On the first Thursday of January, Flipkart co-founder and then-chief executive officer (CEO) Binny Bansal called a meeting with some of the top executives at India’s leading e-commerce marketplace.

He had big news for them: Flipkart had decided to appoint a new CEO and his name was Kalyan Krishnamurthy.

Three of them would no longer have operational roles at the online retailer and would instead “be part of a team that would help set up Bansal’s Group CEO office”, Binny told them individually, according to three people familiar with the matter. And other managers reporting to him would now be doing so to Krishnamurthy.

A Flipkart spokesperson declined to respond to any of the questions Mint sent to the company on 15 February on issues covered in this story.

Krishnamurthy, 45, who had come to Flipkart from its biggest and most influential investor Tiger Global Management in June 2016, had been running much of the company in the vaguely defined role of “head—category design organization” for seven months.

Binny’s team was stunned. They were established corporate leaders, having held senior roles at blue-chip companies such as Hindustan Unilever Ltd and McKinsey and Co. They had come to Flipkart attracted by fat salaries and had dreamt of playing a part in taking India’s biggest start-up public. Most of them had spent less than 15 months at the company.

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“I’m sorry, but this is how it has to be,” Bansal said to one of his leaders, according to the three people cited above.

A few days later, on 9 January, Flipkart made the changes public. Krishnamurthy took over as CEO; Binny became group CEO; co-founder Sachin Bansal would remain as the executive chairman. Apart from Krishnamurthy, chief administrative officer Nitin Seth was the lone man to come out of the reshuffle unscathed; he was, in fact, elevated to chief operating officer.

Seminal moment

Soon after, at least four senior leaders and as many vice-presidents resigned from Flipkart.

Krishnamurthy’s promotion shocked India’s Internet ecosystem for it marked a seminal moment for Indian start-ups: the first instance of an “outside” CEO running a large Indian start-up. It was considered unimaginable that of all entrepreneurs, Flipkart co-founders Sachin Bansal, 35, and Binny Bansal, 34, (they aren’t related), would be the first ones to make way for an outsider.

Yet, this change was months in the making and it was practically sealed after Flipkart’s surprise victory over arch-rival Amazon India in the key festive season battle in October, the three people familiar with the matter said on condition of anonymity.

When Krishnamurthy was tapped by Flipkart’s board for a second spell in the company last June, it told the Bansals the move was only for the purpose of running the Big Billion Day (BBD) sale, the people said.

Flipkart’s board includes investor representatives, chiefly Tiger Global Management’s Lee Fixel, Accel’s Subrata Mitra and Naspers’ Oliver Rippel, as well as independent director Aditya Agarwal, an executive at US-based cloud storage start-up Dropbox.

At that time, Krishnamurthy kept his position of managing director at Tiger Global—he only resigned from Tiger late last year once the CEO move was finalized—the people cited above said. Strangely, Flipkart, which had aggressively publicized all of its high-profile recruits in the past, made no formal announcement of his hiring in June.

Downhill journey

Krishnamurthy came back to Flipkart barely five months after the company had replaced Sachin with Binny as its CEO.

Binny had taken up a mammoth challenge, by any measure. Here was a behemoth that was in shambles after all of its big bets of 2015—an app-only push, a shift to the ad-driven marketplace model and high-profile leadership recruitment—failed miserably.

Binny set three broad targets: increasing monthly sales, breaking even at the gross profit level and improving customer service as measured by net promoter score (NPS). NPS is a measure that indicates the loyalty of a firm’s customers and the overall quality of its service.

To get things done at a firm that employed 33,000 people, generated more than $4 billion in gross sales and had the world’s largest online retailer, Amazon. com Inc., snapping at its heels was always going to take time. Moreover, boosting sales and cutting costs at the same time is every CEO’s dream but only rarely is it actually realized.

By the time the board moved to bring back Krishnamurthy, Binny had slashed Flipkart’s losses and was well on his way towards improving its NPS. However, the firm’s monthly sales were declining, which was in itself unacceptable to its board. More so because Amazon India, which was less than half of Flipkart’s size just a year ago, was rapidly closing in. Flipkart’s valuation was based primarily on its dominant market leadership position; by June, the former was under imminent threat while sales had slid for at least three straight months and had been sluggish for more than six months.

Fixel’s role

The lack of improvement in Flipkart’s sales prompted the board to turn to Krishnamurthy, who had first spent 18 months at the firm as its interim finance chief first and sales head later starting May 2013, the three people cited above said. He had run Flipkart’s first BBD sale in October 2014 and had proven he could get things done. In fact, the idea of bringing back Krishnamurthy had been floated as early as January last year, but the Bansals had rejected it, the people said.

For Flipkart insiders, Krishnamurthy’s appointment came as a shock. After all, Binny had been at the helm only for five months. Why didn’t the Flipkart board give more time to Binny?

The decision was driven by Fixel, Krishnamurthy’s boss at Tiger, the people said. Fixel had invested some $1 billion of Tiger’s funds into Flipkart, some of it against the wishes of his colleagues. If Flipkart didn’t deliver BBD, the company, and in turn, Fixel, would be in serious trouble. Fixel’s reputation hinged on the Flipkart bet.

Fixel also had the support of the other key board members including Accel’s Mitra and Naspers’ Rippel. Together, Tiger, Accel and Naspers own 50-55% of Flipkart shares.

“The main thing in this whole issue was that Lee had lost confidence in the Bansals. He was really shocked by what happened in 2015. Flipkart had completely screwed it up when it had everything going for it. Binny was left to clean up the mess (when he became CEO). It would’ve taken time for anyone to fix it. And he wasn’t doing badly on cutting burn and getting NPS up. So yeah, you can say that it wasn’t fair to Binny. But Lee had lost confidence in the Bansals after 2015,” one of the three persons cited above said.

Turnaround begins

Krishnamurthy was given full control of BBD, which was seen as crucial to Flipkart’s survival and required months of preparation. While on paper the Tiger Global representative reported to Binny, he actually answered only to the board, the three people cited above said.

In a sign of the board’s conviction in Krishnamurthy, in late August, Flipkart put Krishnamurthy in charge of its marketplace, retail and advertising businesses. The heads of marketing, private label, marketplace and customer experience product together reported to Krishnamurthy, while Binny retained control of Flipkart’s eKart and the technology, finance and administrative functions.

More than a month later, Flipkart comfortably beat Amazon during October’s BBD, turning the tide against its formidable rival.

There was no doubt about who had engineered the turnaround.

Some time in October after the BBD victory, Flipkart board members and influential investors broached the topic of Krishnamurthy’s future with Binny, the second of the three people cited above said. They wanted Krishnamurthy as the CEO, the person said.

In the end, it was left to Binny, Flipkart’s other Bansal who had been CEO for less than a year. Binny was given two options: do without Krishnamurthy entirely or make him CEO, the person said.

It was a symbolic exercise: of course, the 34-year-old billionaire had to choose the latter. The decision was finalized by early December.

“The change had to be made. Kalyan had done a fantastic job against the odds. What Flipkart needs now is ruthless execution and he is the ideal man for that,” the second person cited above said.

A month or so later, Flipkart announced the changes to its senior management team and then made it public a few days later. The company said on 9 January that Binny, in his role as group CEO, would oversee functions such as capital allocation across all group firms, merger and acquisition activities, CEO selection at group companies, among other things. Binny is building a new team that will work on new business initiatives, the people cited above said. His co-founder, Sachin, spends most of his time on two things: an initiative to launch private label products that will be branded Made-In-India and bringing together India’s other Internet companies to lobby for government protection against foreign Internet giants such as Amazon.

Gaining steam

Under Krishnamurthy, Flipkart is already showing signs of sustaining its turnaround.The company pulled in gross sales of more than Rs2,600 crore in both December and January, Mint reported on 16 February. Amazon, on the other hand, generated gross sales of roughly Rs2,300 crore, on average, in these months. If sales at Flipkart’s fashion units Myntra and Jabong are included, the company is far ahead of Amazon.

Last year, most investors and analysts had written off Flipkart, saying that it was only a matter of time before it would lose its leadership position to Amazon for good. They had good reason: Flipkart seemed to be in a downward spiral. Its valuation had been marked down by its own investors; it was struggling to raise fresh funds; it kept losing senior executives; and, it had been overtaken by Amazon in at least two months in terms of gross sales (on a stand-alone basis). Given Amazon’s renowned tech, retail and supply chain expertise, it wasn’t a stretch to think that the American online retailer would dominate e-commerce in India.

But Flipkart surprised the market by outselling Amazon during BBD. Its performance in December and January demonstrates the BBD victory wasn’t a one-off and that it still has the chops to hold on to its leadership position.

The key to Flipkart’s turnaround has been its dominance of the smartphone category. It is aggressively chasing exclusive deals with smartphone brands—and clinching them. Smartphones is by far the most important category for e-commerce firms, accounting for more than half of all online retail. Starting with BBD, Flipkart has had more impressive exclusive smartphone offerings than Amazon India including the latest launches by some of the most popular brands such as Motorola and Lenovo.

Hot on the heels

To be sure, Krishnamurthy’s reliance on smartphones is risky.

Firstly, Amazon can simply offer better terms to brands and get them to shift to its platform. Then, Amazon is also far ahead of Flipkart in terms of transaction volumes because of its wider product range, which ensures that Amazon’s sales are more balanced. Amazon India has more than 100 million products to Flipkart’s 80 million.

“While Flipkart has a lead over Amazon right now in major categories such as smartphones and large appliances, Amazon is catching up fast. For Flipkart, it’ll be an achievement if they manage not to concede any further market share to Amazon this year,” said Harminder Sahni, founder and managing director of Wazir Advisors.

Still, the e-commerce market as it stands is dominated by smartphone sales and Flipkart’s strategy is in line with that. The company also enjoys some other important advantages.

It generates higher sales than its American rival in another important category of large appliances, particularly televisions. Unlike smartphones, it will be tougher for Amazon to catch up with Flipkart in large appliances. Flipkart has two important moats: an independent supply chain network for the category and its ownership of Jeeves Consumer Services Pvt. Ltd, an after-sales services provider. Product installation is as important as on-time delivery in large appliances. Amazon still relies on brands to handle installation services.

Smartphones, fashion and large appliances are the three largest categories in e-commerce, together accounting for more than 75% of all online retail. Currently, Flipkart is comfortably ahead of Amazon in smartphones and large appliances. And its ownership of Myntra, in particular, and Jabong ensures that the company has a near-monopoly in online fashion sales.

Relentless drive

After becoming CEO, Krishnamurthy has already put his stamp on the company.

In a 10 January report, Mint wrote that Krishnamurthy is a quintessential behind-the-scenes person who has an exhaustive understanding of e-commerce and works long hours relentlessly. One of the few criticisms made about Krishnamurthy is that he favours short-term fixes over long-term bets entrepreneurs pride themselves on.

Whether the criticism is valid or not, Krishnamurthy is pushing ahead with his vision for Flipkart.

He has set the same three broad targets as Binny did last year: growing sales every month, cutting expenses and improving NPS further, the three people cited above said. Flipkart wants to achieve an NPS of 65, an increase from its previous target of 55, the people said.

Krishnamurthy has ordered a freeze on some of the firm’s moonshot projects and is not allocating any fresh budgets towards its F7 Labs in Silicon Valley, the people said. Flipkart’s logistics unit Ekart has also shut its customer-to-customer service and hyperlocal delivery offering.

“Kalyan wants to keep it simple and focus on Flipkart’s core commerce business and strengths around a great product range and affordability. While the mandate for him is to deliver growth, he also has to keep burn rates under control,” the third person cited above said.

Krishnamurthy’s inspiration is China’s online retailer JD. Tiger Global, Krishnamurthy’s former employer, had invested in JD around the same time it put money into Flipkart and when JD listed its shares in May 2014, it turned into one of the most lucrative bets made by Tiger. Unlike its bigger rival Alibaba, JD is a direct online retailer that gets much of its sales from high-priced products.

At Flipkart, Krishnamurthy is adopting some of JD’s tricks. He wants to slash Flipkart’s logistics costs and further increase sales of mobile phones and large appliances, two high-value product categories.

Krishnamurthy is also betting big on groceries and private labels.

Mint reported on 10 February that Flipkart is building a groceries business, hoping that sales of everyday household items will keep shoppers coming back to the company’s platform. Flipkart held talks to invest in online grocer BigBasket, but those discussions didn’t result in a deal, the people cited above said.

Private labels is another area where the company is expanding fast. Flipkart has also quietly reduced its workforce. From a peak strength of 33,000 in 2015, it now employs less than 26,000 people, the people cited above said. This number will reduce further, the people said.

Focus on targets

In other ways, too, the workaholic Krishnamurthy is making his mark on Flipkart. Inspired by Amazon, which employed both of them, the Bansals started Flipkart in 2007 as an online bookseller. It changed its role model and tried changing its business model in 2015. That didn’t work; over the past two years, Flipkart morphed from a relatively lean start-up into a bloated organization. Its core teams spread across four offices from two in 2014. It desperately lacked a day-to-day enforcer who relentlessly stressed on achieving targets.

Now, Krishnamurthy is playing the role of chief enforcer of daily matters including a ferocious focus on achieving targets. He works weekends regularly and also expects colleagues to do the same at the firm’s offices in Bengaluru. Flipkart executives speak of the fear of missing even weekly targets, which are tracked obsessively by Krishnamurthy and his trusted lieutenants in the retail team. Krishnamurthy has few senior leaders left but his lower-level teams, the people who actually get the work done, are a lot more tightly knit than the Flipkart bureaucracy of 2015. Many of these teams are headed by people who had worked with Krishnamurthy in 2014 but then scrambled to find new roles as Flipkart was trying to transform itself into a Google-type product company from its Amazonian roots. Flipkart is now again an Amazon-type e-commerce firm driven by its retail team.

“A lot of people had become complacent and lazy and there was a lack of accountability. With Kalyan, you know that won’t be accepted. He is keeping everyone on their toes,” a Flipkart executive said.

IPO or sale?

When Flipkart announced the CEO change, many investors thought it was the beginning of the end of Flipkart as an independent company. Now that Tiger Global had its man at the helm, it was just readying Flipkart for a sale, went the thinking. The troubled state of smaller rival Snapdeal and the presence of China’s Alibaba Group Holding Ltd in payments and e-commerce firm Paytm would surely now prompt consolidation among these companies; or worse, it would be picked up at a fire-sale price, investors said then.

However, Flipkart’s eventual exit strategy is far from clear.

The first three people cited above denied the company is up for sale. They said that on an immediate basis, Flipkart is putting all its efforts into raising a new round of funds and improving its financial health so that it can then chase its Holy Grail: an initial public offering (IPO). This view was confirmed by all Flipkart investors and executives Mint spoke with.

Flipkart has held talks with more than a dozen investors including financial firms from China and the US as well as Wal-Mart Stores Inc., the three people cited above said. The talks with many of these investors including Wal-Mart haven’t materialized into a deal, the people said. But Flipkart is still in talks with Microsoft Corp., eBay Inc., PayPal Holdings Inc. and Tencent Holdings Ltd, and at least three financial firms including Google Capital, they said. A down-round is a certainty, the people said. Flipkart is trying to secure a valuation nearer to $12 billion while some of the investors who walked away indicated it is worth $7-9 billion, the people said. Mint reported on 22 February that Flipkart now wants to raise up to $1.5 billion in fresh capital, up from its previous target of $500 million to $1 billion.

Flipkart last raised funds more than 18 months ago when existing investors led by Tiger Global pumped $700 million into the company, valuing it at $15 billion.

Since February of 2016, as many as five mutual investors of Flipkart have marked down its valuation by up to 60%. But with the turnaround showing clear signs of sustaining under Krishnamurthy, Flipkart is at the healthiest it has been in a long time. As with its turnaround, the desperately-needed fundraising that seemed improbable a few months ago is now within its sights.

What happens after that is anyone’s guess.

Also Read: India: Flipkart in talks with Tencent,Microsoft, others for up to $1.5b fundraising

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Fixel’s role

This story was first published on Livemint

How Flipkart got back in the game

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