Flipkart’s Jabong buy puts smaller fashion e-tailers on the back foot

By Myntra and Jabong give Flipkart about 60-70% of the market, leaving very little for the likes of Limeroad, Voonik


Photo: Bloomberg
Photo: Bloomberg

With Jabong in its kitty, Flipkart has not only managed to pip Snapdeal and Amazon in the race to lead the high-margin online fashion segment, at least for the time being, it has also put pressure on smaller online fashion retailers and Internet-only brands that are likely to struggle to scale fast and attract customers.

According to industry experts, Flipkart’s stand-alone fashion business, Myntra, which it acquired in March 2014 for about $330 million and now Jabong, which went to Flipkart for $70 million, will together command about 60-70% of the online fashion business, leaving very little for the rest of the entities to scramble for.

About 430 fashion and lifestyle start-ups have been founded since 2015, according to data provided by Tracxn, a start-up tracker, which together have raised about $481 million.

Start-ups such as Tiger Global Management-backed Limeroad, Sequoia Capital-backed Voonik or Koovs among others, which were perceived to be posing a challenge to Myntra and Jabong until recently, may consequently face the heat as they will have to acquire new customers and stay firm on their niche offerings against an extensive collection from Flipkart, Myntra and Jabong.

“We will leverage each other’s capabilities and focus on healthy profitable growth,” Myntra chief executive Ananth Narayanan told Mint on Tuesday.

According to Narayanan, Jabong’s strength is in international brands and Myntra has strong private labels. “We can offer our private labels on Jabong,” he added, indicating that there will be ample cross-selling between the three platforms, which may put smaller e-tailers at a disadvantage.

According to experts, such a consolidation will give the Flipkart entities the power to negotiate hard with merchants since they command a lion’s share of the market. Besides, cash burn in the form of discounts and marketing costs will decrease with foes now turning friends.

“This will give them (Flipkart, Myntra and Jabong) a lot of bargaining power with the sellers and the sellers will, in turn, have to adhere to their conditions because about 70% of the online fashion market is with them. The overall marketing costs will come down because a lot of marketing goes for pulling a customer away from the immediate competitor. This could give them significant bargaining power with sellers and media buyers,” said Sreedhar Prasad, partner, e-commerce at KPMG.

“In this category, the niche and specialised players will continue to grow if they are well differentiated and maintain customer experience. However, rapid growth in this category may become difficult since about 70% of the market will be with one player, which will get a large share of the trigger-based or impulse purchases,” he added.

Besides, with Flipkart entities now controlling a major chunk of the market and having a stranglehold over bigger brands, smaller e-tailers may now find it difficult to attract more investments at desired valuations and end up as attractive acquisition targets for other online marketplaces such as Snapdeal, Amazon and Paytm, according to industry experts.

In fact, Snapdeal, Amazon and Paytm were in the race to acquire Jabong at different points in time. Amazon was in talks with Global Fashion Group (GFG), Jabong’s holding company, to acquire Jabong more than a year ago, but the talks fell through over valuation. Jabong, back then, had an asking price of about $1 billion. In the last six months, GFG also held talks with Paytm and Snapdeal, which came the closest to buying Jabong before Flipkart snapped it up.

“They (the niche e-tailers) will definitely face valuation and investment pressure. Two key things in every investment are unit economics and road to profitability. Every company will have to prove itself on those counts because it will not have that long a runway that it had earlier. There will be certain challenges with the top three players coming together. None of them is going to challenge the top three. The rest of the guys may turn acquisition targets and other larger horizontals will also drive more consolidation in this space,” said P.N. Sudarshan, partner at Deloitte Touche Tohmatsu India Pvt. Ltd.

Fashion, which offers higher margins to online retailers when compared with mobile phones and books, is expected to overtake consumer electronics as the largest category—at 35% of total online spending—by 2020, according to a June report by Google and consulting firm A.T. Kearney. Online retail is expected to surge to $60 billion by then.

An investor in one of the niche fashion e-tailers said on condition of anonymity that though the Flipkart entities will occupy a bigger share of the consumer mind space, there is enough scope for other businesses to exist because fashion is a largely unorganized segment. Though smaller brands will have to spend significantly on marketing to acquire customers, the ones to be immediately impacted are the fashion businesses of Amazon and Snapdeal.

“Smaller brands, say the online-only brands, will exist as they have a differentiated offerings and are not always available on any of the marketplaces. But, they have to spend on marketing to acquire customers and propel the next phase of growth. But the immediate impact will be on Snapdeal and Amazon as fashion is a very high-margin category, where margins can be anywhere between 25-70%, making it as important a segment as electronics,” the investor said.

Smaller competitors of Flipkart also believe that the acquisition will not have any immediate material impact on them as the latter will now have to account for Jabong’s losses and burns, which may prompt it to rationalize costs.

“For Myntra or Jabong, their destiny does not depend on their own success. It also depends on Flipkart’s success over Amazon. Besides, Flipkart as a company has a certain burn rate and funding requirement. Jabong also has a certain burn. Hence, for Flipkart’s fashion division, the burn will also increase just as the number of customers increase,” said Sujayath Ali, co-founder and chief executive at Voonik.

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