Flipkart’s zugzwang moment

When I was younger, chess was one of my favorite games. I was not particularly good at it, but that didn’t deter me from enjoying the almost magical twists and turns, the myriad permutations and combinations that could emerge from a simple-looking 8/8 board.

Of these, one of the most fascinating positions was the “zugzwang”.

According to Wikipedia, zugzwang (German for “compulsion to move”) is a situation found in chess wherein one player is put at a disadvantage because they must make a move when they would/should prefer to pass and not make a move. The fact that the player is compelled to move means that their position will become significantly weaker. A player is said to be “in zugzwang” when any possible move worsens their position.

Flipkart finds itself in precisely this type of zugzwang position right now.

How so?

The battle that isn’t

For many years now, Flipkart’s public narrative has been framed as a battle—a battle of attrition, a battle for market share, a battle against Amazon. The broad strokes of this narrative paint Flipkart as a homegrown leader in India’s e-commerce market battling off a formidable global competitor in Amazon.

It is tempting to believe that Flipkart’s current position is a result of this battle royale with Amazon, but the fact of the matter is that it has little do with a direct competitor. Flipkart’s predicament is almost entirely its own doing and is a result of what can be termed the “Curse of Capital”.

The curse of capital
When Flipkart completed its last funding round earlier this year, raising money from a clutch of marquee investors such as SoftBank and Tencent, its press statement headlined what seemed like an unusual facet to focus on: “After this financing round, Flipkart will have in excess of $4 billion of cash on balance sheet [sic]”. Of all the points that Flipkart could have focused on, it was telling that it picked this $4 billion “treasure chest” to highlight.

There was a time when Flipkart stood for something in India. It stood for customer focus; it stood for small but meaningful innovations in e-commerce. Today, it seems to stand for just one thing—capital.

While this capital might have earlier served as a moat or at the least given Flipkart ample runway to attempt ambitious experiments, today this capital is more akin to a curse. It’s an albatross around Flipkart’s neck, weighing it down and forcing it to make moves that seem to closer to Hail-Marys than to well-thought-out strategic choices.

Why does Flipkart not need $4 billion?

Simply put, because India is not China.

India is not China

Prior to this last mega-round of funding, Flipkart had raised nearly $2 billion. A lot of credit for being able to raise such a huge corpus goes to the narrative that “India is the next China”—that e-commerce in India would follow the same path as China, with hundreds of millions of customers transacting online regularly and creating companies that would be worth tens, if not hundreds, of billions in market cap.

But the fact remains that even after pouring in billions of dollars evangelizing e-commerce in India, Flipkart’s CEO Kalyan Krishnamurthy himself admitted earlier this year that there are only 10 million monthly unique transacting users in the Indian e-commerce space.

The market is pitifully small.

Growing this market further is challenging to say the least. Flipkart can’t brute-force its way to further scale, and each marginal dollar of incremental spend on marketing is progressively less efficient.

Spending further on discounts might not make sense either. Apart from apparel and durables, most segments operate on early-teen or single-digit margins, and there might not be much room to trim these any further. Also, further deeper discounting is only likely to attract bargain hunters who will shop once and scoot—unprofitable, one-off purchases that don’t justify the investments made for acquiring the sale.

What about investing money into building supporting infrastructure and logistics? Most, if not all, of this, has already been done from the proceeds of previous funding rounds and are legacy costs. Further spending on these facets is unlikely to require massive amounts of fresh capital.

But doesn’t Flipkart still need money to fight off Amazon?