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Jul 12, 2012, 08.23 AM IST | Source: Forbes India

Can Flipkart deliver?

India's top e-commerce website is betting big that "customer delight" will lead it to success. But costs and management issues could play spoilsport

Can Flipkart deliver?
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But with this information on hand, Kumar called Bathwal on the phone and told him "You have a dead stock situation." Bathwal protested. "We can return it to the vendors."

A few days later, Sachin and Binny Bansal called him for a meeting. "Sujeet is now going to head all our categories and doesn't want you to report to him.  I'm sorry, but he is my senior from IIT-Delhi," said Sachin. A week later Bathwal put in his papers. It was much the same thing with the others. The Bansals trusted only their investors and a handful of colleagues from their IIT days. The others were dispensable outsiders.

Das says he was frustrated after being stonewalled every single time he tried to get clarity on the finances. In spite of heading the function, he was unable to find accurate numbers on sales volumes. In one instance he found Anuj Chaudhary, another "Jwala" alumnus, had hired a finance person into his division without so much as informing him.

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Then there was Mittal, an aggressive and abrasive "Jwala" alumnus, with a take-no-prisoners approach. “Five to 7% of the book sales were based on cash. I wanted to know from Mittal why vendors wouldn't accept cheques. But I got no answer. It's possible Sachin and Binny didn't know about these deals though,” says Das.

Mittal, we were told, was on a sabbatical when a request for his version of the story was placed. Two weeks later, Mittal was taken off the rolls. No reasons were provided.

Das adds he also found a mismatch between Flipkart's sales receipts and bank balances in his early days. Ernst & Young's 2011 annual audit report of Flipkart's accounts had also raised at least two "qualifications". Qualifications in audit parlance refer to notes or comments made by an auditor indicating their displeasure with something in a company's books. In Flipkart's case, the qualifications were around the company's internal control and reporting systems. It is not known if those qualifications, or others, were present with the next year's accounts.

“Back then the company was growing so rapidly that it's possible there may have been some lag between the two,” says Sachin in Flipkart's defence.

Das says he resigned in April 2011 before having to put his name on Flipkart's balance sheet for the year gone by. "If I had to put up with so much of pain around finance, I might as well have done it for my own company than as an employee for Flipkart," he says.

"Are you going to put Das' name next to all these allegations?" Sachin asks me during an interview in which Binny and CFO Karandeep Singh were present.

"Yes," I tell him.

"Hmm!!!  Usko toh dekh lenge [We'll deal with him]," he says to Binny, before being pacified by Singh to let matters rest.

"An IPO will be an unnecessary evil for us. Today, there is so much of private capital available that we'd like to stay private for as long as possible, like Facebook," says Binny Bansal. But truth is, Flipkart started evaluating its options way back in 2010 by first studying the regulatory environment in the US, Mauritius and Singapore. Listing in India was out of the question, given SEBI's regulations around generating profits first.

The appointment of MakeMyTrip CFO Magow to Flipkart's board is probably the best indicator of how its IPO will pan out. Magow was the architect of MakeMyTrip's US IPO using a holding company structure based out of Mauritius.

Last year, Flipkart floated a company in Singapore, Flipkart Private Limited, which spent Rs 323 crore earlier this March to acquire shares in Flipkart India Pvt Ltd, a subsidiary company incorporated only in September 2011. It's hard not to consider that as part of the run-up to an IPO next year. But it will raise questions the Bansals have been ducking until now, starting from the ones raised by General Atlantic Partners.

Flipkart also has to fight off aggressive competition from the likes of Infibeam.com, Homeshop18.com (owned by Network 18, Forbes India's publisher), Snapdeal.com and Indiaplaza.com. In books, for instance, Flipkart has over the last few months started raising prices across the board.

Which is why, it will be interesting to watch how the hypothesis that puts serving customers over everything else holds up. On the other hand, Flipkart's competitors too cannot endlessly burn the same fuel it does, venture money, to buy market share.

"If consumers buy only for cheaper prices, free delivery, free returns and free CoD… then the question is, will anyone ever make money? I don't think anyone has a good answer to that," says Kanwal Singh of Helion Partners.

Flipkart is also moving fast to launch apparels and has hired senior people to spearhead the effort. This category is crucial for Flipkart because at 30-40%, it has much higher gross margins than books (where discounting has wiped most margins to single digits) or electronics (6-8%). Ironically, the current market leader in apparel is Myntra, which has Accel and Tiger Global as investors.

Finally, there are the 'softer' issues around culture. After stymieing the first set of professionals who joined in 2010, Flipkart has gone back and hired a second set of people, in most cases even more experienced and senior than their earlier hires.

These include Karandeep Singh, earlier a vice-president at Sapient India, as  CFO; Ravi Vora from Heinz India as head of marketing; and Aparna Ballakur, who formerly headed human resources at Yahoo! India.

Singh is now implementing Oracle Financials, the first major enterprise software Flipkart has chosen not to code from scratch. Why now? “This is a big investment and we had to reach a stage where it could be justified,” says Binny.

Meanwhile Ballakur will need to walk the fine line between bringing in a more professional and open work culture while retaining the good aspects from the old. Why did Flipkart wait so long? "We've been looking since 2009, but just didn't find the right person," says Sachin.

"It's typically an investor who puts pressure on start-ups to professionalise or scale. It's a tough transition," says Priya Chetty-Rajagopal, of global executive recruitment firm Stanton Chase.

What the Bansals need to add now is humility and, perhaps, dilute their audacity and ballsy ways to stay afloat.

(Additional reporting by Shishir Prasad & Pravin Palande)

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