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January 4, 2018

flipkart vs amazon : who is burning more cash

flipkart vs amazon : who is burning more cash"

Indian Ecommerce biggest Players and registered users

Cash burning by indian ecommerce start ups have witnessed a new record.During the Holiday season between September and December, the cash burn—the amount companies spend to run their businesses—is reached up to $400 million, according to research firm RedSeer Consulting.

Flipkart, whose cash reserves have gone up to more than $4 billion after SoftBank, Tencent Holdings and eBay put around $2.8 billion into the company in 2017 , thinks now that profitability is not the highest priority right now and its more about creating a marketshare.Flipkart’s CEO Kalyan Krishnamurthy said Amazon India’s cash burn has been three times higher than that the Indian ecommerce giant,and despite the massive spending,Flipkart was ahead of Amazon. Krishnamurthy, who took over the reins as the online retailer’s chief executive a year ago, told TOI in an interview that Flipkart was the most disciplined consumer internet company in the country, having brought down its cash burn by 50% in the last year. 

Generally Festive season sales make for a huge share of the total annual sales in segments like apparel, consumer goods, and home decor. So companies go on massive advertising spends during this time in the name of great indian shopping festivals.

Earlier, Flipkart had halved its monthly spend to USD 20 million from USD 45 million and also succeeded in raising its biggest-ever funding round of $2.5 billion.Flipkart's monthly cash burn right now is about Rs 260 crore ($40 million).Compared to that  Amazon India is losing about Rs 600 crore per month as it eyes market leadership.

So where does the cash go?A bulk of it goes on discounts as Indians are among the most price sensitive when it comes to ecommerce .In India massive discounting have been key to garnering volumes when it comes to online shopping. According to a recent report by Goldman Sachs, 30% of an Indian e-commerce company’s expenses go towards discounts.

Another significant change has been the " changing customer demographics and the emphasis in penetrating the tier 2 cities.In 2017 tier-II becoming a more important share as a part of the total customer base)…E-tailers are more dependent on third-party logistics players for delivery (to tier II areas) which adds to the overall expenses” 

The one area where spending is seen flat or marginally lower this year is advertising. For companies are now increasingly spending on low-cost channels such as digital marketing.Amazon is believed to have spent almost $1billion last year in India after launching its popular subscription service Prime at a discounted rate, which offers faster delivery and a digital entertainment platform. Amazon registered its highest international losses ever at $936 million for the quarter ending September 30 last year, largely due to India spends. 

According to Flipkart CEO “Its competitors are burning 2.5-3 times more money than us. I don’t even know how they get by with this. Despite that, we stand at least 40-50% bigger than the second player in the market,” he said, directly taking on Amazon, which has spent more than $2 billion in India since starting operations here in 2013.

However the question that needs to be asked to Mr Krishnamurthy of Flipkart is why did it take the company till its recent funding to understand the importance of increasing its marketshare rather than focus on profitability “Few months ago, Flipkart was not talking like this. The reason is, they have excessive funds now and it is in direct competition with Amazon. By burning more cash they want to retain more market share, said Satish Meena, forecast analyst at Forrester Research to Entrackr."However he added "Excessive burn will not give kind of scale you are looking for. Because there is time factor for consumers as well. Flipkart should invest more in infra and generate customer loyalties" 

According to a report from Quartz  Flipkart prior to the funding coming in,  had reduced its monthly burn to about $20 million last year, but increased its spends during the festive season discounting in categories like smartphone to shore up sales. “We did a lot of work in 2017 to reduce the burn, which is at a very healthy level. We are not going to do anything drastic to cut down on anything else to optimise on burn,” Krishnamurthy said. But profitability is not something the company is actively looking at this year. 

Meanwhile The world’s largest e-commerce firm Amazon has attacked Bangalore based research firm RedSeer Consulting on its India ecommerce sale rankings which have shown that Flipkart led the last week’s 5-day festive sales with a 58 percent market share in the gross merchandise value of goods sold. 

The RedSeer report further said that Amazon India saw a decline in market share during the annual festive sales worth USD 1.5 billion this month to 26 percent from last year’s share of about 32 percent. “We have noticed poorly informed speculative reports with irrelevant sample sizes whose numbers do not add up to what we are seeing in the industry. We continue to be the fastest growing e-commerce marketplace in India, including key categories such as smartphones, large appliances, fashion and more,” an Amazon India spokesperson commented upon the RedSeer’s market share report 

The Indian e-commerce market, which has 20 million monthly active customers, is expected to grow 2.5 times this year on the back of categories other than smartphones.However indian ecommerce companies needs to come out of this " obsession with marketshare" very soon and show investors  a truly sustaining model that is based on a strong revenue model based on the ability to make money for investors. Flipkart bears daily losses of over Rs 14 crore in the last financial year as it fought to stave off competition from arch-rival Amazon in one of the world’s fastest growing markets for online retail. The company spent aggressively to attract talent and customers thereby increasing losses.