," said a source, adding that by September the company should be at a $40 million monthly burn rate.

Flipkart's two main entities - Flipkart India and Flipkart Internet - reported a combined a loss of Rs 2,000 crore in FY15. The company last year told ET that it expects to close FY16 by selling goods worth $10-12 billion.

All category heads have been given directions to focus on getting on board "best quality products at lowest cost" with Binny Bansal spending majority of his time with the commerce unit since becoming the CEO.

At present, fashion, electronics and large appliances are the top-selling categories but Flipkart has also been making a push towards new ones like furniture and automobiles.

While most large online retail companies have reduced their dependence on discounts as a growth strategy over the last few months, fixed costs at these companies remain high, especially employee costs.

Flipkart has a total headcount of 35,000, out of which around 15,000 are employed by the logistics unit EKart as delivery personnel.

'Much-needed move'

"It is a much-needed move. A lot of the investors in Flipkart are concerned by the amount of money the company is bleeding and everyone is seeking a path to being break-even positive. Flipkart's recent valuation markdowns reflect both the margin issues and competitive pressure," said Kartik Hosanagar, a professor of ecommerce at the Wharton Business School, referring to a 27% markdown in the value of Flipkart's shares by a mutual fund managed by Morgan Stanley.

A source aware of the details said that the company still has over $1 billion in the bank, which means that Flipkart does not need fresh capital immediately. But shoring up capital reserves further will be necessary before the festive season as it looks to defend its market leadership against Amazon and potential new entrants, like Alibaba and Rakuten.

In all, Flipkart, which counts DST Global, Naspers, and Tiger Global as investors, has raised about $3.4 billion. The process of evaluating and closing categories has already started at Flipkart over the last four months, with divisions like e-books and grocery delivery being shuttered.

"Every category has to stay within the guard-rails that have been set in terms of consumer experience, profitability," said one of the sources.

After replacing cofounder Sachin Bansal as CEO in January, Binny Bansal has undertaken a management overhaul at the Bengaluru-based company and hastened the process of turning the logistics business Ekart into an independent unit, in search of greater cash flows.

"This is much needed for Flipkart as its ability to raise more money from either the public markets or from private equity depends on Flipkart's ability to show sustainability," Wharton's Hosanagar said.

Source:Techgig