The Walmart Effect: Flipkart plans a loyalty program, mega warehouses, and a pharmacy bet

Sunny Sen July 16, 2018 7 min

Flipkart is doing well on business metrics but it needs to do a lot better on customer perception. That was the summary of CEO Kalyan Krishnamurthy’s letter to all employees on Tuesday, July 10.

The ‘Amazon is ahead in customer minds’ context has set off big moves at Flipkart, recently acquired by the world’s largest retailer Walmart. The Indian company wants to launch an Amazon Prime-like loyalty programme, start selling medicines (perhaps, through an acquisition), build massive warehouses (four of them, each on 100 acres of land), and expand its grocery business.

First, the good news at Flipkart: in May, more than 10 million people bought goods on the platform making it the best ever month since it started in 2007. Its gross merchandise value (total amount of goods sold without considering discounts and promotions) has been growing at 47% quarter-over-quarter in the first two quarters of 2018 and the company had nearly 50 million people browsing through its catalogues each month.

“The year started on a good note as we are growing our GMV in the 45-50% range and units in the 65% range. NPS, our key metric to track experience, remains consistently robust at 70-plus,” wrote Krishnamurthy.

NPS, short for net promoter score, is a metric that tracks the customer loyalty and satisfaction.

The score is also Krishnamurthy’s biggest worry: Flipkart is less popular among India’s high-spending online shoppers.

The letter, reviewed by FactorDaily, shows that online shoppers are more loyal to Flipkart arch-rival Amazon India. The scores are based on a study done by consultancy Bain & Co. for Flipkart.

Buyer faith matters

“We continue to lag competition in key segments on NPS,” Krishnamurthy said. “The competition has increased its perception advantage over us in metro and non-metro in the last couple of months and we need to win back there,” he added without naming Amazon India.

Among non-metro users, Flipkart lags Amazon in perception by 12 percentage points. But the difference is stark among metro users, where Amazon rates 28 points higher than Flipkart. With Amazon Prime users, the preference to buy from Amazon is 26 points higher (see chart: Despite Flipkart’s continuous growth, customers rate Amazon ahead in experience, selection and price).

(Read: Flipkart after Walmart: Inside the near future of India’s largest e-tailer)

Experts believe that Flipkart has a problem, consistent over time, with its NPS. “If you take out the mobile phone sales, the gap (with Amazon) is wider,” said Harminder Sahni, founder and managing director of Wazir Advisors, a management consulting firm. Flipkart leads in mobile phone sales in India and is aiming at a 40% market share in the category by 2020.

Sahni added that Amazon’s higher NPS can positively impact its sales. “Once (customer preference) gets converted into sales, the delta gets wider.”

Others, too, believe that the problem can bother Flipkart in the months to come. “When it comes to service, empirical evidence shows that customers are stickier on Amazon,” said Raghu Viswanath, founder and managing director of Vertebrand, a Bengaluru-headquartered management consultancy.

Flipkart wants a Plus, again

Flipkart’s biggest problem lies in Amazon’s mantra for success: largest selection, best prices, and faster delivery. “We have identified selection, price, contact centre experience, and the upcoming launch of lock-in program as critical levers to bridge the gap with competition,” Krishnamurthy wrote.

In the works is Flipkart’s answer to its rival’s successful Amazon Prime subscription service: a loyalty program that is internally called Flipkart Plus, said a source working with the company, adding the name was not final. “It is a Prime-like loyalty program, where subscribers will get a premium offering,” said the source.

According to Krishnamurthy’s mail, Flipkart is working at bringing out the loyalty program before the festival season (starting mid-October this year with Durga Puja). Inside Flipkart, the source quoted above said, preparations for Flipkart’s annual Billion Days sale is already on and it is only a matter of time that Flipkart will launch the loyalty program.

“In a country where you want to create a top, mid and bottom tier of customers, loyalty program works,” said brand expert Harish Bijoor of Bengaluru-based Harish Bijoor Consults, who estimated premium customers make for 7% to 8% of the market. “The top tier who pays always likes to get a premium service.”

This is not the first time Flipkart has tried to come out with a loyalty program. In October 2014 it had launched Flipkart First priced at Rs 500 annually in an attempt to take on Amazon. It bombed.

It offered free shipping, discounted same-day delivery, free next-day delivery and better customer service to the subscribers. But, Amazon under its Prime program offers a lot more than that – movies, web-series and songs.

Prime customers can access free movies and video content on Prime Videos and ad-free music on Amazon Music, they get special offers on Amazon’s annual Prime Day sales, special preview and Prime access-only sales, and they are offered faster delivery.

This time, Flipkart wants to give more than a faster delivery to customers. The company source, who asked not to be identified, said that talks are on with Hotstar, India’s largest online video platform. If all works well, Flipkart’s premium subscribers will get free Hotstar content, which means a Flipkart Plus user will not have to pay anything extra for, say, the next season of Game of Thrones.

Hotstar and Flipkart did not reply to questions sent to the companies.

Building Deep Resources

In May, Walmart announced that it will buy 77% of Flipkart in a $16 billion transaction – making it the largest ecommerce deal in the world. For Walmart, the reason was simple: find new markets and avenues of business to counter Amazon, its most formidable rival back home in the US. “In India also, it’s about Walmart vs Amazon,” said Sahni.

Walmart is known across the world for its supply chain, and it wants to bring that expertise into India. Recently, Flipkart co-founder Binny Bansal and CEO Krishnamurthy were at Walmart’s headquarters in Arkansas, US. They met the Walmart board to discuss their India plans.

One key element of their plans, shaping up from before Bansal’s and Krishnamurthy’s travel, is four mega warehouses – in and around Mumbai, Kolkata, Delhi and Bengaluru. “They will serve the biggest cities where the demand is highest and the states around them,” said the company source quoted above without name. Each warehouse will be 100 acres in size and are being internally tagged “Deep Resources”.

A second source, with knowledge of the warehouse plans, confirmed that Flipkart has purchased one in Kolkata. The company’s “multi-modal logistics park” near Bengaluru was announced in March. The warehouses are expected to be the answer to Amazon’s monster warehouses that gives it an edge on faster delivery.

Once these warehouses are up, Flipkart’s time from order to delivery is expected to go down significantly. “With the kind of money Flipkart already has and with Walmart backing it, the game has just started,” said Sahni, the management consultant.

Flipkart is also looking to double down on two categories – grocery and pharma are the ones in focus.

The category play

Flipkart has big plans to launch grocery. “The category is already live and in pilot in Bangalore. In the next few months, it will slowly become big,” said a third source.

While grocery warehouses will be there in the Deep Resources campuses, Flipkart will tie up with companies for direct supplies. By the end of this year, grocery deliveries are likely to be available in 10 top Indian cities.

While grocery is the big vertical that will slowly unveil itself in the months to come, there is a smaller, yet profitable, vertical that Flipkart has plans in: pharmacy.

According to the first source, two months ago, Flipkart held discussions with online pharma companies: Gurgaon-based 1mg and PharmEasy from Mumbai. “Flipkart is looking at potential acquisitions in the space to start its pharmacy business,” said the source.

Flipkart and 1mg did not offer comment on the development. FactorDaily has reached out to PharmEasy Monday morning and will update this story when we hear from it.

The online pharma business hasn’t been an easy one in India – first, the growth of online pharmacies got choked by regulations and, later, most struggled to find buyers in large numbers.

But why pharmacy? Pradeep Dadha, founder and CEO of Netmeds, explains: “Accessibility of medicines get a lot more complex when you get out of the top 10 cities.” Tier II and III cities account for 70% of Netmeds’s business – it receives orders from 800 towns and delivers in 14,800 pin codes.

Flipkart, with its deeper reach and better customer recall than niche players, expects to swoop in and build a small yet profitable business.

Clearly, Krishnamurthy’s forthright letter is a bugle call to Flipsters in their five-year-long battle with Amazon India. The difference now is that Flipkart has the backing of an ally that even Amazon will be wary of: Walmart.

Visuals by: Rajesh Subramanian


Updated at 08:23 am on July 16, 2018  to correct a few typos.
Updated at 09:14 am on July 16, 2018  to correct in the last paragraph how Flipkart employees refer to themselves: Flipsters. They were wrongly referred to as Flipkarters earlier.

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