Story Highlights

• The problem for Flipkart is that Amazon is breathing down its neck in categories like smartphones too
• Failing a boost in the form of government intervention, Flipkart’s best bet is to innovate and redefine the field
• If it fails to innovate, it will have to bank on its fashion leadership and throw all its weight behind this category

The media mood on Flipkart has been a veritable sine wave, altering between gloom and ecstasy. And 2016 provided great fodder for the media. The gloom of a leadership exodus in July last year and dwindling market leadership (and valuations) was soon replaced by a celebration of revival. Kalyan Krishnamurthy, the fixer, was back. Binny Bansal, the execution-focused leader, was at the helm and Big Billion Day was won. And yet, as we approached the end of the year, the narrative got sour.

Flipkart’s media face, which has always been one of bluster and confidence in the context of their funding tightrope, began to unravel toward the end of 2016. Sachin Bansal called for government protection. Flipkart sold seriously discounted OnePlus 3 phones (despite their Amazon-exclusive status) and got involved in an embarrassing spat with Carl Pei, co-founder of OnePlus. It all ended with a farcical complaint by Krishnamurthy that all Amazon did was copy Flipkart in India.

Flipkart’s veneer seemed to be peeling. Was panic setting in?

What categories to dominate?

After its Big Billion Day 2016, Flipkart’s PR statement took a subtle dig at Amazon to showcase its victory: “Total units sold… does not include virtual memberships and low-cost items like churan, hing, candy, detergent bar and eggs.”

For Flipkart, the Big Billion Day was about showcasing dominance. It focussed its discounting on select categories (smartphones, consumer electronics and consumer durables) and was able to maximise its gross merchandise value. This also opened up a deep chasm between the two rivals in their portfolio strength (which Flipkart itself was happy to call out).

Flipkart’s e-commerce empire is built on electronics, more specifically — smartphones. It built market share aggressively before Amazon arrived and even acquired and shut down annoying competitors (LetsBuy in 2012). It has achieved market leadership today despite Amazon’s aggressive overtures.

On the other hand, Amazon India has gone after the “churan and hing” that Flipkart seems to deride. And everything else. Amazon’s range of products in categories like home and kitchen, FMCG and groceries is much larger than its competitors. It runs aggressive deals on these products consistently. In 2016, Amazon India imported its successful global programs like ‘Subscribe and save’ and ‘Pantry’ to India. It continues to plough money into its express grocery platform — Amazon Now — even as Flipkart shut its grocery business. It is even aggressively pursuing a private label in consumables (including food) using both homegrown and international brands.

Amazon’s aspirations are transparent — it wants to become the “everyday store” for its consumers.

The problem for Flipkart is that Amazon is breathing down its neck in categories like smartphones too. With an around 45% market share in smartphone sales (Q3 2016), Flipkart most definitely tops Amazon’s 30% piece of the pie. And yet, it is a gap that’s pretty narrow considering that Amazon may have the lead in many other categories. More importantly, a few extremely successful exclusives could just tip the scales and change the equation.

The leaky bucket problem

The bigger problem for Flipkart, and one which may be worrisome for its investors, is how it attracts, wins and retains customers.

Big Billion Sale days are very important for the company to focus its limited capital into short, high-impact periods to win new customers. This also plays well for their strong categories — smartphones, electronics and durables — as customers can choose to delay and plan purchases to coincide with these events.

While big sale days are important, Amazon’s customer acquisition is a little less reliant on such events. Its wider product range necessitates an “everyday low price” strategy to encourage customers looking for frequent, repetitive items to keep coming back to its platform. It is looking to capture the consumer mindspace as the “go to” place for their needs.

Habits eventually lead to loyalty, which can be dammed, as Amazon Prime proved in the US. A staggering 52% of all Amazon customers in the US are Prime customers who spend twice as much as regular customers. Amazon Prime India, which launched last year, has a much tougher job (common refrain: Indians don’t want to pay for convenience). However, it offers Amazon the logical next step as it makes e-commerce a daily habit for its customers (as opposed to a sale based event).

Amazon Prime Video, which launched in December last year, will no doubt be a linchpin for Amazon to fence in its loyal users as the market for content in India comes of age.

In this environment, Flipkart faces a real danger of leaking consumers as they look at its deal events opportunistically and do not end up providing a large lifetime value to the platform.

The only trump card — fashion

Flipkart’s two big acquisitions — Myntra in 2014 and Jabong in 2015 — have armed it with its single biggest competitive advantage: together the two e-retailers boast more than 70% of the total online fashion market in India.

Online fashion in India is projected to grow to $35 billion by 2020. It also promises the holy grail to e-commerce retailers: Profitability. While both Flipkart and Amazon have struggled to build a successful fashion business on their own platforms, the size of the prize has seen them make serious capital commitments.

In 2016, Amazon built a portfolio of close to 150 fashion brands and launched its private labels in this space. Yet, it trails Flipkart’s share of the fashion segment (even excluding its acquisitions). In 2017, Flipkart plans to revamp its fashion category by bringing in stylists to curate recommendations, partnering with production houses to showcase its products and launching its own private labels.

Fashion is Amazon’s Achilles heel globally. This is why Flipkart’s acquisitions are not just the key to its survival, but may be its only trump card in a bruising fight.

Finger in many pies or not?

The bigger question is this: Does Flipkart still want to win all horizontal e-commerce in India or should it just focus on its strengths?

Flipkart’s quest to win non-fashion categories is a war of attrition predicated on capital and efficiencies. In 2017, Amazon completes 23 years of perfecting this game and, according to Amit Agarwal, vice president and country manager of Amazon India, the company has no intentions to chase profitability any time soon.

Sheer mastery of execution will not win the game for Flipkart here. Failing a boost from the government in the form of intervention to tilt the playing field, Flipkart’s best bet is to innovate and redefine the field.

And yet, in 2016, Flipkart seemed to have boxed itself into a narrative of discounts and execution efficiency, while Amazon launched several new product features and services.

For all its failings, Flipkart in 2015 was about product innovation and experiments. Perhaps, that’s just the sort of thinking it needs to reinvent itself (with a little more direction). It may need to reimagine its products, experience, delivery and service and be able to offer something unique to India in order to throw Amazon off.

If it fails to innovate, it will have to bank on its fashion leadership and throw all its weight behind this category to win the e-commerce game.

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