Bestsellers From Flipkart

Image: Mallikarjun Katakol for Forbes India

Sachin

Preface
Browse, click and wait. Online book-shopping should really be a breeze. But all too often, in India, the wait turns endless, and frustration mounts. There could be disappointment in store at various levels. Either the book is out of stock, or the book arrives late, or sometimes never arrives. It is the freedom from this frustration, and the unfailing efficiency of its service that has contributed to making Flipkart.com the most popular Web site to buy books in India. At a recent e-commerce event organised by VC Cirlce in Bangalore, not a session went by without a reference to Flipkart. One panelist remarked that if Flipkart had not launched in 2007 and if makemytrip had not gone for an IPO, we would not even be talking about e-commerce in India today.

Characters
Sachin and Binny Bansal (not related to each other, but friends since their school days), engineers, book lovers, travel buffs and founders of Flipkart.com

Chapter 1
– The Beginning –
Sometime in 2006, Sachin and Binny Bansal found themselves at the Bangalore centre of Amazon.com. The two young engineers were drawn into the entrepreneurial, technology-obsessed and metric-driven culture of the firm that swore to be the earth’s most customer centric company. There were stories of how Jeff Bezos, Amazon’s founder, would visit the warehouses and get his hands dirty, never failing to get a valuable insight or two in the process.

And of course, there was the engineer’s focus on efficiency — the urge to automate and measure in order to make better decisions. Sachin and Binny Bansal could get a definite sense of what it takes to succeed in e-commerce: A relentless focus on the back-end. This insight eventually helped them when they set upon their entrepreneurial journey.

The young engineers were getting restless at Amazon and wanted to do something on their own. It did not take long for them to decide on e-commerce; and selling books online was the obvious choice.

In many ways, it was too obvious a choice. Even at the start of the dotcom boom in the Nineties it was fairly obvious that the books business will do well on the Net. The business model can’t get simpler than it does in books: Tie up with book distributors, courier services and a payment gateway — and you are in the game. The margins in this business are large enough to cover the costs. A typical book costs Rs. 300. Of this, 10 percent goes to the publisher, 8 percent towards overheads, 10 percent to the author, and 15 percent towards marketing and distribution. Retailers typically get 30-40 percent, sometimes even 50 percent. An online retailer gets the same margins, and saves on retail space in prime locations.

India had its own set of online book stores even in the dotcom boom days. “Some of them were launched with great promise, but none of them really picked up,” says Anshul Chawla, managing director of UBS Publishers and Distributors, which supplies to a dozen online retailers, besides running its own online bookstore. Today, there seems to be a rush of online bookstores.

Chapter 2
– The Firm –
The idea of selling books online wasn’t new. Amazon has been doing it since 1995. Nor was Flipkart the first to try it in India. Yet, Sachin and Binny Bansal saw that they could still make an impact. When they came in there were two relatively big players in the market — Indiamart and Rediff Books. “We knew there was nothing fundamentally different that we can do. We have to figure out ways to do things better than others,” says Sachin Bansal. “We started by saying, if we have to satisfy our customers much better than others, what should we do?”

One aspect was offering customers something that others were not. At that point of time, free shipping was not the norm. Pre-order of books was limited, cash on delivery was not an option for consumers. Flipkart offered these, fully aware that others would follow. The key was its ability to launch such offers over a period of time, and to do that it had to get its back-end right. It broke the different elements of the books business and tried to do better than the competition in each one of those. That clicked for it.
These days, Flipkart sells two books a minute. Two venture funds — Accel Partner and Tiger Global — have placed their bets on the firm. Industry players say about Rs. 100 crore worth of books are sold online (that’s about a percent of all the books sold in India), and Flipkart does a quarter of that.

Chapter 3
– The Plot Thickens –
Sudhir Sethi, founder chairman, IDG Ventures India, which has invested in e-commerce companies, says that in one way, entry barriers are low for online retailers, but in another way, they are not. “Getting the logistics right is more difficult than one would imagine,” he says.

That, the two Bansals found out soon enough. In the US if you want to cover about 80 percent of all the books that are published, you just have to tie up with three or four distributors. But in India you have to tie up with hundreds. A typical customer in a bookshop knows that shelf space is limited and the books she will see are the ones in demand. An online customer sees no need for such restraint. “Many books that we sold, we sold just one copy. We might never sell that book again, but the customer who bought that book will come back for more,” says Sachin Bansal.  

But they found the distributors far from enthusiastic. “When we first approached a book distributor, we thought they would be enthusiastic — after all, we were offering to sell their products. But people like us were approaching them every day, and they were not too impressed,” says Sachin Bansal. Besides, dealing with an online bookstore is not the same as dealing with a brick and mortar bookstore — the catalogue had to be updated more often, and deliveries had to take place daily based on the customer order. They persisted anyway, often altering their processes to fit the suppliers’ way of doing things. The number of suppliers was 10 when the Web site started; it is now 500.

“But, what’s really important is predictability,” says Subrata Mitra, Partner, Accel Partners, which has invested in Flipkart. Mitra, who sits on the board of Flipkart, feels you need a system to track where books are available and predict how soon and reliably they can be delivered.

Chapter 4
– The Good, the Bad and the Ugly –
For the fledgling success, it’s a tough balancing act. To increase predictability, it should ideally hold a large inventory; but doing that with no clarity on when it will be used, will make costs shoot up. The system the team developed — it’s still evolving, says Sachin Bansal — helps optimise the use of warehouses. Flipkart  has four warehouses; all are being expanded. “The one thing they got right is the focus. Unlike other online retailers who are into a lot of products, the two Bansals decided to focus on books, get that right and then move on,” says Chawla of UBS. Flipkart is now moving on. It has started selling movies and music online, and more recently, mobile phones. Movies and music do not alter the business model much. In mobile phones, however, margins are lower; but since the value per piece is high, it’s still profitable.

Getting into other segments is a must for Flipkart because books alone cannot give scale. “We want to eventually sell everything that can be sold online. That’s the reason why we chose a neutral name like Flipkart. Still, we believe books will be the staple for some years to come, given the growth potential. We have an advantage in this space,” says Sachin Bansal.

Sceptics argue that India is still a brick and mortar market, and people prefer to buy books from physical stores. Flipkart’s argument is that bookstore chains are an urban phenomenon and there is a huge demand in the smaller towns and cities. Online retailers could also score in the area of regional language books. Accel’s Mitra says Flipkart found customers from unexpected segments. “We noticed that there are a lot of bulk orders, for 30, 40, 50 books, and we realised they were reselling it somewhere and that we were bringing a new set of customers to the Net.”

Physical stores selling books online will pose a bigger threat. Landmark has had an online store for a long time. Recently, Odyssey launched Odyssey360 and Crossword is set to launch its own Web stores shortly. They have the advantage of a bigger brand. But, pure-play Web companies tend to offer bigger discounts, and Sachin Bansal believes they also tend to be more focussed.

An even bigger threat is likely to come in the form of e-books. Recently, Amazon announced that e-book sales has equalled the sale of hardcover books. The two Bansals are aware of the potential of e-books. But they see no reason to rush into it. They believe that executing what they presently do — selling books, adding more products to their catalogues, reducing the time between order and delivery — is important. They see the segment growing to cover 10 percent of all books sold in India from about 1 percent now. Sethi is optimistic about online retailing for two reasons. “First, I believe they will rapidly transit from physical books to digital books. Bookselling companies worldwide will have to take a leap of faith very fast. Secondly, I am not commenting on Flipkart, but any company in the e-commerce space in India will have to be global to achieve scale.”

‘Paying customer’ is a recurring phrase in their conversations — perhaps to stop themselves from getting distracted by other metrics such as ‘eyeballs’ that pushed dotcoms into investing on things that never resulted in revenues. That also explains why the two Bansals haven’t done much about the way the Web site looks (ugly). Customers don’t pay for looks. Flipkart’s success depends on how well the two Bansals balance their attention between what customers pay for today, and what they will pay for tomorrow.

Appendix
Recently, Sachin and Binny Bansal hired a set of designers to make the Web site look good in the next two to three months. “In the last two-and-a-half years, 90 percent of our work went in getting the back-end right — the supplier relationships, IT infrastructure, logistics and so on. Now, we think we have a pretty good handle on that. We will be launching more products shortly. It’s time to get a little more aggressive on marketing. It’s not enough to be efficient, we also need to look good,” says Sachin Bansal.