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Sale season
Like most shoppers, Flipkart bought Jabong for a song. But did it really need it?

Kripa Mahalingam

Flipkart finally must know what it feels like to be a customer, managing to snap up cash-strapped online fashion major Jabong for $70 million in an all-cash deal. A 95% discount to the valuation Jabong enjoyed only two years ago, it would  have felt the sheer joy of buying something at a steep discount. A discount like that comes with bragging rights. Last week, it was Flipkart’s turn to brag and on the face of it did look like they earned the right to do so, but in the larger scheme of things, and considering the problems they have on their hands, it may be too early to pop the bubbly.  

Just like online retailers trying to get rid of last season’s inventory by offering massive discounts, there were investors who couldn’t wait to get out of Jabong. The company had used up all the lifelines its investors had offered and was haemorrhaging. After investing more than $200-250 million over the past four years, the investors, Rocket Internet and AB Kinnevik, decided it was better to pull the plug rather than invest more money in the venture. 

In September 2014, Rocket Internet merged Jabong with four other online fashion retailers — Latin America’s Dafiti, Russia’s La Moda, Namshi in the Middle East and Zalora in South-east Asia and Australia to create the Global Fashion Group (GFG). Jabong brought 13% of overall revenues but contributed 22% to the group’s operating loss. Over the past year, GFG has been actively looking for a buyer and has been in talks with several suitors including Snapdeal, Paytm, Future Group and the Aditya Birla Group. From an asking price of $1-1.2 billion in 2014 when the investors were in talks with Amazon, a steeply discounted price tag of $500 million by 2015, to the final sale price of a $70 million, things unraveled quite quickly for Jabong. 

That’s a common thread running across all Rocket Internet’s investments in India. It’s almost like the firm had a signboard over the Indian office saying, “money for free.”  This is their second distress sale after the sale of FabFurnish to the Future Group. There have also been corporate governance concerns with both Jabong and Foodpanda, where the co-founders have been accused of making personal gains at the cost of the company. While Jabong’s Praveen Sinha has denied any wrongdoing, Foodpanda is also rumoured to be on the block and could well be Rocket Internet’s next sale. The German firm’s model of turning executives into founders with not enough skin in the game, and throwing money at buying market share along with remote control management of operations has miserably failed in India. 

Beating the blues
Vivek Gaur, CEO, YepMeOn the other hand, Flipkart really needed a win with the incessant talk of a valuation markdown. “It is a good story for Flipkart to tell. They now have 70% share of the market. It is a smart move since fashion has been sort of an Achilles heel for Amazon in almost all the markets it operates in and Flipkart has consolidated its position in a category where its chances are best against the e-commerce giant,” says Vivek Gaur, CEO, YepMe, which started as an online fashion brand in 2011 and retails on Flipkart, Jabong and Myntra apart from its own site. YepMe is also moving towards omni-channel, with 75-100 stores coming up by Diwali this year. 

But how things ultimately play out will depend on how well Flipkart executes the advantages Jabong has built. While Jabong was spruced up a little before the sale by cutting back on costs, it still burns $10 million a month. For Flipkart, which burns much more, around $50 million a month, the acquisition only adds to its costs. It will, thus, have to figure out how to leverage synergies to keep customer acquisition costs low.  

When Flipkart acquired Myntra for $330 million two years ago to gain entry into the fashion segment, the benefits were fairly clear. With Jabong though, there is considerable overlap. “Jabong does have a strong brand recall but there is an 80-90% overlap between their customers and the brands are universal. The acquisition was more pre-emptive rather than strategic to ensure it doesn’t land up in the hands of competition,” says Harminder Sahni, founder, Wazir Advisors.   

True, it would have been a better fit in the hands of Snapdeal, which does not have a significant presence in the online apparel space, or the Aditya Birla Group or Future Group, which are looking at increasing their online presence. But according to an investment banker, Aditya Birla Group was not willing to offer more than $30-40 million and Biyani, the shrewd negotiator that he is, was offering even lesser. 

Vinay Joy, Associate partner, Khaitan & CoFor Vinay Joy, associate partner at Khaitan & Co, though, the mandate from the Bansals was clear: get the deal done unless there was some major concern. Three days after Joy took off to Delhi with the mandate, the team from Khaitan, which was advising Flipkart on the deal, had done the due diligence, negotiations and sealed it. “Both parties wanted to get the deal done. Completing a deal of this size in a short span is always a challenge but all the major boxes were ticked off. Most of the concerns were already priced in, and in a deal of this size, there were some risks that we were willing to take. For Flipkart, the deal made absolute sense since it cemented their leadership in this space —  they saw a window of opportunity and took it,” says Joy.  

That’s understandable. In the initial years, it was easy for Flipkart to quickly build sales (Gross Merchandise Value or GMV) by focusing on sale of mobile phones even though these offered dismal margins. Those wafer-thin margins didn’t matter really since every time there was a rise in GMV, there was a rise in valuation. But the party lasted only for a while as mobile sales started to peter out and Amazon got into the battlefield with the same game. High ticket electronics didn’t quite work like mobile phones either. With GMVs not growing as quickly, the focus has now turned to more profitable growth with better margins. 

Mahesh Murthy, Managing partner, Seedfund
Since fashion and apparel offer better margins than mobiles, Flipkart has turned the spotlight on this vertical. “It was a pawn-take-pawn-take move by Flipkart but the chessboard is stacked against Flipkart. They have been slipping in almost every metric against Amazon. While the deal may help them keep competition at bay for some time, they have bigger problems on their hands,” says Mahesh Murthy, managing partner at Seedfund. “They have been a company focused on building valuation rather than creating a value-driven business and that’s been their problem.”

Moreover, Amazon India, which enjoys the deep pockets of its parent, has already announced the launch of its subscription program ‘Prime’ in India. This has been a key driver of customer loyalty and repeat transactions in the US. It’s something sorely missing in the Indian market and something none of the players have on offer.  

Smaller fish
But even as Flipkart figures out how to take on this fresh salvo fired by Amazon India, will the consolidation put the smaller players on a weaker footing? With funding options running out fast, will they survive the onslaught of the biggies? Mary Turner, CEO of Koovs says that consolidation is a natural outcome of a fast evolving e-commerce market but there is place for smaller players even if traditional players come online. “As the e-commerce market continues to develop, consumers become more discerning, wanting more choice and that space is filled by a growing number of specialist and targeted players like us.

Mary Turner, CEO, Koovs

 Fashion e-tail thrives on differentiation and requires expertise to win and grow customer loyalty,” she says. Koovs runs an inventory-led model and specialises in western wear for young adults. 

Turner points out that in developed markets like UK, when traditional multi-category lifestyle retailers like Next and Littlewoods moved online, it didn’t limit the opportunities for a company like ASOS, for example, which was launched as a small, highly-targeted fashion brand for 20-somethings back in 2000. ASOS has since grown into the leading online young fashion retailer in the UK. 

Sujayath Ali, Co-founder, Voonik

Voonik, too, is differentiating itself by focusing on the unbranded segment and has a long tail of 20,000 suppliers. “About 80% of the market is unbranded and none of the online players cater to that segment or consumers in tier 2 and 3 towns. So that’s our sweet spot because the competitive intensity is lower,” says Sujayath Ali, co-founder, Voonik. The company works with fixed gross margin of 20% irrespective of the product it sells. Being in the unbranded segment gives it that flexibility. “Some of the players were not built on sustainable unit economics or didn’t have a clear path to profitability. They will continue to struggle. We have been focused on sustainable growth and have refused to take on discounts on our books. Any discount given on the site is borne by the sellers,” he says. The company ship more than 30,000 shipments a day and has an annual GMV of $110 million.

And according to a report by BCG-Google, the online apparel industry is slated to grow to $35 billion by 2020. Sahni of Wazir thinks more brands will continue to come online as part of their omni-channel strategy. According to him, smaller players will find it harder to differentiate in the longer term and horizontal players such as Flipkart, Jabong and Amazon will be used by brands, not as primary, but as an additional channel for sales. 

As the industry scales up, the line between online and offline players  is likely to blur further, with most players choosing the omni-channel approach given that it has been the most successful model so far in the developed markets.

—additional inputs by Himanshu Kakkar

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