Flipkart raised its (and country’s) biggest investment of $1.4 bn yesterday from Tencent, eBay and Microsoft (and acquired eBay India as a part of deal). That’s almost $4.6 bn till date. And probably more in the offing if the rumored Snapdeal deal goes through. For the first time, Flipkart will boast long-term strategic investors backing it – Tencent, eBay, Microsoft and potentially Softbank; that’s a powerhouse of a team of investors they’ve got there. So, does Flipkart finally stand a chance?
There is a basic difference in the way both these companies have built their businesses, at-least so far. To understand how, let’s back up all the way to Amazon’s beginnings. It’s now pretty well known about how Bezos started Amazon.com. But one absolutely needs to read Amazon’s first annual letter to shareholders that Jeff Bezos wrote back in 1997 to truly understand how razor sharp his clarity, vision and the strategy that he had for the company was; he has held on that vision pretty steadily. I’d highly recommend you to read this in its entirety if you haven’t already – absolute gold. It’s all the more impressive reading it now, knowing that Bezos could see it as clearly back then and all his actions were aligned strategically. In particular the following points (I have picked some from a list from the letter):
- We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
- We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.
- We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture, particularly in a business incurring net losses.
- We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.
- We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.
Each point is worth reading carefully. These are not just statements crafted for the sake of writing a shareholder’s letter; these encapsulate the very strategy that’s holding together the fort that Amazon is, and the strong moat that subsequently follows. What’s all the more remarkable is that this was written just two years after Amazon was founded. Amazon now has twenty years worth learning how to be a ruthlessly efficient machine that it is. And keep in mind, these are 20 Amazon-years. (Bezos: “It’s not easy to work here (when I interview people I tell them, “You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three”), but we are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about. Such things aren’t meant to be easy.”).
It is now a well-known fact that Amazon doesn’t care about short term profits, instead holding a long term vision (it’s still day-1 for them, as Bezos likes to remind every now and then; infact they have a building in Seattle named Day1). It was clear then when Amazon entered India in 2013 that it was in for the long haul. Flipkart which had a 5-year head-start in India, had no close competition until then (there was Snapdeal, but was pretty behind and was always trying to catch up really); infact its services were the best that online consumers in India had experienced. But sadly they had paid little, if any, attention to unit economics.
There has been an ecommerce war brewing since then in the world’s second largest internet market (# users) with multiple players, but primarily Flipkart and Amazon India being the important players*. Amazon made a $2 bn capital commitment for India back in 2014 when Bezos visited here with much fanfarAn additional $3 bn as recently as last July. These announcements constituted strategy 101 underlining competitive micro-dynamics: tough commitments (“top-dog strategy”); this was clearly in response to the expected entry of Alibaba (which is the only one at the moment that has the muscle and the know-how to take on Amazon) rather than Flipkart. Amazon knew that Alibaba had the resources to withstand sustained losses. It is not difficult to see that all things considered, the Amazon-Alibaba battle, if it came to that, would definitely be much more bloody, and most probably with a different outcome. It is to be noted here that while Alibaba did win eventually on its home turf in China, the result in India did (does) not need to be similar; for one, Bezos himself admitted that he tried to paint the canvas with the same brush without local customization which clearly did not work in China(there was also the added advantage of protectionist government in China). So far, this strategy has worked well for him (while Alibaba has invested $200m in the Paytm marketplace, it is peanuts really for the funding scene that is playing now; this is apparently to support the payments business Paytm has and leads). At this point, it can be safely said that the only option that Alibaba has is to make an attack through Flipkart. It is to be seen if that it plans to do that, and if it is able to do that at a reasonable valuation.
Amazon had started gaining market share slowly but steadily right after entering in 2013. But it was a war of attribution being played (on the face of it at-least; Amazon was obviously also working on building a infrastructure in a way that utilizes its strengths and working on additional offerings which would only be seen later), with consumers being the biggest winners; till last year, all the players had been engaging in predatory pricing. Ofcourse, as everywhere else, in India as well Amazon also focused on providing the widest selection, lowest prices, and highest convenience (best services), as well as building the requisite infrastructure. As an example of how well localized a game Amazon played in India, considering the low internet penetration amongst sellers, a local team was created – Amazon Chai (tea) Cart – which could “easily move through the narrow streets of Indian markets informing Sellers about the benefits of starting an online business and helping them understand the entire process over a cup of Chai”. These carts also helped local business enlist online (this innovation won a gold award for its innovative outlook). (Flipkart, in complete contrast, had been building the business in a completely different approach: they brought in expensive hires from Silicon Valley, and built expensive offices.)
It was only mid last year when the Indian government (DIPP) outlawed the discounting of products by the ecommerce entities (individual online sellers could still technically provide the discounts). While this looked like it would be net negative for the player with excess funds to burn (because it snatches away a part of the capital advantage which was being used for burn), this actually proved remarkably beneficial for Amazon. They were able to offer services such as FBA (Fulfilment by Amazon) and effective shipping that enabled sellers on the platform to lower their cost of selling. These sellers could then pass on these savings to the customers. Amazon continued to gain market share. (Some online sellers are still complaining that WS Retail, wherein Amazon holds a ~25% stake, still indulges in predatory pricing). The famous Amazonian flywheel is hard at work and bearing fruits already.
The excellent Amazon Prime has already been launched in India as well, with Amazon Prime Video gaining market share super fast (much widely used as compared to Netflix). This has proven to be such a strategic bundling and only a one of the most strategic thinkers of our times, Bezos, could have thought about it. Like elsewhere, Prime has proven itself to be a differentiator. Flipkart has followed with Flipkart Assured, but it’s not in the same vicinity. As Bezos rightly claims, Prime is “such a good value, you’d be irresponsible not to be a member” (this was sent in annual shareholder’s letter in US context, but holds perfectly true here as well). For one, Prime Video is a part of Prime. This is such an excellent strategy, and it uses multiple aspects of behavioral economics with such beauty; the whole thing is just inspiring. Read below how Bezos described why they went into content creation at Code Conference:
“From a business point of view for us, we get to monetize that content in a very unusual way. When we win a Golden Globe it helps us sell more shoes, and it does that in a very direct way.
If you look at Prime members they buy more on Amazon than non-Prime members, and one of the reasons they do that is once they’ve paid their annual fee they’re looking around to see “How can I get more value out of the program?” And so they look across categories, they shop more, a lot of other behaviors change that are very attractive to us as a business, and the customers utilize more of our services.
And so we really want to do things that will cause free trial conversion to go up, so people start Amazon as a free trial member, and we watch the free trial conversion rates, and then we want people to renew at the end of the year when it’s time for their Prime membership to renew…we’ve been able to monitor that people who use Prime Video change those two metrics. They renew at higher rates and they convert from free trials at higher rates.”
Thus far, in India, Amazon has been playing a much more aggressive and strategically intelligent game (vis-a-vis its battle in China) – I’d say so far, Amazon India has a far better understanding of the local nuances, users preferences, buying patterns than the home-grown firms. To be fair to Flipkart, it has upped its game several notches since the last few months. They have an improved focus on unit economics, and on building a strategy with longer term vision. With the capital in the coffers, and long-term investors by its side, it has as fair a shot as any firm could have it. At this point, technically it could be anyone’s game. And the new set of investors with relevant know-how (from China) may just prove to be the silver lining that the defending warrior needs.
It’s going to be an interesting time for ecommerce in India for sure.
*Snapdeal held the third position, but it was reduced to obscurity pretty quickly; moreover the strategies that it employed were all short-term fixes rather than long term strategic thinking. It had become clear that the game was to be acquired rather than to lead.