Recently, we saw the American retail giant Walmart acquiring a 77% stake in India’s largest e-commerce player, Flipkart. While Flipkart maintains the crown of having the largest user base, but one thing that is not to be forgotten that the company is still not generating any profits. Walmart, on the other hand consistently tops the list of Fortune 500 companies.
However, one must take note that India’s e-commerce market is yet to expand and will start generating profits soon. But one unnoticed reason for such huge valuation comes from the complex structure of Flipkart, which has a less-famous jewel in it – the wholesale business. Yes, the commerce giant might be primarily known for its marketplace model and exciting deals and Flipkart offers, but it is the wholesale business of the company which actually generates much of the revenue of the company.
And the wholesale business not just earns more revenue, but it is actually more efficient than other businesses of the company. Since it burns lesser cash now, and earns the major chunk of revenue too, it straightaway means that the wholesale business is something that prompted Walmart towards Flipkart’s purchase. Further, Walmart already has the experience of running wholesale business in India, which makes it even better for the company to go for the deal. Walmart currently has 21 stores in India where it sells goods directly to businesses.
A look into Flipkart’s financial records shows that the parent company, Flipkart Limited (Singapore), earned a revenue of INR 20,454 crores in the year ended March 2017. But what is interesting is that Flipkart’s Marketplace, which is run by Flipkart Internet Pvt Ltd, earned only INR 1882.8 crores out of it, which means that the revenue of share of this business is only 9.2%.
While on the other hand, the whole sale business of the company, run by Flipkart India Pvt Ltd, earned a whopping INR 15264.4 crores out of which, which makes the revenue share of this business close to 75%. So nearly 3/4th of the actual revenue of the company comes from wholesale business, and not from the flagship Marketplace business. The remaining part of the revenue is earned by other businesses of the company like Myntra, Instakart and PhonePe.
The Flipkart group earns its revenue from four major models – marketplace services, payment collection services, logistics services and other remaining businesses. The marketplace model is the internet portal on which registered sellers list their products and retail buyers purchase them. Income from logistics comes from a fixed charge being made on delivery on goods. The payment services get their revenue from the money being charged on successful transfer of money, depending on the transaction value. And in the ‘others’ section comes income earned from providing advertisement spaces to businesses on its website, and the rent charged for it on the basis of contract.
While the wholesale business is a clear winner when it comes to the revenue of the group, it is an operational jewel too. It earns most of the revenue of the company, but contributes least to the losses. For the year ended March 2017, the Flipkart group made losses of INR 8771.4. The whole sale business, which covers almost 75% of the revenue, accounted for losses of only INR 244.7, which is definitely impressive. The largest revenue sharer of the company accounts for less than 3% of the losses.
On the other hand, the marketplace section of the company posted losses of a whopping INR 1639.3 crores, which covers a major share of losses of the group. It is to be noted is that the revenue of marketplace model is only 1882.8 crores. The other business of the company like Myntra designs posted losses of 627 crores.
Flipkart India Pvt Ltd, the wholesale arm, is extremely efficient in terms of employee expenses too. Out of 2052 crores employee expenses of the group, the wholesale arm accounts for only 166 crores. While Myntra Designs accounts for 267.5 crores from it, the marketplace arm covers 1032.8 crores. Walmart must have noticed these stats and would probably have spotted this efficient and money making jewel.
Flipkart’s Payment App, Phone Pe
But one issue with Flipkart Group’s another ambitious business, which is payments app PhonePe, is that it is still struggling to make any significant contribution to company’s revenues. Even after crossing the milestone of 100 million users recently, the company made revenues of only 3.03 crores, which is certainly not a figure to be impressed of. However, the jump in revenues of PhonePe, when compared to last year, is pretty significant. Last year that payments arm earned only 19 lakhs as revenue, as per the company’s filings with Registrar of Companies.
However, one big reason for such strange statistics of revenue of Flipkart is its complex organizational structure. An analyst, on condition of anonymity, revealed that Flipkart group is very complicated in its structure. “It is certainly not easy to allocate the sales to different business units and there are some things which are difficult to assess. For instance, WS Retails is probably one of the biggest sellers on Flipkart and is closely related to Flipkart. But the founders had sold their stake some years back, to Rajeev Kuchhal and some other investors,” he said.
Adding further, the analyst said,” As the group is structured in a very complex manner, the revenue of one company can become a cost for the other. And this makes it difficult to allocate revenues to different business units. But on the face it, the wholesale business is the largest contributor in revenues.”
It will be interesting to see how Walmart, probably the world’s most successful retailers, turns the home grown startup into a profitable company. Walmart certainly has the capability to do that, and the deal is surely going to bring a lot of changes in India’s e-commerce sector.
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