Business models in E-retailing

There are two major models in E-Retailing business

1. Inventory model
2. Market place model

Inventory model[Amazon USA ]

The inventory model is followed by organisations such as Amazon , Wal-mart , Tesco.
Here the Retailer procures goods from suppliers and maintains an inventory . On receipt of
an order the item is delivered to the customer . This is similar to brick & mortar retail except
that display of goods , ordering and payment are done on the internet .
This model was followed by Flipkart upto 2013 . It established warehouses in Delhi,
Bangalore, Mumbai and Kolkata to keep a balance between inventory and cost of
delivering goods. Facing difficulties from the 3PLsin the form of higher delivery cost, late
deliveries and faulty products delivered resulting in return and customer dissatisfaction, it
started its own logistics arm named e-Kart.

Domestic suppliers
Master warehouse

Foreign suppliers

Regional warehouses

Regional parcel hubs

Shipment
advice
E-fulfilment centre

Orders

Customers

Market place model [Tencent Holdings China]

Here the e-retailer provides an online market place where sellers display their goods .and
buyers can place order and make payment online.. The e-retailer charges the sellers for
providing the services . Alibaba & Tencent holdings of China , e-bay USA are the
prominent examples. In this model the main advantage is that there is no need to hold large
inventory . However an E-retailer using a marketplace model must ensure that it has
appropriate technology to permit smooth business operation . Otherwise there will
be no demand from vendors to host products on the site .
Amazon follows the market place model in India. It offers nearly 15 million
products. Amazon India has two fulfilment centers in Mumbai and Bangalore and
plans to start five new fulfilment centres across the country. Amazon India has set up
a logistics arm named Amazon Logistics.

Domestic suppliers
Regional parcel hubs

Foreign suppliers
Shipment advice
E-fulfilment centre

Orders

Customers

Key drivers:
A. Revenue:
Inventory
Gross merchandise value / transaction
Revenue % of GMV
B. Cost

Marketplace

No difference
5- 10%

40-45%

Variable

Search engine PPC rates

Conversion rates
Delivery cost /packet

No difference
No difference
High

Low

Warehouses
Salaries
IT infrastructure

High
High

Low
Low

Fixed

No difference

FlipKart & Myntra

FlipKart is Bangalore based ; founded in 2007 but had grown to approx. 15000
transactions / day by 2013 .with GMV $800 million /year. It started with books but now is
present in several categories including fashion .
Myntra is focussed on Fashion . It attracts a very large number of visitors and does 13000
transactions/day . Its GMV is estimated at $100 million / yr.
Both FlipKart and Myntra follow hybrid models . They started off with inventory based
model but switched to a market place model to scale up rapidly .
Both FlipKart & Myntra started off with inventory based models but later switched to
market place model to access foreign funding and due to lower working capital
requirement. . Indian laws do not permit foreign investment in Direct retail .
Visitors /month
Transactions/day
GMV /yr
Business model

FlipKart
12.6 million
15000
$ 800 million
Upto 2012 Inventory
From 2013 Marketplace

Myntra
13.2 million
12-13000
$ 100 million
Marketplace

Cost Structure
The fact that these firms employ a hybrid model makes it difficult to evaluate their cost
structure . These firms are privately held so financial information are not in public domain .
In order to estimate the cost structure data from well known international firms which are
publically available have been used . For Myntra the data publically available is 2-3 years
old . It appears from public information that at that time most of its business was based on
own inventory. So the GMV has been equated to revenue . The sales expenditure has been
estimated for Myntra using PPC rates in India as 50% of same segment rates in USA.

Models
Cost structure[ typical
values]

Revenue [ % of GMV ]
Cost of revenue[ % of
revenue]
Sales &GA[% of revenue]
Operations[% of revenue]
EBIT[ % of revenue ]

Inventor
y
AmazonUSA
100%
70%
30%
0.10%

Market place
Tencent
-China
~3.5%
10%
30%
8%
52%

Hybrid
Flip
Myntr
Kart
a
20%
100%
50%
55%
25%
-30%

40%
80%
15%
-35%

Analysis of Costs
The E-retailer has to attract visitor to his site through advertisement . A small proportion
of the visitors actually make a purchase . The E- retailer gets a fraction of the transaction
value [ Gross Merchandise Value or GMV ] as Net revenue .
Net revenue

= Gross Merchandise value less Cost of goods sold [GMV-COGS] .

The net revenue is derived using the cost structure table and publically available values of
GMV ; YOY growth rates
FlipKart has higher value / transaction but Myntra has higher margin.
Conversion rate = [Transactions /day]x 365 / No.of visitors
Figures for transactions and visitors are available in press reports .
Cost of sales = PPC rate / % conversion rate
For Myntra the PPC rate is higher and conversion rate lower. So cost of sales / transaction
is higher than FlipKart. . Also Myntra attracts higher number of Visitors than FlipKart .
So the Cost of sales is very high for Myntra.
Myntra also uses 3PL where as Flipkart has its own Logistics group . So cost of Logistics is
higher for Myntra .
The Variable costs are listed below.
Variable cost drivers
FlipK
art
Year 2013
Visitors Mill
Conversion rate %
[transaction /visitor ]
transactions/day
GMV mill $

151.2
3.621
%
15000

GMV/transaction $

800
146.1
2

Margin % of GMV
PPC rate USD
Logistics % of GMV

20%
0.25
10%

Flipka
Myntr rta
Myntr
a
158.4
309.6
2.880
3.242
%
%
12500 27500
828.80
100
57
82.570
21.92
93
30.233
40%
%
0.5
0.25
15%
10%

Hence Myntra has high margin but very high costs and low GMV/ transaction.

Flipkart has Low margin , but high GMV/transaction and lower sales and back end costs.

So if revenues and costs / transaction are analysed the following result is obtained
$/transaction
GMV
COGS
Net Revenue
Costs
Operations
Logistics
Sales
Infrastructure
EBIT

FlipK
art
146.1
1
116.8
9

Myntr
a

FlipMyn

21.92

82.57

8.77

49.16

29.22

13.15

33.41

4.68
14.61

2.10
3.29

5.35
8.26

6.90

17.36

6.90

9.17
-6.14

0.00
-9.60

9.17
3.74

Higher
margin

Lower cost of
Sales

Thus the Merged entity benefits from higher margin of Myntra and lower cost of sales of
FlipKart .
Projected earnings-Flipkart

Projected earnings : Myntra

Projected earnings : Merged entity