Copyright 2016, Forbesindia.com

Myntra's road to profits

The fashion etailer is betting on its private brands business, led by denim and casual wear line Roadster, to go from red to black


g_100329_ananth_narayanan_280x210.jpgMyntra CEO Ananth Narayanan feels giving importance to Myntra Fashion Brands was one big reason why it started growing
Image: Selvaprakash Lakshmanan for Forbes India



In early 2017, Myntra CEO Ananth Narayanan unveiled his Mission Apollo to the top brass, identifying its private labels business, Myntra Fashion Brands (MFB), as the key catalyst to the company’s profitability. A clutch of 13 in-house brands owned and distributed by Myntra, MFB products had higher margins than third-party brands, and Narayanan assumed they could swing the Flipkart-owned fashion retailer to profitability.  

Over the past few years, Indian ecommerce has walked on thin ice. Losses have piled up, layoffs have singed the players, and big companies like Amazon India, Flipkart and Paytm contributed to 70 percent of the ₹10,670 crore losses that a group of 14 companies reported in FY16, says a report by Kotak Institutional Equities. In such a setting, Narayanan’s MFB plan and pursuit of profitability sounded just as audacious as the US government’s Project Apollo—of landing a man on the moon—had seemed in the 1960s.

In six months, however, Narayanan’s conviction was vindicated as MFB posted 5 percent Ebidta (earnings before interest, depreciation, tax and amortisation) profit in June. Sure, net profit is still some distance away. But then, in a market such as India, where ecommerce companies are bleeding from the discounts they are offering to lure customers, Ebidta is an indication that the tides are turning. Mission Apollo is well on course.

“When I joined, Myntra’s private brands portfolio was about 14 percent of the platform. It had a good start, but it wasn’t scaling,” reminisces Narayanan during an interview in the ‘Thinking Room’ at the Myntra headquarters in Bengaluru, where employees usually drop by to spend some time away from the hustle at work. “One reason why it wasn’t growing was lack of importance. The moment you declare it important, people pay attention to it. Shining a light on MFB was one big reason why it started growing. Second, we genuinely improved the products,” he adds.

Today, MFB is a ₹2,000-crore gross sales (net of discounts, excluding product returns and cancellations) run rate segment, which currently accounts for about 23 percent of the company’s sales. Narayanan wants this number to go up to 30 in the next 6-12 months. 

g_100331_manohar_kamath_280x210.jpg
Manohar Kamath, chief of Myntra Fashion, at the company headquarters in Bengaluru
Image: Selvaprakash Lakshmanan for Forbes India

MFB products, about 9 percent of the items retailed on Myntra, churn out about 2,000 new designs every week. “We used something called ‘design to value’. We said there may be 2,000 styles, but the fabric can be common. The buttons or zippers can be common. It is a little bit like the auto industry where you have options, but the basics remain the same,” says Narayanan. Now, eight private brands, including Roadster, Mast & Harbour (annual revenue run rate of ₹190 crore) and HRX (₹170-180 crore revenue run rate), which it bought from actor Hrithik Roshan last July, figure among the 20 bestselling brands on the platform.

Myntra’s push to private brands came at a time when it clocked losses of ₹816 crore in FY16 and ₹741 crore the year before. Also, the company and its parent Flipkart, which are among a brand’s key sales channels today, barely registered a blip in the retail segment five years ago. They were browbeaten by brands to either bear a lion’s share of the discounts, which perennially kept them in the red, or stop discounting the brands altogether, which would lead to an erosion in the consumer base.
 
Private brands, where companies control everything—from design to sourcing of raw materials to manufacturing—managed to break this impasse because they have higher margins that gives the companies enough space to tinker with pricing. In fact, Myntra isn’t the only ecommerce company to fall back on private brands in pursuit of profits. While internet-only fashion brands have slowed down—Tracxn, a startup tracker, says only three such startups were founded this year, as against 118 in 2016 and 244 the year before—private brands are increasingly gaining prominence in categories such as grocery, electronics and beauty. Flipkart, for instance, has two private brands, Billion and SmartBuy, for electronics and home products. For grocery startup BigBasket, private brands in staples, gourmet food, vegetables, bakery and meat account for about half of its sales.

Beauty and personal care startup Nykaa expects its private brands portfolio for products like nail enamels, lipsticks, kajal and body mists to account for about one-fifth of its business in future.  

Says Rajiv Mehta, former managing director, South Asia, Puma, and former chief executive at Arvind Sports and Lifestyle Ltd and Arvind Fashion Brands Ltd, “The only way to wriggle out of the stalemate [over discounts] with other brands was to create your own brands or buy directly from China. In doing so, you essentially buy at factory price and sell at maximum retail price. You will have the entire margin and it could be double the margin from third-party brands.”

[bq]Myntra Fashion Brands products churn out 2,000 designs every week[/bq]
At the heart of Myntra’s private brands business is a denim and casual apparels brand, Roadster, which has become a force to reckon with, clocking annualised gross sales run rate of ₹650 crore, significantly more than any other brand on the platform.

It hasn’t been an easy climb for Roadster, which was launched in November 2012. A brainchild of Gautam Kotamraju, who has since quit Myntra to head rival Amazon’s private brands business, and Tribikram Mishra, associate vice president at MFB, Roadster stood a good chance of being dwarfed by a brigade of legacy brands like Levi’s, Lee and Pepe, which retailed on Myntra. By the end of 2015, the brand had clocked barely $3 million in gross sales, despite hefty marketing spends and an expensive endorsement by actor Ranveer Singh.

“We found out that some styles just didn’t work with customers. We were too out there and created 15 different washes. Customers didn’t care and it cost us a lot,” says Narayanan. It was then decided that Roadster will no longer be a celebrity-led brand. Instead, it would deliver a wide assortment of designs in outdoor denims that are high on fashion and marketed through digital channels instead of the traditional ones. Also, it would launch a fresh range of apparels every six to eight weeks.

 In early 2016, a revamped Roadster launched two new collections, Machinist and Pocketman. The products flew off the shelves and the brand notched up $50 million in gross sales that year. “The spike was because we started to get the variety right. Also, Roadster was sharply priced (at a ₹400-2,000 range),” says Narayanan.

Today, Roadster’s revenue is comparable with most denim and casual wear brands in the country. Benetton, for instance, clocked ₹735 crore in revenue in FY16, growing by 2.2 percent over the previous fiscal, Levi’s clocked ₹753 crore, growing by 18.5 percent from a year ago, while Pepe Jeans reported net sales of ₹348 crore after a 29.3 percent growth over the previous fiscal.

“Most of these are international brands with a heritage. As an Indian brand, which is about four years old, have you crossed them? No. Are you close to them? Very close. Do you have an ambition to cross them? Yes,” says Manohar Kamath, chief of Myntra Fashion.

 
How does Myntra plan to push its private brands even further? Analyse consumer behaviour data, study what sells, predict demand and offer buyers a wide assortment of designs periodically. Roadster and Mast & Harbour, the top two private brands from Myntra’s stable, stock 7,500 and 3,500 designs, respectively.

The success at home has also got Myntra thinking about taking some of its bestselling private brands global through eBay India, a business that its parent Flipkart acquired earlier this year. Private brands in categories such as beauty and home are also on the anvil.

Myntra and its private brands business assume even more importance as fashion, with a gross margin of between 20 percent and 60 percent, is expected to become one of the biggest categories for online retailers by 2020. According to a March report by the Boston Consulting Group, about $30 billion of the fashion market in India is expected to be digitally influenced by that time, a sharp increase from the current $7-9 billion. Hence, Myntra is one of the key weapons for its parent Flipkart in its battle against Amazon.

 “Private brands are a big differentiator because they will not be available elsewhere. Most people who have tried building in-house brands have treated those products like labels. Myntra is spending money on building the brand, which is necessary. It doesn’t help if you own the distribution but don’t invest in building the brand,” says Nitin Chhabra, chief executive at Ace Turtle, an ecommerce consultancy firm.

Interestingly, Myntra’s success with private brands hasn’t been replicated by other homegrown fashion ecommerce startups. While internet-first brands such as Bonobos and Stance have scaled great heights in the US, well-funded homegrown startups such as Zovi and Yepme have fallen by the wayside. “Internet-first fashion brands haven’t scaled in India primarily because there is barely any brand recall. Unless you offer an extremely differentiated offering, why should anyone shop, except for discount seekers?” says Mrigank Gutgutia, engagement manager at Redseer Consulting.

But Narayanan is confident that MFB is here to stay. “Let us assume that in five years, there will be 15 big brands in India. My vision is that Myntra can own five of them,” he says.