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BW Businessworld

‘How We Scale Up Will Be Key To Success’

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For long, it was considered an Amazon clone because of founders Sachin Bansal and Binny Bansal's unabashed admiration for the world's biggest Internet retailer. In fact, Bangalore-headquartered started out by selling books exactly like Jeff Bezos at Amazon. That was more than four years ago.

Over the past year or so, Flipkart has not only diversified into other product categories, but also raced ahead of its e-tailing peers in India. It expects to close financial year 2011-12 with a top line of Rs 550-600 crore. Thanks to three rounds of private equity and venture capital funding, the company has been able to spend heavily on building warehouses across the country. And it has hired executives to deliver products to customers in order to have absolute control over logistics.

Flipkart now has eight warehouses and 1,500 delivery executives, prompting critics to ask whether it is an Internet company or a logistics company. The two Bansals (not related to each other) met with BW's Rajeev Dubey and discussed — among other things — why customer delight will be the differentiator between winners and losers in the Internet retailing space. Delivering products directly in 30 cities currently, they say, Flipkart will ramp up to 100 cities in two years.


You are closer to Amazon than to the eBay model. How much of this has been strategised and how much has been created on the go?
Sachin: From a model perspective, we are similar to most other online e-commerce companies around the world, which is less like an eBay model. Its marketplace has an advantage of not having to invest in warehousing and logistics, while we have to do that. From what we are seeing around the world, and also in India, is (that) with respect to a pure marketplace model ours is a superior model — in the long-term, and from a customer experience point of view.

And profitability?
Sachin: Profitability is something that happens...will happen big-scale in this model. In a marketplace model, you can get profit at a small level also. But, again, my experience is not very good and it is hard to retain customers. In our model, because it is difficult to build the customer experience, it automatically creates an (entry) barrier. It is a more dependable model. So, from a long-term perspective, from profitability, from customer experience, from dependability, all those aspects, this is much more suitable.

Amazon's jeff bezos has said that if there was anything he would like to change in the model, it is the warehouses... that they are too costly...
Binny: But he keeps creating five of them every year.
Sachin: I think what Jeff Bezos means by that is, probably, that although it is an Internet business, you have to run a very large backend support operation, 90 per cent of which is not Internet.

Maybe, that is what he will want to change… focus more on the Internet side of things than on logistics. But I think, the real value is definitely in the backend because it is not about getting customers and selling them something on the website. It is about serving that order.

How much of this is your conviction as founders and promoters, and how much of it is the conviction of the investors?
Sachin: It is completely our conviction, and we have managed to find investors, who are aligned here. And we only talk to those investors who believe in this philosophy.
It must be a dream run right now—the growth and the enormous potential for growth. But, at what point are you looking at hitting profitability?
Sachin: We can be profitable today, if we want to, if we stop investing. Again, when will we start thinking about becoming profitable?  There is no answer to that question right now.  It will depend a lot on growth and on market potential. If the market keeps growing the way it is growing for us, we will keep investing. If there is a growth potential, we will go after it. When we see that growth is stabilising, or falling to a certain threshold, let us say 100 per cent year-on-year; if it is less than that, we may want to think about profitability. But right now, that seems a distant horizon.

With 1,500 people you are practically building a parallel logistics company.
Binny: We have been forced to. We worked with courier companies for the first three years. Then we started cash on delivery, we worked with them for six months, and then, courier companies could not match the scale at which we wanted to grow. So, we decided…
Sachin: So, we had to step into this reluctantly, but we are happy that we did.
Binny: Today, our service quality has become a much bigger differentiator.

But you still have couriers in other cities?
Sachin: About 70 per cent of our deliveries are done by our teams, and some 30 per cent by third party.


Are you looking at 360buy kind of delightful experiences like, you order before 11 p.m. and you get the delivery by 10 a.m. next morning?
Sachin: That is what we are working on right now. So, within 24 hours, or if you order in the morning… In 8 cities especially... it can happen… and we are working on it. If you order at 8 in the morning, by 6 or 7 in the evening you will have the product in your hand. Or, if you order in the evening, the next morning the product will be in your hand.

How closely have you assessed Amazon and China's 360buy and Taobao?
Sachin: From a high level… we know what they do... 360buy we have met. We have a common investor — Tiger Global. But, even if you meet them, unless you spend a lot of time, you cannot really understand. It is very high level information that we have, but most of our thinking is driven by our needs…
Binny: By customers' needs…by the Indian market and by the customer…

When you started, you began with books — like Amazon.
Sachin: We started very similar to Amazon because we were trying to solve one particular need at that time. For books, you have to do what we were doing. The basic premise we started with was that the market does not have a player which can provide great service, and we wanted to differentiate on service.
Binny: We did not think sellers will be able to provide a great service…

Are you cash positive? In which categories?
Sachin: We are operationally profitable.
Binny: Whichever category it is, we are operationally profitable. As we launch new categories, obviously, they take time to get profitable.

Sachin: In books, we are fairly (profitable).

What about services? Are you going to launch services, like Groupon?
Sachin: No. We are not thinking about that right now. We like to keep things very simple. We would like to think about simple models and look at…in the end, the customer...

But are things in your control.
Binny: Experience is in our control.
Sachin: Customer experience is what we want to own end-to-end, and consistently do it.
Binny: If we do that, the company will be profitable for sure in the long run. So, if you think long-term, this is what we focus on rather than tweaking business models.

How is your customer experience different from others?
Binny: We take it fanatically. Every new person joining Flipkart has to go through customer support training mandatorily. And our customer service representatives have a lot of power; they have a lot of freedom. We tell them, "you are on the side of the customer, not on the side of the company. You are here as a customer representative in the company."
Sachin: We have cut down on the bureaucracy in customer support. They do not have to take approval of managers. If they think it is the right thing for the customer, we have trained them to think, to take a call on that.
What is the best that you have done?
Sachin: Oh, they can do anything they want. They just put themselves in the shoes of the customer that if this was to happen to me, what would I expect? What is the right thing that the company should have done? Let me just do that. Sometimes, we let the customers keep products for free because we messed up on some part of the delivery or something...or a lot of times, we do that…sometimes we replace products and even if there was manufacturer's fault… We do not ask them to run around service centres. Those are the kind of things that we regularly do for customers.

How many SKUs (stock keeping units) do you have on offer right now?
Binny: About 10 million plus, most of which are books.

What is your biggest challenge right now?
Sachin: That includes scaling the organisation, getting the right people in the right roles and infrastructure, but without diluting the customer experience. Today, we are selling 30,000 items every day.  Even if we do 3 lakh items a day, we want to maintain the service standards. Going from 3,000 to 30,000 versus going from 30,000 to 3 lakh, is a much bigger challenge. We know for sure that the success of the business will depend on our ability to scale up by maintaining the customer experience, probably improving it.

Of the stocks in your warehouse, how much is on your balance sheet?
Sachin: We buy everything. But, we buy intelligently. We do not buy just everything that the vendor has.
Binny: We do a lot of prediction on what we need to buy.
Sachin: We use a lot of analytics to predict, based on sales. We do everything in-house.  We do all technology in-house.


Whose analytics do you use?
Binny: We have built our own. It is proprietary. It is based on a lot of data... on similar trends in a similar segment, for example, high-end Android phones. This is the sales trend that it has, and if in the first 10 days, these many sales have happened, this is the prediction. Then (there are) ratings on the website, what people are talking about it, and a lot of inputs go into that…

Amazon is in your backyard now and has launched an eBay-like platform since they cannot come in unless FDI rules are relaxed. You are not going to join their platform?
Binny: We do not see any value to our business from being on the platform. We are not very clear on what the platform is all about.
Sachin: And we consider Amazon as a big competitor. It is very clear, there is no point in selling on the competitor's website.

But, there has also been intense speculation that you are building your valuation to sell out.
Sachin: No. No. That is definitely not true…
Binny: If they want to pay tens of billions, then probably...
Sachin: Then also, probably. We are building the company for long-term, and every action that we take is keeping a 5-10 year horizon.

Is there any impact slowdown has had on the business so far?
Binny: Slowdown would help our business. Retailing as a category is still growing.
Sachin: There is an impact on electronic sales because of dollar rates…

And you never believed logistics companies could deliver this...
Sachin: You go to them with such a proposal…they will stare at you, blankly. Most of these companies do not have the cash to invest. At scale, these processes are hard to manage. They do not share our vision.

How soon do you hope to be a billion-dollar revenue company?
Sachin: We are targeting 2013-2014 for a billion dollars in sales, and we are on track. That is what we still have in mind.

How do your analytics work? What is the key to your analytics?
Sachin: Because we are online, we are able to collect a lot of data. Each and every click is recorded. Which person did what; if they saw this product, they also saw that product. If they bought this product, they also bought that product. So, we see a lot of data being generated on a day-to-day basis… and all of that gets fed into our analytics. We analyse very deeply, almost everything that we see, including very, very small things like, what is the size of the buy button that we need to have on the website.

The next steps that we are taking are in using that data, and working closely with vendors. For example, Penguin Books, we tell them, okay, you print, you have 3,000 books in print, there are 3,000 more books that you could print, and we will be able to sell for you because customers are looking for them. Those are the kind of data that we share with our suppliers, and we help them sell more.

(This story was published in Businessworld Issue Dated 13-02-2012)