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Flipkart Burnt Through Nearly Half Of $6.1 Bn It Raised From Investors In The Last 10 years

Flipkart Burnt Through Nearly Half Of $6.1 Bn It Raised From Investors In The Last 10 years

From Tax Woes To Troubles With Sellers, Flipkart’s Aim Of Hitting Profitability By FY18 Remains A Dream

Homegrown ecommerce giant Flipkart has burnt through nearly half of the $6.1 Bn funding it raised from investors over the last decade, since it started operations in 2007. The company’s accumulated losses jumped several-fold to $3.6 Bn (INR 24,000 Cr) as of March 2017, from $1.5 Bn (INR 10,000 Cr) a year prior to that.

As per its filings with the Accounting and Corporate Regulatory Authority of Singapore, accessed by Inc42, Flipkart witnessed a slowdown in its revenue growth during the last fiscal.

Sales of its ecommerce arm, which operates fashion portals Myntra and Jabong as well as digital payments business of PhonePe, underwent a 29% growth, reaching $3 Bn (INR 19,855 Cr). While the number is impressive in itself, compared to the 50% revenue growth the company clocked in FY16, this represents a significant drop.

As of March 2017, Flipkart sold goods worth an average of $8.3 Mn (INR 54.4 Cr) daily, compared to $6.4 Mn (INR 42.20 Cr) worth of goods that were sold every day in the previous year.

According to its financial results, the ecommerce behemoth reported an eight-fold increase in its interest costs from $123.7 Mn (INR 806 Cr) to $661.5 Mn (INR 4,309 Cr) in FY17. The jump, as per sources, has been largely due to the increase in interest accrued to preference shares issued during its fundraise.

On a positive note, cash burn rate dropped as Flipkart managed to cut its losses slightly at the earnings before interest and tax level. However, losses after tax surged from $801.8 Mn (INR 5,223 Cr) in the fiscal ending on March 31, 2016 to $1.3 Bn (INR 8,771 Cr) in FY17.

Flipkart Vs Amazon: The Competition Is Getting Close

Recently, in a report titled ‘Online Retail Forecast (2017-2022) Asia Pacific’, Forrester Research found that Amazon India is now behind its arch nemesis Flipkart by only 1% in GMV market share for 2017, in comparison to 5% in 2016.

Currently, Flipkart’s standalone market share was 31.9%, while Amazon’s was 31.1%. As per the report, although Flipkart leads the charge with its subsidiaries Myntra and Jabong, “Amazon has taken the lead in categories such as appliances, consumer electronics, and more importantly, groceries, which builds platform stickiness.”

Even as Flipkart leads in fashion and smartphones, the report stated, “After surpassing Flipkart in 2016 for the first time (in metropolitan user preference), Amazon has strengthened its position as metropolitan Indian consumers’ preferred online retail destination and is aggressively closing the gap with Flipkart to become the single-largest online retailer in India in terms of sales.”

Dismissing the findings of the report, a Flipkart spokesperson said, “The findings of this survey are incorrect and do not reflect ground realities. Flipkart is the undisputed leader in Indian ecommerce with 60% overall market share. Further, the so-called survey to find out which online shopping destination Indian consumers prefer has no legs to stand on because it fails miserably on the most important criteria for a survey, which is to have a large-enough, representative sample size.”

Recently, the tussle between the two ecommerce majors was seen earlier during the festive season sale last October-November. At the time, etailing industry managed generated $1.5 Bn sales ( INR 9,000 Cr). Flipkart generated 2.3x times the business in the festive season sale with 58% share, while Amazon managed 26% share of the total sales.

Similarly, during results of Republic Day sale towards the beginning of this year, Amazon India had said that it received the highest share of orders with 2X orders than the nearest competition in the Indian ecommerce industry, and nearly double the number of transacting customers. The company also claimed to acquire 1.7X new customers over a normal business day with 85% coming from Tier II, Tier III and below geographies.

At the time, Flipkart had rejected such claims and said, “Our sales in categories such as mobiles, fashion and large appliances were 2X of competition. During the three-day period, our share of the etail market would be between 60-65%. On the back of a stellar sale, Flipkart continues to maintain the lead as the largest ecommerce player in the country.”

Is Profitability Still A Distant Dream For Flipkart?

In July 2017, reports surfaced that online marketplace Flipkart was looking to cut losses and move towards profitability during the current financial year ending on March 31, 2018. To that end, the ecommerce giant was reportedly planning to curtail discounts, while also reducing warehouse and logistics-related costs.

Additionally, Flipkart was hoping to bolster sales and break even at the gross profit (GP) level by the end of FY18. Flipkart’s decision to refocus its strategies on attaining profitability came just a month before the ecommerce giant secured a massive $2 Bn-$2.5 Bn funding from SoftBank, as a follow-on to the earlier $1.4 Bn round from Tencent, eBay and Microsoft.

Incidentally, Flipkart is currently engaged in talks to raise a substantial funding from global retail giant Walmart, in exchange for a stake in the online marketplace. As per its recent indications, Walmart is looking to enter the Indian ecommerce space by acquiring a 25% to 51% stake in Flipkart through a mix of primary and secondary purchase of shares from existing investors including SoftBank, along with an investment of $7 Bn. If the deal goes through, Flipkart’s valuation will rise to $20 Bn from its current valuation of $14.2 Bn.

Given the way things stand at present, it seems that reaching profitability might be a more challenging task than Flipkart originally envisioned. The company recently made headlines when it asked sellers to deal with 60% of the discounts during sale events.

A communication mail sent by Flipkart to its merchants stated, “The break-up of the incentive offer will be that the seller will burn 60% and Flipkart will burn 40%.”

Earlier in November 2017, it altered its selling rates, lowering commission by 5% on items priced below $4.61(INR 300) for many categories including mobile accessories. Also, the payment settlement time frame was reduced by two days for sellers in the silver category.

Recently, Amazon made a similar move when it modified its seller fees by reducing seller fees by nearly 70%  in categories like daily needs and apparel and increasing it by up to 50% for items like power banks, chargers, shoes, etc.

Concurrently, Flipkart also finds itself in a pickle with the Income Tax Department, which refused to stay the $17.2 Mn(INR 110 Cr) tax penalty on the ecommerce giant as part of the tax assessed for FY15-16 and gave it a deadline of February 28, 2018 to deposit $8.5 Mn as tax and $8.5 Mn as bank guarantee.

Under the latest ruling, the IT department has asked the ecommerce firm to reclassify discounts not as a cost but a capital expenditure, meaning that it should not be deducted from the revenue and should, therefore, be taxable.

As the Indian ecommerce market reached $33 Bn registering a 19.1% growth in 2016-2017, according to the Indian government’s Economic Survey 2018, major players like Flipkart and Amazon have been expanding and exploring avenues to gain a stronger foothold in the burgeoning market.

However, for Flipkart, the road to profitability is hindered not just by its rivalry with Amazon. From troubles with the Income Tax department over reclassifying discounts as revenue expenditure to conflicts with sellers over deep discounting, the homegrown unicorn has a bunch of hurdles to overcome before it can before profitable.

With report surfacing that Flipkart is now actively looking to hire more than 700 people across various tech positions, its expenses are likely going to increase multiple-fold in the coming months. While the dream of breaking even by FY18 will remain fulfilled, whether it manages to successfully cut losses, without losing business, will be interesting to watch.