Flipkart’s Jabong Buy Shows Online Commerce Is In Consolidation Mode

Two years after buying Myntra for a whopping Rs 2,000 crore, Flipkart has now acquired Jabong, a major player in the fashion and lifestyle segment. The valuation of the latest acquisition has not been made public, but according to Livemint, the fashion etailer was seeking a valuation of $100-150 million.

Jabong tried to sell itself to Amazon last year but the deal reportedly fell through because of over-valuation. The global e-commerce giant, run by world’s third richest man, Jeff Bezos, probably didn’t find it worth their money.

However, one reason why the deal has gone through this time may be that Jabong has drastically cut down its losses to Rs 46.7 crore in 2015 from Rs 159.5 crore in the previous year. The company has seen a 14 percent jump in net revenues from euro 28.6 million in the first quarter of 2015 to euro 32.6 million in the same period this year.

Flipkart is also feeling threatened by the spectacular rise of Amazon in India. It has not been effective in stanching the flow of its customer base to Amazon, which is now the second biggest player in the market.

Consider this Times of India report which was published a month ago: Flipkart has seen its GMV (gross merchandise value) run rate stall at about $4 billion for almost a year, while an aggressive Amazon has gone from clocking $1 billion to $2.7 billion in gross sales. Snapdeal has registered an almost 50 percent knock-down in sales numbers and, as of June, its GMV run rate was around $2.5 billion.

GMV is the overall sales on an online marketplace, excluding discounts and returns.

As evident from the above numbers, Flipkart is fast ceding space to Amazon. While its earlier move to acquire fashion brand Myntra may have been a sound business decision, the latest one looks more like a strategy to grow big to take on its main rival. Amazon has already pumped in $2 billion to expand its footprint in India and pledged $3 billion more in the near future. Chinese e-commerce giant Alibaba is also looking to make a debut in India. In this scenario, Flipkart’s new move makes sense.

Will consolidation help Flipkart in taking on Amazon? Only time will tell. The e-commerce players, almost all of them, are still more concerned with growth than profits. For them, scale comes first and consolidation or merger or acquisition helps in achieving that goal. But at some point investors will start looking at the margins too. These firms will have to tweak their models to start delivering for bottom line for sustainability cannot come by increase in negative gross margins.

Consolidation of these fashion etailers (Flipkart, Myntra, Jabong) will definitely help in achieving the desirable goal of creating a fully self-sustained supply chain. It is easy to do so in textiles compared to other areas. Yepme, for instance, has created its own brands in such a short time since inception.

What’s next for Flipkart? Are more acquisitions on the horizon? According to this report, it is planning to invest Rs 670 crore to create a new digital payments business. It had acquired a startup called PhonePe three months ago for this purpose.

Earlier this year, Alibaba was in talks to buy a stake in Flipkart. It is already an investor in Paytm and Snapdeal. Can the Chinese giant even push for the merger of all three – Flipkart, Snapdeal and Paytm – in future to take on its American rival Amazon? The possibility cannot be ruled out. However, once Paytm becomes a payments bank, mergers will be tough, for the Reserve Bank of India does not allow banks to merge into commercial businesses.

One thing is certain. Be it e-commerce or other online businesses, consolidation is the way forward. In the case of Flipkart, it is a fight for market share. For others, it could be driven by investors, who may want to consolidate their portfolio, thereby shielding themselves from risk exposure.

As Ketan Patel, senior vice-president at Kotak Mahindra Bank, says, “As we move on from customer acquisition to customer retention and revenue and profit, consolidation is going to happen. It is not something that we should shy away from but something we should look forward to.”