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Flipkart.

com adopts the Marketplace Model for E-Commerce


Introduction
E-Commerce, a mode of retail introduced in the 1990s, has today kept its promises of providing a hassle-free, secure shopping experience to customers and has become a widely adopted service throughout the world. In India, E-Commerce is the fastest-growing mode of retail and several companies, local and (more recently) global, have decided to enter the market. In 2013, perhaps the biggest news for the market was US ECommerce giant Amazons decision to enter the market , following the relaxation of the countrys Foreign Direct Investment (FDI) norms for the retail sector. Coinciding with the launch of Amazon in India was the news that Flipkart.com, Indias dominant E-Commerce portal in terms of market share, was changing their operating model from maintaining their own inventory, to a Marketplace model , i.e., one where buyers place orders through Flipkart.com (who also take care of the delivery and logistics) but the inventory of items on sale is not owned by Flipkart.com, but by other sellers. In fact, the Marketplace model has been adopted not only by Flipkart.com, but by several other Indian online retailers. The CEO of Snapdeal.com, another major E-Commerce website, stated his belief that the inventory model is dead . Through this study, our aim is to understand the impact of supply models on E-Commerce firms and why the shift was necessitated in the Indian context. The focus of this study will be on Flipkart.com, though it is possible that the concerns are valid for other Indian E-Commerce firms as well, since the preferred choice of supply model for most large firms has been the Marketplace model.
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Company Background - Flipkart.com


Flipkart was founded in 2007, and is headquartered in Bangalore, India. From a revenue of USD 1.86 mn in 2009-10 to USD 8 mn in 2010-11 to over 80 mn in 2011-12 , Flipkarts growth has been phenomenal and has played a pivotal role in the growth of e-Retail as a sector in India. In October 2013, Flipkart.com closed their fifth round of funding, raising US $360 million in the process , the highest ever by an Indian website. According to a company statement, Flipkart offers products in 17 categories and has over 1 million unique visitors per day.
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Retailing in India, Euromonitor, July 2013 Amazon now in India, The Hindu, July 2013. Online at: http://bit.ly/13lEpDD 3 Flipkart launches its Marketplace with 50 sellers onboard, YourStory.in, Apr 2013. Online at: http://bit.ly/IJZhiy 4 Snapdeal CEO says inventory model is dead, looking for deals. Online at: http://bit.ly/12MNOqn 5 Flipkart may launch online marketplace on its website, Business Standard, Oct 12. Online at: http://bit.ly/1bg3eBp 6 Flipkart raises $160 million in latest funding drive, Reuters, Oct 2013. Online at: http://reut.rs/Ir6fbL

With a target to reach US $1 bn in sales by 2015, Flipkart is not setting itself any easy goals to achieve, though the sector of Online Retail is projected to grow at a healthy rate in the years to come, riding on a variety of enabling factors like increased internet connectivity, adoption of technology for the supply chain and increasing adoption of online payment methods.

E-Commerce Explained
The generic term E-Commerce is used for describing the sale and purchase of items via an online service, usually a website or portal. There are three primary modes of conducting these transactions: 1. Customer to Customer C2C online retail is enabled by services like Online Classifieds, which allow users to post and share information regarding items on sale. The category is still in a nascent stage in India and a few portals like eBay.in have existed since some time, enjoying moderate success. 2. Business to Customer Online travel, online retail, digital downloads and financial services are examples of B2C E-Commerce business categories. B2C is by far the biggest category of E-Commerce in India. Though online travel is the biggest among these in India (at about 3.5 times the size of online retail in 2012), online retail is set to catch up and account for the same total revenues as online travel by 20157. 3. Business to Business B2B retail as a category is set to benefit from the introduction of several online B2B marketplaces, like Flipkarts, in the years to come. As of now, most users of B2B retail in India are Micro, Small & Medium Enterprises (MSMEs). Every E-Commerce transaction is facilitated by the three flows; namely product flow, information flow and monetary flow. The relationship is represented in a simplified manner below. Supplier Airline/Railways Manufacturer Companies offering jobs Individuals

E-Commerce Player

Buyer Individuals Businesses

Logistics Providers

Call Centres

Financial Intermediaries

Network Services

Internet Service Providers

Ernst & Young estimates. Source: Rebirth of e-Commerce in India, 2012.

Enabling Services

Core Layer

Figure 1 : The E-Commerce Ecosystem

In brief, the movement of goods from suppliers to consumers via e-Commerce portals and logistics firms constitutes the product flow. Information starts from consumers, and then moves through the e-Commerce portal to the supplier(s) (which might be a third-party firm), constituting information flow. Payments made by consumers reach e-Commerce portals and suppliers through financial intermediaries, constituting the monetary flow.

The Conundrum of the Two Models


Online retailers like Flipkart.com can choose one of two methods of operating, and the choice is crucial to define the kind of business the firm runs. They are defined below: 1. Inventory-Holding Model: Retailer keeps an inventory of the goods being sold through the website. Investment is required in warehousing and logistics, and the inventory creates an additional risk that the firm needs to account for. Profits are through the margins on the products sold. Regional Logistics Player Regional Warehouse

Logistics Firm
Products shipped from Warehouse

Product Delivered Order Placed

Zonal Warehouse E-Commerce Portal


Notification to E-Comm firm and amount credited to bank

Consumer

Payment Gateway
Customer directed here
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Financial Service Provider

Figure 2 : The Inventory-Holding Model for E-Commerce

2. Marketplace Model: The website acts as a medium to connect buyers and sellers (like a shopping mall), and does not maintain an inventory of the goods sold on the website. Revenue is through charging a commission on every sale, the rate for which varies from product to product and is decided by the vendors and the e-Commerce portal.

Rebirth of e-Commerce in India, 2012. Ernst & Young Rebirth of e-Commerce in India, 2012. Ernst & Young

Regional Logistics Player

Goods shipped to Regional Logistics player

Logistics Firm
Merchant ships to customer through Logistics firms

Product Delivered Order Placed

Zonal Warehouse E-Commerce Portal

Consumer

Merchant
Order details sent to Merchant

Payment Gateway

Notification to E-Comm firm and amount credited to bank

Customer directed here

Financial Service Provider

Figure 3 : The Marketplace Model for E-Commerce

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Both models have managed to co-exist, with some firms preferring the Marketplace and others sticking to holding their own Inventory. A point to note about the Inventory Model is that not all the goods for sale on the website are stocked in warehouses. The percentage of the goods actually held in the inventory is generally about 40% to 80%. The benefits and drawbacks of the two models are discussed below.

Comparison of the Two Models


Inventory-Holding Model
Delivery schedules and commitments are easier to meet since the warehousing and certain logistics are controlled by the same firm, and a logistics system integrated with the IT system enables easier tracking Advantages of bulk-buying: Since high-demand goods can be bought in large quantities, high margins can be achieved for these. Pricing and Bundling: Akin to large physical retail stores, E-Commerce firms can choose to boost sales with seasonal discounting and bundling Superior Post-Purchase Experience: Providing services to customers is a critical success factor in the online retail domain and Inventory model allows firms to manage these carefully but at the same time
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Marketplace Model
Schedules and Commitments might be tougher to control since suppliers and merchants control the delivery pace and quality Margins of the merchants are not known to ECommerce firms and they need to employ a variety of techniques to calculate commission %ages Innovative techniques are at the mercy of merchants and E-Commerce firms need to rely on them for any marketing promotion Again, the post-purchase experience is up to the final merchants, whose efficacy is not under the ECommerce portals control

Rebirth of e-Commerce in India, 2012. Ernst & Young

Investment needed in warehousing and logistics. Considerable fixed costs needed to set up operations. Payment settlements schedules vary depending on which product is sourced, from whom, etc. Managing relations with different suppliers is essential In case of a fragmented supply side, it can be tough to maintain a diverse inventory which helps cater to the demands of everyone

Little or none of such investment is needed in the Marketplace model. All settlements between vendors and E-Commerce firm occur after the product has already been sold, so schedules are not something to worry much about A fragmented supply side can be managed well by delegating the work to several merchants, who can be held responsible for niche categories of products

Table 1: Pros and Cons of the Marketplace model and the Inventory-Holding Model

Comments from the Industry


The jury is out in the Indian E-Commerce circle on which model suits the demands and nature of the industry in the best fashion. Kunal Bahl, CEO of Snapdeal.com, another E-Commerce portal stated in a recent interview that the inventory model for online retail was dead11. On the other hand, Vikas Ahuja, CMO of Myntra.com has argued that for high-involvement categories such as apparel, inventory-holding is the only way that quality and customer-satisfaction can be ensured12. Ahuja further argues that the choice of model depends on the major product category and though the Marketplace might work for goods such as books and electronics, it is bound to pose issues for others like apparel. Sundeep Malhotra, CEO of HomeShop18.com, described the greatest challenge of transitioning from one model to the other as maintaining the customer experience13. Amarjit Singh Batra, CEO of OLX.in stated that huge operational costs of maintaining inventory can force retailers to focus on only a few product segments, and that HR-issues with managing ones own inventory can be a huge burden on a fledgling E-Commerce firm fighting for a place in the Indian online-retail domain.

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Snapdeal CEO says inventory model is dead, looking for deals. Live Mint, Apr 13. Online at: http://bit.ly/1eUGcoq TC Debate: Which e-com format marketplace or inventory-ledwill lead to profitability first?, TechCircle.in, Nov 13. Online at: http://bit.ly/1eNRtq7 13 Are we ready to adopt the marketplace model?, Exchange4Media.com, May 13. Online at: http://bit.ly/1ixX89l