A few days ago, Indian retailing leviathan Flipkart gobbled up one of its competitors, fashion online purveyor Myntra, the 3rd largest Indian e-tailer in a deal—the largest in e-commerce so far—estimated at $250-350 million. Many of the news reports following this deal proclaimed it to be a watershed. One, in a hagiographic turn, called Sachin Bansal, one of the co-founder of Flipkart, a consummate risk taker.
Indeed, founding any business in India and building a premium brand name for it like Sachin Bansal (and his co-founder Binny Bansal did) is no small feat. And even if it was a model built in a mirror image of Amazon, doing it in the early days of the internet in India with few users and a terrible logistics infrastructure required some guts.
But what really lies beneath the deal, apart from the usual banal suggestions of synergy and efficiency?
A few have pointed to e-tailers being awash in a river of red. According to the Economic Times, Flipkart loses Rs 70 crore a month while Myntra is not just bleeding but also rapidly losing market share to competitors like Jabong and other fast-rising fashion e-tailers. In 2013, Flipkart lost Rs 281 crore (US$47 million) on revenues of Rs 1,180 crore (US$197 million) while Myntra lost Rs 134 crore (US$22 million) crore on revenues of Rs 212 crore (US$35 million) Which is why, combining forces—in other words, sharing a logistics and technology backbone, as well as customers—will stem that tide to some extent, is the thinking.
So far, the strategy in e-commerce has been to raise money like gangbusters (Flipkart raised US$541 million in five rounds of funding while Myntra has raised US$125 million) in the hope of simply out-muscling the market, but as Flipkart—or rather, the company's investors Accel Partners and Tiger Global Fund have found out, there is a limit to doing that.
One reason why that's the case is because of a certain shark named Amazon that has started patrolling the waters in India. After the China disaster Bezos is apparently very focused on making India a gargantuan success and has already made huge gains in its supply chain, advertising and customer acquisition. Apparently, the US retailer, in just one year has received a staggering fifty-percent of Flipkart’s website visitors
According to KPMG in just a year, Amazon India has garnered half the visitors of Flipkart (6.78 million vs. 13.22 million). And, with FDI in retail around the corner—even if the government doesn't go all the way they are likely to introduce significant concessions—it could completely upend the landscape.
Once deep-pcoketed Amazon and Walmart are able to introduce their own products after being able to afford shifting to an inventory model (which is what Flipkart was in its earlier avatar before getting hammered by working capital headaches) others may find no room to maneuver. Tack on the fact that traditional retailers are quickly ramping up their e-commerce efforts and the situation begins to look even more bleak.
Which is why Myntra makes sense for someone like Flypkart. The e-tailer gets to add-on the leader in the hottest growth category in e-tailing—fashion—and one that has the fattest margins, something I wrote about here and here. The combined entity already has 50 percent of the market and is expected to increase that to 70 percent with this fashion-focused acquisition.
Of course, all of this is just academic if you listen to one of India's astute observer of the e-commerce space, Mahesh Murthy, co-founder of VC firm Seedfund who had a list of stinging criticisms and bleak observations about the Flipkart deal on quartz.com.
Murthy points out that Flipkart has a habit of buying other firms and promptly shutting them down (Letsbuy for example) and that in every one of these acquisitions, there was one common factor—VC Accel Partners. If you look at just Flipkart, Myntra and the defunct Letsbuy, one more common name crops up: New York-based Tiger Global.
Says Mahesh: "So this was perhaps less about finding a great acquisition opportunity and more about the funds who own these firms taking five eggs from five wobbly baskets, putting them all into one larger basket and hoping it wouldn't wobble so much. Add that to the disclosure that the founders of Flipkart are now on salaries of nearly US$2 million each—an extraordinary number by Indian standards for young first-time entrepreneurs running a loss-making company, and you'll see that this is perhaps less about entrepreneurial passion to hack it and more about trying really hard to make The Great Indian Roll-up work for its investors. Hardly the watershed e-commerce moment that’s being talked about."
The fact is, Flipkart's founders and investors are, as Murthy points out, desperate to cash out by IPOing before they run out of money in a few years but India's stock exchange rules prevents a money-losing company like them from doing so. And India's e-commerce industry, while gaining traction, is far from the juggernaut that is China—70 percent of its $13 billion market size is made of travel companies that list gross receipts within this number.
In other words, the US$3.5 bilion annual e-tailing industry is just about what a 4th largest player in China makes in one day. Of course, India's smartphone market is exploding and mobile shopping is fast becoming an accepted practice. But it's stall a long, long way off to justify what people like Murthy say are insane valuations for e-commerce companies in India.
So, better for VCs to make their investment an attractive overall package for a great white like an Amazon or a Rakuten who may be cruising around for a good deal.
And if that doesn't work, Murthy says that the company and its founders will be sure to think of some other way to cash out.