India`s Online Commerce is estimated to be around $19Bn as of 2018. Indian Internet user base stands roughly at 350 million as of 2018. Indian retail and financial inclusion might leapfrog to Ecommerce and Digital payments skipping completely a revolution of Brick and Mortar retail plus banking mimicking the way China leapfrogged to E-commerce retailing and digital led financial inclusion.
Flipkart was India`s pioneer and is still the leader in Ecommerce retailing and is believed to have a net registered user base of 100 million users and monthly active users of 8-9 Million. The business model is a combination or hybrid model of both inventory based and marketplace based retailing underpinned especially through acquisitions of Jabong and Myntra. But its original model was pretty much inventory based and transformed into marketplace bringing sellers just the way Amazon transformed. In fact Amazon`s transition to Hybrid model (digital + brick and mortar) led way to many Indian leading retailers to adopt hybrid model. Flipkart Advantage offers warehousing for inventory storage, packaging and delivery or completing fulfilment. Sellers can choose either self-fulfillment or through Flipkart. Buyers trust products which are backed by their fulfilment like Fulfilled by Amazon Prime or Flipkart advantage.
2 prominent and prolific business areas of Flipkart are Electronics and Fashion retailing. Has 25% market share in smartphones and Gross Merchandise Value (GMV) of 6000 crores in other electronics category. Smartphones is the largest revenue generator for Flipkart. They have 6500 Crore ($1 Bn) GMV in Fashion retailing with 70% of Online fashion shoppers shopping in Flipkart per them which means 24 Million users in $4 bn fashioncategory. This can scale up to 100 Million in 5 years users just in Fashion retailing. Total GMV increased by 43% in 2017 year over year. From the data available in public, it looks like they have a total GMV of around $6.5-7 Bn. Higher the GMV, higher the sales of these Ecommerce sites. So we calculate potential GMV growth when we do the valuation in the later part of this analysis.
User Base and behavior in Indian Ecommerce sites & Flipkart as case in point:
Flipkart has a user base of 100 million users and monthly active users of 8-9 Million as of Dec 2017. Characteristics or customer behavior of users on the digital platforms carry a substantial significance in terms of its sales prospects. Like Flipkart`s big billion day sale or Amazon prime day or Alibaba`s Singles day are to target significant repeat business from registered users or to target new customers to their sites. Amazon first prime day sale in India in 2017 is touted to have carried out 3X sales in 30 hours. Flipkart has timed Big billion day even better in September just before the festive season kicks off in India. People plan their festive shopping targeting these mega sale days and Ecommerce players has seen big success in their inventory depleting off. Flipkart achieved Gross sales of $1 Bn in 2017 during the Big billion day sales period of 5 days. Indian customers usually have a tendency to plan their shopping well in advance and wait for the mega sale days. Ecommerce sites take advantage of these customer searches and promote targeted marketing including personalized campaigns on these sites. They are usually savvy in touch and feel and hence visits retail stores to understand and feel the products. Once the shortlisting is done by personalized visits to these retail stores, they save the item on ecommerce sites and plunge shop on the big sale days. No wonder we cannot rule out the importance of brick and mortar retail stores completely and hence hybrid models are catching up with instances like Myntra opening up their physical fashion stores.
Competitions are rising across the spectrum from different global giants including Amazon, Paytm Mall, Shopclues in Ecommerce arena and with more offline retail giants like Future and Reliance embarking on Hybrid models
Amazon entered Indian markets in 2012 through Junglee.com and grew their market share to 30% in Ecommerce just over 5 years lying closely behind Flipkart`s market share of 40%. Jeff Bezos in his newsletter stated “Amazon.in is the fastest growing marketplace in India and the most visited site on both desktop and mobile”. Reliance Retail is also growing their sales at rapid pace at a CAGR of 40% overlast 10 years, clocking $11 Bn sales in fiscal 2018. Reliance also has well entrenched Hybrid models with omnichannel sales strategy through Ajio.com and reliancefreshdirect.in. They have partnered with Grofers for grocery delivery in many cities. Paytm Mall which is owned majorly by Alibaba (around 30% stake) and Softbank (25% stake) will compete with Amazon India and Walmart owned Flipkart. Paytm established as India’s single largest digital wallet services is now venturing big time into Ecommerce. Alibaba and Softbank recently announced investing around $450 million to grow Paytm Mall valuing the company at around $2 Bn. They might be looking to replicate Alibaba Ecommerce model in India.
Walmart`s revenue details and Cash flow:
Walmart clocked a total revenue of $500 Bn growing 3% YoY. Ecommerce sales and GMV grew 44% and 47% respectively. Company generated operating cash flow of $28 Bn and returned $14.4 Bn in 2017 fiscal. Return of capital to shareholders is an important factor to analyze when evaluating their $16Bn investment in Flipkart acquiring 77% of it. We need to outweigh the ROI on $16 Bn investment in Flipkart against just returning that capital to shareholders. Walmart`s international revenue was flat at $118 Bn with no growth year over year.
Walmart`s China and Brazil strategy that didn’t work:
While Amazon India story was successful in all aspects of building user base, it wasn’t the same case in China. They failed miserably to gain Chinese ecommerce market share. Walmart too is not successful in China and a total failure in Brazil even after trying for past 2 decades. Per Walmart its one formula doesn’t fit all cultures and is still adopting to the strategies to win in these emerging markets. According to their website, prior to the closures in Brazil, the chain had 544 stores, 200 pharmacies, 50 restaurants and 10 gas stations in 18 states. Understanding local customers and tastes of Brazilians, Chinese and Indians are extremely complicated and so it makes sense to do acquisitions of already successful local Ecommerce Biggies for which they will have to pay 30% premium atleast. For instance Walmart`s acquisition of Yihaodian, a fast growing ecommerce business in China had worked better to capture local user sales, which later Walmart sold to JD.com in 2016. Walmart holds 5% stake in JD and could well be a future complete acquisition candidate Walmart might be repeating similar acquisition strategy in India as well to adopt to local customers and build Hybrid model of commerce sales.
Walmart`s potential India strategy:
Walmart has gone through a great deal of ordeal since a decade to enter Indian retail market but couldn’t establish due to the 51% Foreign Direct Investments constraints. They could only settle for B2B oriented cash and carry stores in India so far which garnered around $0.3 Bn revenue in 2017. They are definitely looking to establish Hybrid model omni-channel retail strategy in India through their recent Flipkart acquisition. Walmart will also be burning cash in next few years to retain and grow user base and hence the sales volumes. While Amazon can sustain the cash injection due to their high margin global advertising and cloud business, we need to see how Walmart will get and deploy the capital to inject into Flipkart.
Walmart valued Flipkart at $20.8Bn and purchased 77% stake for a cost of $16Bn.Lets take a shot at valuing Flipkart in the industry standard based on Gross Merchandise Value (GMV) & Sales projections.
Revenue for 2018: $4.6 Bn (30820 Crores). Growth YoY from FY17 -> 50%
Revenue for 2017: Rs 19,854 Crores. Growth YoY from FY16 -> 30%
Revenue for 2016: 14, 650 Crores
Losses for 2017: 8,771 Crores. 68% jump from Fy16
This translates to Flipkart generating a revenue of approximately Rs 2500/ Active monthly user in a month. Totally they have around 10 Million monthly active users. If this grows to 50 Million users in next 7 years, then the revenue generated per month could grow 5-6 fold from where it is now. This would mean revenue can increase to a range of $25-35 Bn depending on new users growth, competition from prominent players, new offline retail stores addition etc. The detailed excel snapshot of valuation is below:
To summarize we arrive at a potential 3X growth of current market capitalization for Flipkart albeit whole passel of assumptions and factors like Walmart maintaining atleast 25% market share over next 8 years and Indian ECommerce retaining its 30% CAGR growth. I have arrived at a potential sales figure of around $31 Bn for 2025. Considering Flipkart is further expected to burn cash of $1.5-$2 Bn over next 2 years, it will be really interesting to see how Walmart will execute their Omni-Channel retail strategy in India competing against the global behemoths like Alibaba and Amazon.