Shipping in Dire Straits

Published: August 6, 2014 - 18:06 Updated: August 6, 2014 - 18:16

Indian e-tail captain Flipkart founders while investors sweat at the bilge. Are they jettisoning quality to stay afloat? 

Sadiq Naqvi Delhi 

The news of a $1 billion infusion into desi e-mart may have cheered some quarters, but one hopes the funds will, at the very least, bring some business sense back into the outlet. After all, you can’t keep ripping the market with an uncertain product and huge losses and continue to raise big funds. The Flipkart bubble could burst quite like the dot com bubble as the Indian market is not yet ready to abandon a routine trip to the shop. 

The stories of Flipkart’s excesses may be greatly exaggerated, but the e-commerce market in the country perhaps needs to know that consumer consciousness spreads twice as fast as consumer base. In the absence of sound management practices and quality control, the major players in the e-market are just piling up huge liabilities. 

Instances of receiving the wrong items during shipment have gone up. As are the delivery of defective devices increasingly on the rise. People are writing in to complain about the rapid degradation of their wares. In the light of all this, I too decided to experiment with online shopping by buying a pair of shoes and a backpack. An expensive brand at that, with the guarantee promise and so on. To my shock, the backpack didn’t last two weeks. The first to come off was the chain zip itself, and the stitches soon followed. After a lot of hemming and hawing, the customer care at Flipkart agreed for a refund. The shoes, on the other hand, were out of shape in a month. After this experience, I asked friends if they had similar stories. I heard from many. A friend who had a children’s item delivered instead of what she’d ordered, another friend had to replace her mail-ordered phone after she found it defective. Internet forums, too, are chockfull of complaints from irate customers.  

Perhaps there’s a reason behind this madness. Market watchers have been saying the big players, in order to attract maximum traffic, end up selling products at a loss. The bulk buying and activating economies of scale help to push the product at a lower-than-market rate. But going by what’s ending in customer’s hands, one wonders if the companies have started trading defective products.  

A recent Google India report on the growth of the e-commerce industry in India cites trust as a major factor when it comes to consumer behavior and their chances of getting accustomed to the online market places. The pace at which the industry is growing may have led these majors to take to unlawful practices. Like an employee of, an online e-mart, once shared with me, “We do manage to get e-mail lists of consumers of other portals. It is not that difficult, you just have to find out the guy who has access and who is ready to sell it at a premium.” 

He says such tactics are a must, as they help in poaching the customer base of other companies. E-commerce majors, however, are not the only ones who are treating your private information as a commodity. Cellular service providers like Idea Cellular are far worse. Your personal call details are not just on the central system, which can be easily accessed by any of their employees, but also arbitrarily handed over to collection agents to threaten defaulters, their families and friends—basically anyone who exists on their phone call records. Such details also find their way into the hands of many companies who are making a living out of targeted marketing. While political parties like AAP smartly created their own database, many individuals with access to these databases came in handy for other politicians during the recently concluded elections.    

“We believe India can produce a $100 billion company in the next five years, and we want to be that. Whether it takes five or ten years, we are here for the long-term,” co-founder and CEO Sachin Bansal told a business channel after the latest round of mammoth funding. Sachin and Binny Bansal, who attended IIT Delhi together and ended up working for e-commerce giant, started Flipkart in 2007. Initially just selling books, the duo sustained the company by borrowing Rs 10,000 every month from their parents after an initial investment of just Rs seven lakh. Within seven years, the online major was recently valued at $7 billion. But the outlet is yet to post even a penny as profit on its balance sheet, leaving many to question the current valuation. Moreover, there is still no clarity on the stakes left with the two promoters. With private funds coming in, it is easy to keep such details under wraps. An IPO would make it mandatory for them to make all the details public.    

In various interviews, however, the Bansals suggest that they were looking forward to an IPO to raise funds. They planned this after multiple rounds of funding proved unable to get the outlet anywhere close to profits. And there was fear that investors might not be willing to pump in more money. Till last year, the company had raised a whopping $550 million in funding from various venture capitalists, including MIH India (a unit of South African media company Naspers group), Accel Partners, Iconiq Capital Llc and Tiger Global— firms backed by foreign money. The huge inflow of foreign funds had also led the Enforcement Directorate to launch an investigation on the possible violation of FEMA. “An investigation is pending in Bengaluru, for Foreign Direct Investment (FDI) was not allowed in multi brand retail,” an ED official told Hardnews

However, owing to massive expansion to fetch more revenues, the wholesale business of India’s largest online retailer reported a loss of Rs 281.7 crore in the year ending March 2013. This was more than double the loss in the previous financial year, when the books reflected a loss of Rs 109.9 crore. Revenues increased to more than Rs 1,180 crore, from Rs 204.8 crore the previous year, while expenses jumped to Rs 1,366 crore from Rs 265.6 crore last year. The cash balance too dropped to Rs 166.2 crore from Rs 236 crore a year ago. This is the contradiction. How is Flipkart able to raise funds when it is incurring losses and when there is so much attrition? Answer to this tricky question came from an online entrepreneur. According to him the investors have to keep putting in money into Flipkart to save their first round of investment. They realise that in the absence of funds the mounting losses will sink their ill balanced cart. Also, Flipkart and other online retailers are working on certain assumptions like growing internet penetration, increasing purchasing power and penetration of banking and so on.  Although, consumers are allowed to pay in cash, there is still a lot of head space left before Flipkart and other retailers earn profit. 

On the other hand, Mukesh Ambani’s Reliance Retail, a chain of stores across the country, not only reached the Rs 10,000 crore turnover mark within six years, but also managed to post a profit. Kishore Biyani’s Future Retail, which has given way to Reliance Retail as the biggest player in the organised retail market, has managed to keep itself afloat despite dwindling profits. 

And then there is the big issue of online retailers getting ahead of the regulatory and legal environment. As stated above, Flipkart has been slapped with notices by Enforcement Directorate on issues of money laundering. While the intent of the promoters may not be to engage in any criminal activities, but isn’t violation of law a crime? It is true, though, that the government has been compelled to reform its legal system when it became difficult to enforce them due to the change in technology or social environment. 

 It is the pursuit of increasing revenues and a greater market share that is driving Flipkart’s strategy, since other e-commerce majors are catching up fast. Amazon India, a subsidiary of, announced it would invest $2 billion just a day after Flipkart announced its latest funding success., too, is growing at a fast pace. 

Industry insiders suggest that funds will trickle in till the time the investors have a viable exit option—that is, when the company comes up with an IPO. Right now, they have no option but to keep pumping in funds to ensure that their earlier investments don’t tank and the predictions about the enlargement of online retail market lives up to the expectations of highly paid consultants. Fact remains that many buyers still like to visit a showroom and try out the shoe, shirt or phone before buying it. The soaring profit of Reliance Retail last year is an indication that the old economy still rocks.  

Indian e-tail captain Flipkart founders while investors sweat at the bilge. Are they jettisoning quality to stay afloat?
Sadiq Naqvi Delhi

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This story is from print issue of HardNews