Flipkart buys Myntra. Finally!

23 May,2014

 

By Archana Rai

 

So, finally Flipkart has bought Myntra, exposing an open secret and sending a not-so-subtle message-to rival Amazon. Despite loud protestations, it is quite clear that the investors, three of whom own shares in both companies, played a big role in seeing this deal through. Bringing together India’s largest online retailer and the country’s hippest fashion portal makes financial sense for the investors, and also strategic sense. The hard part is going to begin now.

 

 

Flipkart-Myntra deal: The anticipated FDI in e-retail a big driver

 

By Mehak Chawla

 

The Indian e-commerce industry has fared pretty well, especially if we consider that there are only about 200 million internet users in India. This number could grow to 500 million by 2015, according to consulting firm McKinsey & Co.

 

The size of India’s e-commerce market in 2013 was around $13 billion, according to a joint report of KPMG and Internet and Mobile Association of India (IAMAI). The online travel segment contributed over 70 per cent of the total consumer e-commerce transactions last year.

 

Online retail companies earned revenues of around 139 billion rupees ($2.24 billion) in the financial year that ended on March 31, 2013, according to a Crisil report. Though this is just 0.5 per cent of the total revenues of brick-and-mortar retail companies, online retail sales have been growing much faster. Revenue of e-commerce firms grew by 56 per cent annually between the financial year that ended March 31, 2008, and the year ended March 31, 2013, according to Crisil.

 

The pressures on e-commerce companies have long been known, be it cost competition with brick and mortar retail or the first mover advantage. And while the Flipkart-Myntra acquisition is surely a step to combat Amazon, the looming FDI regulation could also be a big factor in this deal. Once the 100 per cent FDI in e-commerce comes in, big retailers like Amazon and eBay will be able to follow an inventory-based model, as against the marketplace model they are currently bound to follow.

 

Currently, global B2C e-commerce firms like Amazon and eBay operate in India as online marketplaces. In this model, these companies do not own any inventory and do not sell any of their own merchandise to Indian shoppers. They offer products from third-party sellers. This model can completely upturn if the 100% FDI in e-retail is to come in. Indigenous products from the likes of Amazon and Walmart (and their own inventories) can change the dynamics of the Indian e-commerce industry like never before. No wonder then, that the home-grown players like Flipkart are upping their ante.

 

Though the stand of the Modi led government on 100% FDI in retail, especially in e-retail is not yet very clear, chances are that the regulation will go through. According to Vishal Tripathi, Principal Research Analyst, Gartner India, chances are that FDI in e-retail will happen. “Even if they don’t allow 100% FDI investment in retail immediately, chances are they will make the retail environment (including online retail) friendlier. NDA has always leaned towards private enterprises and they are likely to bring business savvy regulations.”

 

The pressure on the government to pass this regulation is also high with the likes of Walmart lobbying for it and UK based Tesco showing a keen interest in entering the Indian e-commerce space.

 

When 100 per cent FDI in (online) retail does come in, chances are that we shall see a lot more consolidation happening in the e-commerce space, believes Tripathi. Given the fact that global brands will intensify the competition in an already fiercely competitive e-commerce space, desi ventures are likely to start rolling up their sleeves.

 

Other than the FDI in retail segment consideration, there are of course other elements that both Flipkart and Myntra were dealing with. The biggest of them being the cost considerations. According to market sources, Flipkart is losing close to Rs 70 crore a month. Myntra on the other hand, is fast losing market as well as mind share to the likes of Jabong.

 

As a result, the deal seems like a win-win for both the parties because they have several synergies in their processes (and investors) that they can exploit for innovation. “The e-commerce market will be eventually decided by the customer experience. And Flipkart and Myntra have a lot to do in that regard in order to match up to the Amazon experience,” says Tripathi.

 

Source:The Economic Times

Copyright © 2014, Bennett, Coleman & Co. Ltd. All Rights Reserved

Licensed to republish

 

Instead of Flipkart and Myntra burning more cash to battle each other and the rest of the lot in the crowded online retail industry, investors now have the comfort of knowing their money will be used to fight the real challenger- Amazon-whose founder Jeff Bezos views India as a key market where he is willing to commit considerable sums of money from his considerably large war chest.

 

Myntra, which informed observers estimate has been valued at around $370 million, is a strategic fit for Flipkart. As fashion becomes the premier battleground for online portals in India, Myntra with its higher margins from branded apparel, will help bolster Flipkart’s defences.

 

With a product mix dominated by electronics, books and low-cost apparel, the seven year-old company founded by IIT-Delhi graduates Sachin Bansal and Binny Bansal has demonstrated that it is willing to think different and think big.

 

Even as talks with Myntra’s Mukesh Bansal started and stalled in recent months, Flipkart has been busy. Inhouse logistics arm eKart now delivers products sold by rivals, while payment gateway PayZippy is being nurtured as a separate business, the first of several technology products the company says it will build.

 

But these are just good beginnings. So far, Flipkart’s Bansals, who hope to sell everything apart from cars and groceries, have wooed customers with steep discounts that have coloured their books red. To grow faster, they need higher margins that are delivered mostly by products designed in-house.

 

Myntra will help with its portfolio of private label apparel that enjoy margins of up to 60%, but Flipkart needs more such arrows in its quiver. Private label electronics-as Kindle has done for Amazon-can boost notoriously low margins in the segment. They can also do well by scouting for ideas and products in India’s technology startup space that is throwing up innovations ranging from wearable devices to technology that can automate warehouses and help customers get a feel of the clothes displayed on their portal.

 

More boldness has to be the calling card for the Bansals, who claim to draw inspiration from Jack Ma’s Alibaba, as they take on Bezos’s challenge on their home turf. Investors who have sunk money into this battle and are banking on Sachin Bansal’s famed “cool temperament” to see them through, will need to ensure he has enough motivation to invest skin in the game.

 

Bezos owns nearly 18% of Amazon, while Ma’s 8.9% in Alibaba is set to deliver a fortune to the Chinese entrepreneur who has built an empire that spans the gamut from a wholesale portal to an investment platform for online shoppers Flipkart’s Bansals are estimated to together own about a fifth of their company that is now valued at about $ 2.5 billion. With Myntra in the fold, surely they have much to do battle for.

 

Source:The Economic Times

Copyright © 2014, Bennett, Coleman & Co. Ltd. All Rights Reserved

Licensed to republish

 

Post a Comment 

Comments are closed.

Videos