The financial details were not disclosed but the transaction is valued close to US$300 million. Industry experts analyse the deal…
India’s e-commerce sector has witnessed the biggest consolidation with the largest e-commerce firm Flipkart fully acquiring the online fashion store Myntra. The financial details of the deal were not disclosed, but the transaction is valued close to US$300 million, according to sources. Flipkart said it would invest more than US$100 million in the coming 12-18 months in the fashion business.
In this new association, along with being the CEO of Myntra, Mukesh Bansal will also head the fashion business for Flipkart and join the Board. Post this announcement, Flipkart and Myntra will continue to work as independent entities.
“We believe that the future of fashion in India is e-commerce. We have known Mukesh for a long time and are delighted to partner with him. Myntra has a strong team with excellent domain knowledge. They also have the best relationships with lifestyle brands. This partnership will strengthen both our positions in the fashion space. We will continue to work as independent entities and grow together as leaders in the Indian fashion and lifestyle industry,” said Sachin Bansal and Binny Bansal, Co-founders of Flipkart.
“The acquisition is more about scale and not cost,” added Binny. Electronics has been the largest revenue driver for Flipkart, but the founders stated that they will be significantly accelerating the fashion segment to make it the largest selling category on the platform.
Today, the overall fashion category is worth close to US$60 billion and is expected to grow to about US$100 billion in the near future, according to industry experts.
Flipkart will leverage the domain expertise of Myntra in fashion and Myntra will utilise the technological capabilities and marketplace extensions of Flipkart.
“We are excited to partner with Flipkart, the biggest e-commerce platform in India. Sachin, Binny and their team have built a pioneering e-commerce platform on a foundation of strong technology and customer-centricity. Flipkart is the most powerful e-commerce brand in India and has a very ambitious agenda to build the next generation of retail in India. Leveraging mutual strengths, we will build Myntra into India’s leading fashion powerhouse and create many original fashion brands,” said Mukesh Bansal, Co-founder and CEO of Myntra.
What triggered the deal?
The main reason for the acquisition to take place was to gain competitiveness against rivals. It will lead to higher economies of scale with huge savings as both the companies have a similar customer base. The e-commerce companies face the problem of high capital expenditure and logistics, but a buy-out will help solve many of these problems.
Rachna Nath, Retail and Consumer Leader, PwC India said, “Flipkart had taken a decision to enter multiple categories as part of its diversification strategy. To be able to get depth in each of these categories, the option is to develop from ground-up or acquire/merge with companies who have already created expertise in the area. Hence, the deal helps both to acquire capacity and market.”
Flipkart has a strong foothold in electronics and books, while for the past few months, we have seen it make a big push towards fashion retailing with ad campaigns targeted at fashion stores. Buying Myntra will help in fast-tracking its fashion business as it claims to be the largest player in the online fashion segment. Smartphones and fashion are the biggest online shopping drivers and this deal brings two leaders together.
According to Ashish Jhalani, Founder, eTailing India, fashion is the hottest growth industry and Flipkart instead of investing in developing the strength believes it can get that from Myntra. The latter wants the deal to achieve economies of scale in customer acquisition and operations.
Also, what made the buy-out likely were the common investors — US hedge fund Tiger Global and venture capital firm Accel Partners. Pragya Singh, Associate Vice President, Retail, CPG and e-tailing at Technopak said, “The common investors have consolidated their investments. Both, Flipkart and Myntra are leaders in their respective categories; hence, the merger is a potent combination and will help in acquiring a leadership position in the e-commerce space.”
Experts suggested that this will help Tiger Global and Accel Partners to focus on only one company and invest in just one entity. This also triggers the speculation of an IPO, which will help the investors in getting a return on their investment.
Closer look at the Indian e-commerce segment
The internet penetration in India has seen a huge revolution over the last decade. From two million internet users in 2000, the number shot up to 205 million internet users by the end of 2013. India is adding four million internet users every month and by the end of 2014, there will be over 250 million internet users.
The growing access to internet, rapid adoption of broadband, smartphones and tablets, and improvements in the payment and delivery systems will prompt more and more people to shop online. The penetration of courier services is also very important to boost online shopping in India. According to a joint report of the audit firm KPMG and Internet and Mobile Association of India (IAMAI), internet penetration of 25 per cent could be the tipping point for e-commerce growth in India. The report also stated that the e-commerce market is growing at an average annual rate of 34 per cent since 2009 and touched US$13 billion in 2013. Analysts have also predicted that the e-commerce business in India is expected to reach around US$50 billion to US$70 billion by 2020.
According to Nath, the India e-commerce space will see consolidation to create synergies and scale. The market will see a few large players emerge, and in the end, it is the consumer who will benefit.
Compete with Amazon
This move will help the merged entity in gaining higher profit margins and building competitiveness against Amazon who has been aggressively expanding in the Indian market through new product offerings, slashed prices, heavy marketing push and next-day delivery.
Jhalani said, “This is a natural progression in any space. It is actually a great thing as the merger would create a stronger domestic player that on one end can have better expenses with economies of scale, and on other end offer a wider selection to attract more of the consumer wallet.”
However, there is also a danger of a price war which may lead to a decline in profits. Experts predict that there will be more such deals happening in future especially for players in the fashion and lifestyle category. Companies who manage to bring in more customers at a decent acquisition cost will be profitable in the coming years.
What should be Amazon’s strategy?
Nath explained, “At the moment, Flipkart and Amazon’s models are different since Amazon is driven by FDI norms and in India, it is a marketplace. Having said that, I think it would continue to get more sellers on board to increase the breadth and width of the categories and sub-categories they provide to their customers.”
Experts predict that Amazon could also look at consolidation in India. Jhalani feels that Amazon is unfazed by all this. “It already has in place a strategy to build similar models in-house that Flipkart is getting through Myntra merger,” he said.
Is there a reason for Snapdeal, Jabong and eBay to worry?
Amazon is not the only competition for the entity because US-based Walmart is also planning to launch its online services soon. Another American e-commerce giant eBay is already operating in India and there are other strong players such as Snapdeal and Jabong that are capturing the pulse of the consumers through innovative offerings. Yesterday, Snapdeal completed a new round of equity financing of US$100 million from Temasek, BlackRock, Hong Kong-based Myriad, Premji Invest and Tybourne.
Nath pointed that rivals such as Snapdeal, Jabong and eBay largely play in different areas. “Today as per Mobile Association of India, out of 17.5 million people who surf the net, 13.6 million browse products and only 7.4 million actually place an order. In effect, this means that if these companies are able to just convert these ‘walk-ins’ into ‘buyers’, it would have a disproportionate impact on their revenue. Most of the companies are trying to target this segment of customers and using analytics to great effect to provide offers in real-time. Hence, today there is enough space for these companies to grow.”
On the survival strategy, Jhalani explained that eBay is already working with Snapdeal, but Jabong will need to find a strong partner to expand and grow.
Why are investors betting big on Indian e-commerce?
The Indian e-commerce space has recently seen a rising investor interest. As mentioned earlier, Snapdeal has completed a new round of equity financing of US$100 million. In February, it had raised another US$133.77 million in a funding round led by eBay. Flipkart also received a fresh funding of US$160 million, while Myntra raised US$50 million in a financing round led by Premji Invest in the first week of February.
Indian classified website Quikr secured US$90 million in a round by Swedish firm AB Kinnevik in March 2014, and Yatra raised US$23M with Singapore-based Vertex Venture as lead investor just last month.
With the foreign direct investment (FDI) favouring the marketplace model, companies have adopted it in an effort to maximise capital efficiency. There will be more competition and further consolidation in the Indian e-commerce space as the government is likely to allow foreign direct investment in e-commerce.
The trend of e-commerce attracting a bulk of capital investments is here to stay as the market is evolving and there is diversification of the product segment to jewellery, baby products and many other fashion and lifestyle products. Experts suggest that investors are also banking on the growing penetration of internet in smaller cities and rising interest of younger people in online shopping, who spend approximately 16 per cent of their disposable income online.
Ideal path to be adopted by the merged entity
Experts believe that the merged entity should focus on integrating successfully and synergising on individual strengths of sourcing, customer base, technology, etc.
They also feel that though the ideal path is to merge the customer acquisition and operations of the two companies, it is necessary to keep Myntra independent to develop the fashion category. Singh explained that it makes more sense for Myntra not to completely merge with a multi-player because it has huge potential of its own. It should continue as a separate entity in the fashion segment.
Both the companies have already decided to operate independently after the deal, according to Binny of Flipkart.
Mukesh said, “We are not anticipating any change in the structure of the teams. Both the firms will be working autonomously to achieve economies of scale.” In two to three months, they will be looking at collaborating the logistics of both the parties.
The founders have also hinted at an IPO in the long run but their immediate focus is to get the metrics right and scale up the fashion business through this acquisition.
Many mergers and acquisitions have failed due to differences in the interest of the two partners or lack of integration across companies. It has not necessarily resulted in arithmetic addition of their strengths or customer count. Many have also happened just to remove a major competition. But again, there have been plenty success stories to keep us hopeful of the Flipkart – Myntra. We cannot wait to see how will this acquisition pan out in the future.