Tuesday, January 17, 2012

Flip side of Flipkart: Red Ink for e-tailers, RIP book shops...........

Jan 17, 2012
By Binoo K. JohnThe other reason is the huge price slash in books (a minimum of 25 percent) if you order them through portals like flipkart.com, or infibeam.com or makemeread.com. (Disclaimer: This writer has a stake in makemeread.com)

In times of recession and decline of the old order, obit writers get furiously busy, putting up the right epitaphs, analysing the causes of the big fall and blaming the universal forces that shut out another old tradition. In this group of threatened oldies is the indie bookshop which has been on the hit-list for over two years now.

So when another book shop decides to close down, in this case, Pune’s 63-year-old Manney’s (Read more here), it is a sign that the time of reckoning is almost here. Manik Mani, the owner, says the decision to close down has nothing to do with sales but that he is tired and needs a break and his daughter is not old enough to take over.

Beneath all this it is quite clear that sales would have been dropping at Manney’s just as it has been at other book shops across the country and around the world. In New Delhi, the well-known shops to have closed down are Bookworm (Connaught Place), Oxford Book shop (Connaught Place) and Book Shop (Khan Market), apart from other smaller shops.

Many such shops will put up a brave face and hold on for some more time but in another two years, book shops operating in premium markets in cities would have all closed down. Or they may remain open only by losing money. The primary reason is that rentals in prime areas will be much more than the profits made from sales of books and stationery, making it more profitable for the shop owner to rent out the space.

How does it work? How can portals discount prices to such an extent without bursting their own bottomlines or net income? How long will internet book sales boom?

Though book sales are shifting drastically to internet portals, the fact is that most portals sell books for a loss or without profit. For example, on flipkart.com, the price of Poor Economics: Rethinking Poverty and the way to end it, by Abhijit Banerjee and Ester Duflo, sells for Rs 321, an unimaginable discount of Rs 175 on the actual cost price of Rs 499 which you would have had to pay if you bought the book at Manney’s.

The reason why Manney’s has to close down can be clearly seen here.

What many people do is go to shops like Manney’s, which they have been frequenting for a long time, note down the new books, go home and order it from any of the portals. For some time now Manik Mani would have wondered why his favourite customers are not picking up anything. His shop would have become a place to browse and select, a sort of brick-and-mortal search engine for the buyer. He unknowingly offers that service free, because unlike earlier, even the ardent book lover is not going to buy much from him since he has a much cheaper option.

Yes, Manik can order some old books for you and tell you when Thomas Mann’s Magic Mountain Everyman Library edition will be available in his shop. By that time it will be available on internet book shops as well.
How does it work for Infibeam or Flipkart and Rediff or the Indiatimes store and other start ups?

Flipkart gets Poor Economics at a 35-40 percent discount from the distributors, just like Manik. Prakash Books, which is the north Indian distributor of Penguin India, will be getting all books at a 50 percent discount from Penguin or other publishers and will be passing down 10-20 percent to the retailer.

Here’s the flip side. Retailers take a 25 percent profit on sales while Flipkart or Infibeam pass them on to the customer since there is no rental or warehousing cost.

It is not that simple, though. Once you grow big like Flipkart of Infibeam, warehousing is a must. Also, staff costs go up. Since customers are not charged for delivery within India, Flipkart and Infibeam finally end up losing money on each book they sell. When Flipkart sells one copy of Poor Economics, they will be poorer by Rs 30 at least, according to this author’s calculation.

Internet stores don’t make money on book sales. Then what are they looking for?

What the big internet retailers are interested in is a big database of internet buyers who, in the future, can be targeted for various marketing strategies. An internet portal’s primary worth or valuation depends on how many customers it has and only secondly the turnover.

That is also the reason why once they get a database of half a million they will have to turn to selling electronic items on which profits are better. If they lose Rs 30 on selling one copy of Poor Economics how much will their daily losses be? How long can this be sustained?

Flipkart has enough cash reserves as of now. But if they do not get a good valuation and a buyer in the next two years, the portal will be in trouble. Its spends on multi-media advertising must also be hugely adding to its burden.

This is also the inherent drawback in taking huge venture funding. Venture capitalists are on the lookout for valuations, not sales or proper delivery of books. Nor, in this case, are they interested in the spread of the reading habit in India.

To deliver a book of less than 500 gm from Delhi to Kolkata will cost at least Rs 30 for Flipkart or Infibeam through an Indian courier company.

To cut down on costs, Flipkart has hired its own distributing staff and set up its own logistics company. When Chetan Bhagat’s new book was launched, Flipkart hired 700 personnel for distributing his books across India, according to Bhagat himself. In the long run, this is going to hurt terribly. Having your own delivery personnel will help if you are selling goods at a profit and not at a loss, as in the case of books. By present reckoning, Flipkart will have to make up for the loss in book sales by selling electronic goods and other products to which the emphasis will have to shift as the number of internet buyers swell.

So while Chetan Bhagat’s laughed his way to the bank, Flipkart must be thinking of the next venture capitalist. In other words, it is not profitable to run a virtual book shop unless you get a huge valuation and then exit as fast as possible. In this case, the book seller must be hoping that amazon.com – or someone else – will buy them out at a big valuation. But nothing of that sort has happened so far. Also, the sales figures do not match valuation expectations.


  1. is there any way to invest in flipcart?

  2. Hi savinir,
    The only way on can invest now is meet the management and invest as a QIP.

  3. wow i didnt know that small investors like us can invest in non-listed companies. Thanks for the Info... can you provide us more info abt the same.