Flipkart Beats Snapdeal to Acquire Jabong

In a major move towards consolidation, Flipkart-owned Myntra came from behind to beat Snapdeal in acquiring fashion and lifestyle rival Jabong for $70 million, in an all-cash deal.

The acquisition is a significant gain for Flipkart in consolidating its lead in the ‘fashion & lifestyle’ segment that is likely to touch $40 billion by 2020, according to Myntra CEO Ananth Narayan.

Bengaluru-based Myntra, which was itself acquired by Flipkart in 2014 for $330 million, has been trying to ward off competition from Jabong and with this acquisition, it will see its Gross Merchandise Value (GMV) rise significantly.

This is how Flipkart bagged Jabong

Intense competition in the online retail business has led to most companies offering massive discounts to gain market share. This has resulted in the overall online business expanding at the cost of profits.

In fact, many companies have actually folded up since 2012, while the remaining ones have witnessed increasing losses. Founded by Germany-based Rocket Internet in 2012, Gurugram-based Jabong has been able to raise $250 million since commencing operations.

Its strength has been its portfolio of international brands and a healthy active client base. Kinnevik and Rocket Internet which hold 35% and 20%, respectively in Jabong, have been negotiating the sale of Jabong with several investors including Amazon.

Amazon – which has long term plans to emerge as a dominating player in the online space in India, was keen to acquire Jabong but talks fell through in 2014 on account of the steep price of $1.2 billion being demanded by Jabong’s promoters.

Amazon would be patting itself in the back for not taking the plunge in 2014 as Jabong was finally acquired for just $70 million by Flipkart-owned Myntra. Once Amazon dropped out of the race for Jabong, Snapdeal took up the case to acquire Jabong and has been in active negotiations with Kinnevik. Aditya Birla-promoted Abof.com too had expressed interest in Jabong, but it seemed Snapdeal was on its way to grab Jabong.

But this month negotiations ran into a roadblock as Snapdeal raised questions on how the deal was to be structured and raised questions regarding FDI rules that could be a problem going forward. Kinnevik on their part were keen to close the deal early as they had been losing money on Jabong. Adjusted ebitda loss for Jabong in FY16 was $ 61.7 million against a revenue of $138.7 million.

Snapdeal was expected to close the deal by 21 July, so when it began to hesitate on the terms, Myntra saw an opportunity and moved in quickly to offer an all-cash deal within three days of agreement being reached. Kinnevik, not wanting to take any chance, closed the deal with Myntra and Snapdeal was left out in the cold.

Why is Jabong so important to Flipkart and Myntra?

Flipkart is facing stiff competition from cash-rich Amazon and Snapdeal for retaining market leadership. Like all online firms, Flipkart too has had to face a downward revision in valuations and has been growing on the back of exclusive mobile deals it had signed with various telecom majors like Motorola.

However, with several brands abandoning Flipkart in favour of Amazon, it was keen to build on the ‘fashion and lifestyle’ segment, an area where Myntra had strength. Flipkart is presently shipping 1.6 lakh merchandise every month, with Myntra shipping around 1.3 lakh. With Jabong’s monthly shipments of 50,000, Flipkart will gain major GMV and market share in the profitable segment of fashion and lifestyle. Furthermore, it plans to build upon the fast growing and profitable ‘home’ segment.

So between Flipkart, Myntra and Jabong, Flipkart has a lead over Amazon which is still to crack the fashion and lifestyle segment in India. This also gives Flipkart an edge over rival Snapdeal, which is itself trying to build its fashion and lifestyle business.

Valuations and profitability threaten the industry

As India continues to develop and grow the e-supply chain, online retailers have been witnessing tremendous growth. The problem is that once again investors have been going overboard in company valuations and this has led to a bubble, similar to what was seen during the internet Bubble 1.0 in 1998-1999.

Jabong was commanding $1.2 billion valuation in 2014 at GMVs far lower than what it does today. Between 2014 and 2016, its valuation fell from $1.2 billion to just $70 million!

Caratlane, a gems and jewelry company, recently acquired by Tata-owned Titan, witnessed valuations of $ 117 million in 2014. In 2016, it was acquired for $90 mn. Same is true for Commonfloor. Just a year ago, it was valued at $155 mn, but was acquired by Quikr in 2016 for $100 mn in a share-swap deal.

This is the big worry! The online industry has been witnessing valuations that are not justified by numbers and this can only harm the industry going forward. With valuations of most ecommerce companies being revised downwards, consolidation seems to be the only way out for those with deep pockets.

The problem is compounded by increased competition that has led to massive discounting as a way to gain market share, which often comes at the cost of profitability. Ultimately, only those companies will survive that are fully integrated in the entire supply chain resulting in a superior customer experience.

Amazon understands this and has the deep pockets necessary to make the requisite investments and patiently grow its clients based on superior customer experience.

Amazon has rightly identified 1-2 day delivery as a differentiator and an important factor in customer retention and customer experience. It has recently launched Amazon Prime, a subscription based service that offers 1-2 day guaranteed delivery across 100 cities covering 1.4 million products.

That’s a significant attraction for buyers who want instant fulfilment. The model is already a proven success in the US and other markets where over 50% of Amazon’s 100 million clients are subscribers to the service.

The deal is made more attractive by offering subscribers a 30-minute ‘first purchase’ window along with several other free offerings that it will throw in.

Flipkart had launched a similar service in 2014 called Flipkart First but had to withdraw the scheme. Now, in reaction to Amazon’s move, Flipkart is contemplating bringing back a similar service under a new name F-Assured. One will have to wait and see how that fares against Amazon’s Prime.

Meanwhile, the online space will continue to witness M&A deals, as other newer entrants try and grab a slice of the growing opportunity.

 

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