Is Flipkart Making A Mistake By Abandoning The Alibaba Model?

What is Alibaba Model? Well, at the most basic level, the Chinese giant acts as a facilitator, a middleman, if you will, between sellers and buyers. Alibaba is different from its Indian counterparts like Flipkart in the sense that unlike them it doesn’t hold inventory and doesn’t participate in logistics but is rather a marketplace which facilitates the sale of goods. As simple as that.

Millions of sellers sell their products online through Alibaba, some free of cost, others pay a subscription fee. But most of them pay Alibaba to prioritise their content in site’s search engine (like google ads) for more visibility and this constitutes a major chunk of the company’s revenues.

Now, Flipkart from its inception in 2007 to about till a couple of years ago, followed the Amazon model, which meant that the company not only acted as a facilitator but as a retailer also. More than half of the revenue it generated, was through WS Retail Service Ltd, a wholly owned subsidiary of Flipkart. [WS Retail was created to abide by the Indian law which prohibited foreign-funded companies selling products to Indian customers directly, however, they could engage in business to business (B2B) selling]

Last year, Flipkart decided to abandon the Amazon model for the marketplace one of Alibaba. This made sense mainly for two reasons:

First, it requires less money to run a marketplace model since you get out of the warehouse keeping and delivery business. Not only you don’t have to worry about the storage costs, the headache of unsold inventory is also gone.

Second, it brings a lot of ad revenue as thousands of retailers register with you to sell their products and pay a premium fee for that.

Third, It opens up the avenues for a wide range of products which diversify your business and provide customers with a lot of choices.

On top of that, the government recently allowed 100% FDI in online retail of goods and services under the marketplace model. [Note: FDI has been allowed only in the marketplace model therefore legitimizing only the facilitator role of the e-Commerce companies]. The government also capped contributions from one seller to 25% of the total sales of a company.

Flipkart’s WS Retail currently contributes 35-40% of its total business and Amazon’s Cloudtail contributes around 60%. So, it made all the sense for Flipkart to go all out for the marketplace model.

But, instead of accelerating its shift, the company has decided to abandon it altogether.

This is because the things didn’t turn out the way the Flipkart had hoped they would.

The customer service level declined as the third party vendors couldn’t simply match the customer experience of Flipkart’s WS Retail.

Flipkart lost control over inventory and delivery times, and people started complaining about late deliveries, poor product quality, etc.

It started losing ground to Amazon which through its warehouse arm, Cloudtail, was delivering products fast and in a more efficient way. Comparisons with Amazon and viral feedbacks regarding poor service quality of Flipkart on Social media started hurting its brand really bad.

So, the e-Commerce firm has now decided to shift a majority of its sales to a select group of third-party sellers, Livemint reported today. “Flipkart has been working closely with some of existing sellers on its platform to equip them with the skills to manage a large number of orders.....The large sellers shortlisted by the company will use the firm’s Flipkart Advantage service, under which products are stocked in Flipkart’s warehouses and shipped directly to consumers once the order is placed. This helps the company have tighter control over the inventory and delivery times.”, says the Livemint report.

Since, 100% FDI is applicable only to the e-Commerce companies that have one seller contributing not more than 25% to its total sales, the Flipkart’s strategy seems to be to reduce the WS Retail’s share (it has been doing so for the past one year) in its total sales and create and train more such retailers under its supervision so that the diversification happens but without compromising the service delivery and customer experience.

This is a clever way out of the mindless regulation that the government has come up with. Amazon may follow suit soon to milk the FDI cow.

However, Flipkart will lose out on a lot of ad revenue. According to Mint, the company is generating $1 million in advertisements. Most of it come from its more than 100,000 sellers that pay hefty fees for premium positioning on Flipkart’s website and app. It will be an uphill task to compensate for such a huge loss. Plus, the government has ‘banned’ online retailers from giving discounts, apparently, in its bid to create a level playing field with the offline retailers.

But the consumers needn’t worry about their gravy train coming to a halt for the Flipkarts and the Amazons of the world will find a way around this senseless regulation too.

The jury is still out on whether Flipkart has made a right choice by reverting back to the Amazon model because both Alibaba and Amazon have been immensely successful. Though, this vacillating between the two models has shown that the company is still finding its feet.

Experimentation may not be a bad thing but its time the top executives at the company got their act together and focus more on implementation rather than going back and forth between the two models.

The success of both Alibaba and Amazon shows that model is not the problem, management and implementation is.