Flipkart acquires Myntra to gear up for the battle with Amazon

Flipkart's acquisition of fashion portal Myntra today has earned the title of the biggest acquisition in the Indian e-commerce segment. The country's largest e-tailer acquired Myntra for an undisclosed amount, which the experts say not only strengthens Flipkart’s position in the fast growing online retail space, it also lends it enough ammunition to take on the deep-pocketed and fast emerging global e-commerce giant Amazon.

While both firms refused to give financial details of the transaction, various media reports estimated it to be in the range of $300 million-$330 million (approx Rs.1800-2000 crore). On May 6, Mint reported that it is a cash and stock deal. 

“The valuation at which this deal has happened, we are very thrilled. We believe it is a fair valuation and a huge upside for all of Myntra shareholders. It’s the right valuation for the company,” said Mukesh Bansal, founder and CEO of Myntra.  
Seven-year-old Flipkart.com is not new to strengthening and deepening its position in various categories. While it started as an online book store, within three years it expanded its product range to add mobiles and electronics. Two years ago, it added more categories like clothes, footwear, toys and accessories. Now, one can also find baby, home and kitchen products on their site. 

Fashion is their next big bet. It's an important business for e-commerce firms due to the high margins and faster growth potential. Online apparel retail gives gross margins of as much as 30 to 40 percent compared with lower gross margins in electronics and single to negative gross margins in books.  

According to Myntra, the combined entity will currently command over 50 percent of online market share in the fashion segment, while in the next 6-12 months it plans to increase its share to 60-70 percent in the online fashion space.  “Fashion is one segment where profitability can be achieved much faster compared with other categories as the margins are higher. As the revenue contribution from fashion increases we will have more profitable levers,” said Mukesh Bansal.

At present, for the combined entity electronics is the largest category, but fashion might become the largest segment in the near future, Flipkart said.

Today Flipkart also announced investment of $100 million in fashion business over the next 12 to 18 months, further highlighting the firm’s emphasis on this segment.  

“The number of women shoppers online is increasing in a big way. Clearly, Flipkart aspires to be a destination for fashion, they need to break some clutter of being a horizontal player and get buyers who look for fashion brands,” said Niren Shah, managing director, NVP India.

Experts point out that the Flipkart-Myntra deal comes at a time when the sector is gearing up for consolidation due to stiff competition. “Only the niche and/or the players with good financial muscle would be able to survive, the rest would look for acquisitions or being taken over, thereby, building a good case for consolidation in this segment,” said Sandeep Ladda, India Technology leader, PwC India, adding that the Flipkart-Myntra deal is estimated to be valued at around $250-350 million.

So far, Flipkart has made five acquisitions, including WeRead, a social book discover tool; online electronics retailer Letsbuy.com; rights to Bollywood news site Chakpak.com’s digital catalogue and Mime360, a digital content platform.

“It (consolidation) is good for the industry because it brings efficiency,” said Aashish Bhinde, executive director (Digital Media and Technology), Avendus Capital, an investment bank. “Acquiring Myntra will enable Flipkart to gain leadership in fashion which is a very critical category for mass e-tailers. Delivering a great customer experience in fashion is very different from doing the same for electronics or books. Myntra brings far greater depth in the fashion vertical.”

Both Flipkart and Myntra have raised multiple rounds of funding and have at least two common investors - Tiger Global Management and Accel Partners. Sachin Bansal, co-founder Flipkart clarified to Forbes India that common investors did not play any role in the transaction.

In fact he said it was the other investors that prompted the deal. “From our side it was Naspers and others while from the Myntra side it was IDG Ventures and Kalaari Capital,” Bansal said.    

The Indian e-commerce market was worth $13 billion in 2013, according to a report by KPMG and the Internet and Mobile Association of India. Online travel bookings contributed over 70 percent to e-commerce transactions last year.

The Indian e-commerce industry is fast turning into an interesting battle ground. Though it is plagued by high mortality of firms due to lack of capital, negative margins and no visibility on profitability in the race to scale up, the slugfest intensified after Amazon Inc launched its marketplace in India last year. US-based Amazon has already built a large product catalogue and is investing a lot more. Other contenders include Jabong and eBay backed Snapdeal.

“I don’t believe Flipkart did this (acquisition) as a defensive move to thwart competition. It is clearly driven by Flipkart's desire to deliver the best customer experience in its focus verticals. They are doing the deal to establish leadership in the fashion vertical,” said Bhinde, adding that immediate focus for Flipkart will continue to be on scaling up to establish leadership across verticals.

“Focus on profitability is likely to get pushed back by a couple of years given the strong three-way battle that has emerged,” he added.

Post this announcement, Flipkart and Myntra plan to work independently. “We will continue to work as independent entities and grow together as leaders in the Indian fashion and lifestyle industry." said Sachin Bansal and Binny Bansal, co-founders of Flipkart, in a statement.  

Sachin Bansal said an initial public offering is definitely on their mind but they would not put a date for it right now.

Investments in online services companies grew 23% in value in 2013, compared with 2012. There were 79 deals worth $722 million last year compared with 100 deals worth $586 million in 2012, according to PwC estimates. “Being a capital intensive segment, companies will have to remain attractive to the investors to attract more investments for scaling up. If not, they would be deprived of funding and hence, would look to be acquired,” said Ladda.

On his future goal, Sachin Bansal says he is inspired by China's Alibaba, "Our role model today is Alibaba.com. Alibaba is a big inspiration for us. What they have done is very unique. They have been able to create a whole e-commerce eco-system. If we are able to do half of what they have done we would be very happy."