Under new chief financial officer Sanjay Baweja, Flipkart Ltd is slashing hiring in all but two functions, increasingly outsourcing order deliveries to logistics companies, improving its supply chain planning and boosting marketplace sales to bring the company’s ballooning costs under control. While Flipkart has emerged as one of the most valuable Internet companies globally, there is growing pressure on the Bengaluru-based e-commerce firm to control costs and show investors that it can generate profits in future. The pressure will only become stronger as Flipkart prepares for an initial public offering (IPO), which is expected some time at the end of 2016, according to investors and analysts. None of India’s e-commerce companies, including Flipkart and Snapdeal, are anywhere near achieving profitability. “As the industry matures we need to show the path to profitability,” Baweja said in an interview. “We’re moving into a cost-containment mode where our fixed costs will become smaller of the overall pie going forward. The aim is to make most of our costs variable so that we spend only as per the volumes or sales we’re generating. Hiring for our corporate functions will need to be much more controlled. We’ll continue to hire aggressively in technology and logistics but we don’t need to add people in functions such as HR (human resources), finance and legal.” Baweja, who is the senior-most executive hired by Flipkart yet, was brought in by the company late last year from Tata Communications Ltd. He is expected to play a key role in preparing Flipkart for its IPO. Flipkart, India’s largest e-commerce firm, is growing sales at a rapid pace by spending huge amounts of cash on deep discounts, advertising and adding warehouses. The company’s workforce has more than tripled to roughly 33,000 people over the past year. For the year ended 31 March, 2014 the losses of various Flipkart India entities amounted to Rs.719.5 crore on revenue of Rs.3,035.8 crore, according to data from the Registrar of Companies. These entities reported sales of Rs.1,195.9 crore and losses of Rs.344.6 crore for the year ended 31 March, 2013. Supply chain costs, primarily warehouse management and logistics, are one of Flipkart’s largest expenses. The company has struggled to operate its large logistics network, which includes more than 15,000 employees, in a cost-efficient manner, partly because its focus was toward adding capacity to meet surging demand rather than saving costs. Now, the company is putting greater emphasis on controlling supply chain costs by strictly implementing its business plans by monitoring expenses on a quarterly basis and improving space utilization at its warehouses by increasing use of technology. “If our planning becomes better then capacity utilization of our warehouses will improve and that’s a key part of improving supply chain efficiencies. This includes signing up new warehouses much closer to when we can start using the warehouse. Earlier there were times when we were signing warehouses several months before they started being operational. That will stop,” Baweja said. The company is also increasingly outsourcing its order deliveries to external logistics firms. Currently, a majority of Flipkart’s deliveries are handled by WS Retail Services Pvt. Ltd, which is the company’s largest seller and logistics provider. “We had a relatively transactional approach with third-party logistics partners since we delivered a majority of our orders. But now we’re working much more closer with our third-party logistics partners. We’re going to share our technology with them, give them large volume commitments and enter into much more collaborative partnerships,” Baweja said. Apart from controlling costs, Flipkart is trying to build its high-margin advertising business, with chief executive officer Sachin Bansal taking direct charge of this initiative, Mint reported on 16 February. The company is also increasingly moving toward the marketplace model and has set a target of adding 100,000 sellers in 2015 from 12,000-13,000 currently. Flipkart, which started out by selling products directly to shoppers, moved to a part-marketplace model, where it connects customers with other merchants. The marketplace model burns less cash than direct online retail. To be sure, it’s far from clear if Flipkart’s cost-control and margin-boosting measures will work. The company will need to continue to spend big on hiring thousands of people in the supply chain and adding capacity. It plans to more than double its warehousing capacity over the next year, according to three people familiar with the matter who declined to be named. Since its valuation—estimated at $11-$12 billion—is based almost entirely on its ability to maintain its flying sales growth, Flipkart will also have to continue giving deep discounts and spending large amounts on advertising. “It’s highly doubtful if Flipkart can achieve profitability over the next few years,” an analyst who works with Flipkart said on condition of anonymity. “Discounts, advertising and supply chain account for their largest expenses and if they want to maintain their market share, they will have to continue to spend big on these three. When there is no way you can cut your biggest expenses, how will profits come?”
0 comments :
Post a Comment