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Myntra's Jabong buy may've nullified competition, but what about profits?

By acquiring Jabong, the online fashion retailer has consolidated its position as the market leader. Now, it has set its sights firmly on profitability, says CEO Ananth Narayanan

Published: Aug 29, 2016 06:34:24 AM IST
Updated: Aug 24, 2016 02:16:11 PM IST
Myntra's Jabong buy may've nullified competition, but what about profits?
Image: Mallikarjun Katkol for Forbes India

It was a typical quarterly board meeting for the Myntra team on a cloudy Thursday morning on July 21. The top management of the country's largest online fashion retailer was taking stock of the company's growth and financials at their sprawling headquarters off Hosur Road in Bengaluru. The financials were in line with expectations and the conversation soon drifted to competitors. That brought the conference room to a potentially game-changing deal brewing in the market: Jabong, the second largest online fashion retailer in India, was up for sale; also, importantly, Snapdeal’s exclusivity for the all-cash deal had expired.

The timing was perfect and the excitement in the room was palpable. Jabong was of immense interest to Myntra. In fact, in the last year, the Bengaluru-based firm had engaged thrice with the Rocket Internet-backed Jabong for an acquisition, the last conversation being as recent as in April. The upside is self-evident: The acquisition creates a formidable joint entity, nullifying competition and accelerating growth. Happily, the sell price had come down since early last year and worked well for Myntra, which had itself been acquired by Flipkart two years ago for $375 million.

This time around, Myntra wasn’t taking any chances. It sought the help of its US-based investor Tiger Global Management, one of the world’s largest hedge funds and venture capital investors. As a result, on the evening of July 21, Lee Fixel, partner at Tiger Global, called Lorenzo Grabau, chairman of Global Fashion Group (GFG), the entity into which Jabong was absorbed in 2014. Fixel learnt that if Myntra could muster up $70 million, the deal could be closed. (Tiger Global refused to comment on the deal when contacted by Forbes India.)

Myntra's Jabong buy may've nullified competition, but what about profits?
It took Myntra a day to decide that it would put the cash on the table this time. On July 23, three officials—Ananya Tripathi, senior vice president and head of strategy and planning at Myntra; Nishant Verman, head of corporate development and strategic partnerships at Flipkart; and Sankalp Gupta, principal, corporate development at Flipkart—flew to Delhi to win Jabong. The next 72 hours were intense; 48 of these were spent at law firm Khaitan & Co’s Connaught Place office in New Delhi, where the deal was structured, finalised and signed for $70 million in cash.

“There were a lot of nail-biting moments because we were waiting for the signatures to happen. There were other parties who went to bed on a Friday night thinking they had the deal, and slept on Monday until they woke up the next day only to see in the papers that they didn’t. So it was quite an intense physical and mental process to just be in the room with everybody and make sure that we sign,” says Tripathi, adding that the consideration this time was lower than Myntra’s earlier offers which were a combination of equity and cash. “The important thing to the other party was cash. This was something we didn't catch earlier.”

Myntra's Jabong buy may've nullified competition, but what about profits?

The Jabong deal is in keeping with other strategic moves by Myntra over the last few months. The country’s most funded online fashion retailer also acquired Bengaluru-based mobile content aggregator Cubeit last month for an undisclosed amount and took a majority stake in clothing and shoes brand HRX, launched by actor Hrithik Roshan, to give a fillip to its private brands business. Myntra has also sealed an exclusive tie-up with UK-based fashion retailer French Connection (also branded as FCUK) as part of the effort to ramp up its international portfolio.

And in the frenetic pace of change at Myntra, behind the scenes, a critical role is being played by its 39-year-old CEO Ananth Narayanan, who joined the company in July last year from global consulting firm McKinsey & Company where he was a director. His 15 years there have imbued him with people management skills that are proving invaluable in leading a team of 2,000-odd employees with an average age of 25.

“I have seen my dad maintaining a daily diary where he would keep a note of people who helped him that day. The next day he would figure out a way to say ‘thank you’ to them,”
says Narayanan, whose father A Sankaranarayanan was former managing director of Hindustan Motors. “I think in terms of appreciating people, it is something that has stayed with me. I don’t think I do it so systematically, but I try, even in Myntra. I think it matters and helps in building a strong connect.”

And a strong connect is what Narayanan is now creating at Jabong. He already spends three days a week in Jabong’s New Delhi office. Since the acquisition, he has held two town halls with all its employees (about 500 in all) and several small group meetings fielding difficult questions.

Myntra's Jabong buy may've nullified competition, but what about profits?
Image: Abhishek Chinnappa / Reuters
Experts believe that the Myntra-Jabong deal will consolidate the fashion ecommerce space

“Jabong as a company has gone through a gruelling six months of uncertainty. The first reaction among its employees was relief. The next reaction was nervousness on what will be our plans with Jabong. In my interactions with the employees, the message is very simple: Synergy and growth. And conveying that is very important,” Narayanan tells Forbes India, three days after announcing the deal.

We met Narayanan on July 29 at the Myntra office in Bengaluru, on a day when the city was washed out by incessant rains. Dressed in a button down polka dotted white shirt, teamed with a sober pair of blue trousers, his demeanour is calm. For good reason, too. Because, though the acquisition was only a fortnight old at this point, Narayanan had already put in place some immediate fixes at Jabong. To begin with, he had beefed up the call centre team to improve customer service and speed up processing of refunds. Also, while the business plan is still a work-in-progress, he has prepared an initial road map for Jabong, which he currently intends to keep as a separate entity.

“A consultant can work well as a CEO depending on what a company needs. As famous investor Ben Horowitz says, there is a war-time CEO and there is a peace-time CEO. What Myntra needs is a peace-time CEO who can put systems and processes in place and take the company to the next level,” says Sasha Mirchandani, founder and managing partner, Kae Capital, an investment firm. Mirchandani was one of the early investors in Myntra and exited the company in 2011.

Systems and processes clearly seem to be on Narayanan’s mind. Over the next few weeks, the plan is to have clearly defined categories between the two brands. “There are selections in Jabong and Myntra that appeal to a unique set of customers. Yes, there might be some 20 percent overlap in some areas, but in the larger scheme of growing in the market, I don’t think it matters. I feel the USPs of both the brands are slightly different,” says Narayanan.

Harminder Sahni, founder and managing director of retail consulting firm Wazir Advisors, differs, saying that Myntra and Jabong compete head-on when it comes to customers: “They have the same brands, similar customer outreach strategies, similar customer base (more than 80 percent customers shop on both platforms). So there is hardly any immediate direct benefit in acquiring Jabong, other than owning the competition.”

Also, as Mario D’Souza, lead, strategy and management, at Bengaluru-based Fryed Advertising, points out, the customer in this space has always been fickle. “It would be interesting to note how much of a unique customer base Myntra has acquired from Jabong, given the hundreds of crores both brands have spent on marketing,” he says. “There is low customer loyalty in this space, where users chase discounts and offers, and it is very likely that the customer bases overlap, perhaps significantly.”

But Narayanan reiterates his belief in the sanctity of both brands. “I want to run both the entities separately because while the DNA of both the companies is similar, the customers they serve are different,” he insists. Myntra is a mass premium destination brand with a strong focus on men’s categories (60 percent of its customers are men), he says. Private labels (a total of 11 brands) are an important part of Myntra’s offerings and have a stack share of 20 percent of its revenue. Meanwhile, the USP of Jabong is that it is more women-centric (60 percent of its consumers are women) and it has a strong portfolio of international brands. Jabong is also stronger in certain geographies such as Delhi-NCR. Currently, the penetration of online fashion retail in India is about 3 percent, he points out. “I think that number is going to get to 10-12 percent by 2020-2021. What Myntra and Jabong will be able to do is to accelerate the path to get to the higher percentage of penetration,” he adds.

Narayanan has laid the groundwork to leverage both the entities. “We can look at cross-selling brands across the Myntra and Jabong platforms to leverage certain brands and offer more choices to consumers,” he says, adding that “we will get Jabong’s supply chain to be more efficient as currently it is completely outsourced [even though] we have Myntra logistics, Ekart (Flipkart’s logistics arm) and our own warehouses in operation.”

He can draw from the success of several companies that have operated their brands separately: For example, German auto major Volkswagen Group has brands like Audi, Bentley, Skoda and Volkswagen catering to different price points. Similarly, French luxury goods conglomerate LVMH has several watch brands like Fred, Hublot and Tag Heuer. The key for the parent company is to define a category clearly, says Mirchandani.

Further, D’Souza believes the Myntra-Jabong combine allows both brands significant efficiencies in one of the biggest cost centres for an ecommerce company—marketing. “They could negotiate better rates across vendors, lessen customer-facing discounts by offering other forms of value such as access to the private brands of each platform, better delivery services and turnaround time, and improved customer service. Importantly, they can now negotiate strong media and advertising costs which otherwise run into many crores,” he says.

Myntra's Jabong buy may've nullified competition, but what about profits?

In fact, one of the concerns for the industry is that the combined entity will be in a stronger position to negotiate for better pricing with its sellers, but “it’s just a fear,” says Anil Joshi, managing partner at Unicorn India Ventures, an early-stage investment firm. “In my opinion, the entities would optimise their internal structures to improve efficiencies for healthy margins. These could include logistics, digital marketing and removal of duplicating resources. Negotiating with sellers on prices is viable only in the short term; Flipkart is a long-term player.”

Jabong's chief executive Sanjeev Mohanty is helping with the transition and will be with Jabong till September. He is not talking to the media, but Forbes India reached out to Praveen Sinha, co-founder of Jabong, who stepped down from the company in 2015. Sinha offered a positive spin on this deal: “It consolidates the fashion ecommerce space and the energies can now be focussed on delivering quality consumer experience instead of sales/discounts. The deal will benefit all stakeholders—sellers, consumers and the companies—in the long run. The cost synergies will reduce stress on P&L (profit and loss).”

Marketing may take the front seat with consumer-facing companies, but for any ecommerce business, technology is inevitably the core. Shamik Sharma, chief technology officer at Myntra, points out that “even though Jabong in India may not be considered to be at the forefront of technology, the tech base that they have is quite advanced, because it was backed by Rocket Internet earlier”. Underestimating their technology would not be wise as, “Rocket’s technology has been used in all its portfolio companies across geographies, such as Dafiti (a Latin American fashion portal) and others. So Jabong’s tech platform does not just incorporate learnings from India, but [from] many global players. It is in pretty good shape,” says Sharma.

Myntra's Jabong buy may've nullified competition, but what about profits?

What is also in good shape post the acquisition is Myntra’s market leadership health: Flipkart, Myntra and Jabong together boast almost two-thirds of the online branded clothing market. Myntra and Jabong have a combined base of 15 million active users a month. Prior to the deal, Jabong was Myntra’s closest rival with about 20 percent share in the country’s online fashion market, while the Myntra-Flipkart combined entity commanded over 50 percent.

Typically, the marketplace model (such as that of Myntra) is the highest funded segment in the fashion business. Other players in the online fashion space include Gurgaon-based Yepme, Fashionandyou, Limeroad, Yebhi, Zovi and Koovs.

As of January 2016, Myntra’s annualised gross merchandise volume (GMV) was $800 million, targeting $1 billion by the end of the current fiscal. Jabong claimed that its GMV was $66 million around the same time this year. (Typically, GMV for an ecommerce company is the value of all goods sold on its platform. However, it does not include discounts and returns. Online retailers in India don’t share their revenues but offer the GMV figure to show the firm’s financial health.)

Myntra's Jabong buy may've nullified competition, but what about profits?
However, despite the Jabong deal, Narayanan is clear that there is no change in the path to profitability for Myntra. “By the end of the current financial year, we would like to be a profitable company. Probably we will get Jabong to accelerate in terms of profitability,” he adds.

The current status, according to a March 2016 article in business daily Mint, is that Myntra’s revenue was up by 77 percent to Rs 758 crore for FY15 from Rs 427.26 crore a year earlier; however, its losses increased by almost three times to Rs 1,126.60 crore from Rs 386.10 crore, according to the filings with the Registrar of Companies.

Jabong seems to have fared better, as per a May 2016 report in The Economic Times. It registered revenues of Rs 243.78 crore for the first quarter of 2016 (Rocket Internet follows the calendar year principle to declare its financials) as against Rs 213.87 crore during the same period last year, while trimming its adjusted Ebidta loss to Rs 89 crore from Rs 121.70 crore in the corresponding quarter.  

These struggles with profitability, though, are a reality across the Indian ecommerce industry and the combination of fashion and lifestyle categories will potentially help improve the fortunes of the likes of Myntra-Jabong. Consider that, for instance, gross margins in the online fashion business are as high as 40 percent for branded goods and about 50-60 percent for private labels. Narayanan points out that online fashion and lifestyle together is pegged to be about a $40 billion market in India by 2020, while the overall ecommerce industry is expected to touch $100 billion in the next four years.

With a focus on expanding its categories in the online fashion and lifestyle space, over the last few months, Myntra has entered three new segments: Jewellery, home furnishing and personal care. Narayanan says he isn’t considering the acquisition route to ramp up its presence in these areas, but he is open to exclusive partnerships. In May this year, Myntra partnered with Tata Group’s jewellery brand Tanishq to sell Mia, its work-wear jewellery, on its platform. In June, it announced an exclusive tie-up with Austrian luxury jewellery and accessory brand Swarovski as well.

On the technology front, Myntra is investing in areas such as mobile and supply chain fulfilment experiences (like alterations and try-and-buy services).

While the integration of the two brands is an ongoing process, a lingering issue is the due diligence of Jabong. Typically in most M&A deals, financial and legal checks are conducted before the transaction is closed. In the case of Jabong, time was of essence and closing the deal took precedence.

Myntra's Jabong buy may've nullified competition, but what about profits?
But the Myntra team doesn’t seem worried. “From a documentation perspective, we are well protected with robust representations, indemnities and customary provisions we see in similar deals. We closed it in 48 hours guided by commercial acumen and jurisprudence,” says Ganesh Prasad, partner, Khaitan & Co, who advised Myntra (now part of Flipkart) on the acquisition of Jabong from GFG, which is backed by Rocket Internet and Swedish investment company Kinnevik.

However, the due diligence aspect is pertinent as Jabong has faced allegations of being embroiled in financial irregularities, including siphoning off of capital. But Narayanan brushes this aside, saying, “There may have been some financial irregularities in the past. There is nothing irregular currently. We found it clean and that’s why we bought it.”

These allegations, however, seem to have clearly hurt Jabong. From a valuation of about $1.2 billion in 2014, Jabong’s valuation nearly halved to $70 million in 2016.

Therefore, for GFG, the deal meant that it could cut its losses and focus on more profitable businesses. “Following a strategic review of its Indian operation, the GFG board concluded that Jabong’s position as India’s leading fashion ecommerce destination would be best served through a business combination with a local player,” GFG said in a statement on the transaction on July 26.

Jabong’s losses and India’s highly competitive ecommerce market also seem to have swayed GFG. “The transaction will de-consolidate our highest loss-making operation while delivering capital that can be deployed in high-return opportunities across our footprint. While the recent operational improvements at Jabong were very encouraging, the ecommerce market remains extremely competitive and unprofitable,” says a GFG spokesperson, in response to an emailed questionnaire sent by Forbes India.

The man who finds himself at the centre of change at Myntra appears unflappable. This is despite the fact that, while growing up in Chennai, he had not thought he’d be in this position today. Narayanan was a student at Vidya Mandir, an academically acclaimed school whose students invariably populate the IITs. He went on to study mechanical engineering at the University of Madras after which, in 1998, he went to the University of Michigan in the US to do his masters in industrial engineering and operations research.

“I’m not a business school guy. During my college days, I had never heard of McKinsey; my dream job was to join engineering company Cummins Inc,” he says. However, Narayanan landed the job of an analyst at McKinsey’s Cleveland office as a campus recruit in 2000 and spent the next 15 years with the consulting major.  

“Almost nobody leaves McKinsey at a senior partner level. But I did for a couple of reasons,” admits Narayanan, who got introduced to Flipkart co-founders Sachin Bansal and Binny Bansal, and Myntra’s founder Mukesh Bansal through a common friend. “I liked them as people and thought I could relate to them. I liked their combined vision of building a new-age company. Also, an independent operating role and taking Myntra from one point to the next level influenced my decision to take that plunge.”

It also helps that his daughters believe he now has “the coolest job in the world”. That has to be inspiration enough for the family man Narayanan, who has three children Nayantara, 11, Shreya, 7, Aarya, 4, and two Golden Retrievers. His wife Sandhya runs her family-owned chain of diagnostic labs in Chennai.

A year on the new job, Narayanan has discovered a new-found love for fashion. “Earlier I never thought about colour palates and textures. From a staple of black, blue and grey suits, today I’m having a constant sartorial adventure. If you don’t go through that personal journey, it would be difficult to know what Myntra is about,” he says.

Because he keeps it personal, Ashutosh Lawania, co-founder, Myntra, says Narayanan also draws everyone else into the larger journey and vision.

“He is very inclusive, believes in collective decisions and solving problems together. For him, it’s work hard, party harder,” says Lawania.

And true to his words, during our second meeting with Narayanan, the Myntra team was getting ready for a party to celebrate the success of an 'end-of-reason' sale. The company had arranged transport to take its employees to the Manipal County Resort in Bengaluru and multiple announcements were being made to ensure no one was left behind.

Happily for Myntra, that can also be said for Narayanan’s leadership style.

(This story appears in the 02 September, 2016 issue of Forbes India. To visit our Archives, click here.)

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