Why is Flipkart Going Down?

While going through market news, I stumbled upon that the giant online retailer, Flipkart, is undergoing financial turmoil, reported 2000 crore loss in the financial year 2015, up from previous year loss of 715 crore. Here comes the intriguing point, despite of its rising sales which has trebled to 10,390 crore from the previous financial year sales volume 2,846 crore, Flipkart incurred huge loss.

There are two divisions of Flipkart – Flipkart India, wholesale arm and Flipkart internet which manages customer-facing portal. Collectively, these both divisions incurred losses 836.5 crore and 1,096.4 crore respectively.

I wonder, what exactly would have been behind this humongous loss in spite of its growth in revenues? Is it marketing strategy? Is Flipkart making wrong moves and failing to streamline the business operations? Or is it a business strategy for long-term success?

Due to losses incurred Flipkart has to apply for 450 Crore loan amount from private bank HDFC. It is apparent that to meet operational cost objective, Flipkart has taken loan amount.

Another blow to Flipkart is that one of its investors, Morgan Stanley, recently marked down its share in the company by 27%, cutting down the online retailer's valuation to $11 billion from $15.2 billion.

What I found more curious is the statement from Flipkart’s spokesperson that they simply want to focus on building trust with its existing as well as prospective customers luring them with heavy discounts. According to them, once they will build a customer base, they will expect increasing sales as well as profits.

What could be primary reasons of Flipkart going down?

In the rat race to win target customers by offering heavy discounts, Flipkart has already spent a huge amount on marketing activities, funding discounts, technology activities and building new warehouses. Further evaluation fetched up with some solid reasons behind the failure.

• Providing employees perks (employee expense 476 crore)
• Heavy discounts
• Brutal price-war with its competitors which resulted into slashed prices of products.
• Extravagant promotions
• Flexible return policies

From my point of view, this strategic working model is totally a blunder lacking economic sense because no company can sell goods or services below the manufacturing cost without any margin, just for the sake of building customer base or stay ahead from the competitor. For sustainable business, Flipkart has to come up with alternate revenue models if they are still following discount models to win customers.

It is quite obvious that flush with cash, companies develop expensive habits like extravagant marketing campaigns and undifferentiated customer acquisition methods, elevating the entire fixed-cost structure of the companies, which is difficult to be reduced back when market circumstances change.

I personally have been evaluating the market performance of Flipkart and other e-retailers. Consequently, I found that the business and marketing strategy that Flipkart has adopted is a serious and irreparable damage from the business point of view. Once the customers start expecting discounted products, expectation of customers will increase in future. Therefore, I believe that Flipkart should have a balanced approach towards winning the brutal price war between its competitors, and wining the largest market share.