The answer to why Flipkart acquired Jabong is here

Flipkart has always been in the news doing something or with something being done with reference to it. It has now acquired Jabong – The online fashion retailer. The move didn’t surprise many as the news of Jabong finding a suitable seller was in the news since sometime now. But the surprising element for a few observers was Flipkart buying it after having been a witness to an onslaught of valuation downgrades by its investors.

The move could prove to be a strategic one as Flipkart needs to recoup and resurrect to avoid the disruption caused by Amazon in the market. This move was followed by an earlier acquisition of Myntra. Flipkart is trying hard to maintain its position against the tough competition from other big players. Flipkart is also under pressure to increase the revenues and glamorize its bottom line as soon as it can.

Jabong, on the other hand, has not been able to cope up with the brutal competition for deep discounts in pursuit of new customers and was in search of a buyer.

Flipkart Strategies

“Unity is Strength!”

It is a well known fact that everyone except Amazon has to depend on the investors in getting money to proceed with the plans. Amazon can easily pour billions of dollars into the Indian market compared to others who have to fight it out in order to raise money. Amazon has recently announced plans to invest 5 billion dollars into its Indian operations.

It is not possible for Myntra or Jabong or Flipkart or Snapdeal to pull something of that tune in the current scenario and that could possibly explain the reason behind this acquisition which implies the concept of fighting it out together against the emerging power instead of fighting among themselves.

Flipkart and the already acquired Myntra were already holding a large chunk of market share in online fashion and lifestyle Category. By acquiring Jabong they hope to increase the market share further more as they believe acquisition will give access to a large customer base, increased territorial reach and a great team. It seems Flipkart hopes to combat the challenges posed by mighty Amazon and other players by concentrating on fashion segment.

Flipkart’s decision makes great business sense even when we see this in the backdrop of what happened to Yahoo!, Who was once the leader in the Internet industry. It once had golden opportunities to acquire both Google and FaceBook. Had those acquisitions materialized, the story would have been entirely different. Now, they sold their core business to Verizon for $4.83 billion which is meager when compared with all the lead they initially had.

Another factor could be that – Flipkart wouldn’t want the Flipkart-Myntra magic to be recreated by Snapdeal-Jabong. In the Process, Myntra will also have one less competitor to worry about!

While Jabong has been hemorrhaging money, it still has a great set of brands, logistic know-how, and substantial learning from four years of ops. Quite a few new players — Tata Cliq, ABOF — would love that and it would add value to them. This acquisition denies them that possibility.

According to the PTI report, Jabong narrowed down its gross loss to Rs 46.7 crore for 2015 on the back of lower level of discounts from Rs 159.5 crore in 2014. Its net revenue rose 7.1 per cent to Rs 869.1 crore in 2015 compared with Rs 811.4 crore in 2014.The GMV (gross merchandise value) in 2015 increased to Rs.1,502.9 crore compared with Rs 1,320.6 crore in 2014.

If in this case, Myntra did not buy Jabong, Jabong could’ve been bought by Snapdeal or Reliance giving them wings to grow stronger. When you’re a strong player in the market and have a few competitors around, the ideal goal should be to finish the competition; thereby not giving a chance to have multiple options for the customers to go to. Consolidation gives more power than playing in a scattered market. Post the acquisition, Myntra will have access to “a combined base of 15 million monthly active users” as per the press release on the development.

After the acquisition of Myntra by Flipkart, There Reportedly was huge effort by Amazon India to sign a deal with Jabong. It didn’t work out.

About The Acquisition

Flipkart, India’s e-commerce giant, has acquired online fashion portal Jabong for $70 million from Global Fashion Group through its fashion unit Myntra, beating rivals including future group and Snapdeal. The combination should help the company take on the increasing competition from Amazon’s Fashion Category in India. However, it was clarified that Jabong and Myntra will operate as separate brands.

Flipkart got a cut-price deal, paying just $70 million for Jabong, which was worth as much as about $508 million in December 2013. Kinnevik and Rocket Internet, the promoters of Jabong, took a massive cut, but would probably be happy to see the close of a sale that has been in the making for over a year and which, at one point, looked like going nowhere. Moreover, $70 million all-cash isn’t a bad deal for Flipkart and that too for getting a full-fledged working company. And for Jabong, they have got a chance for revival.

About $20 million was poured into Jabong just to keep it afloat for 1 year and begin the search for potential buyer. For Flipkart, the acquisition of Jabong will extend its dominance in the fashion space and is seen as a move by the company to preserve its position as India’s No.1 e-commerce marketplace in the face of an onslaught by Amazon India. Flipkart is doing everything that it can to maintain the coveted status of market leader.

It is pertinent here to note that the fashion and apparel segment enjoys the highest gross margins globally among all e-commerce business segments. The Acquisition will help Flipkart further penetrate into the fashion category.

Industry Trends

According to a June report by Google, Fashion Retail, which offers higher margins to online retailers compared with mobile phones and books, is expected to overtake consumer electronics as the largest category at 35% of total online spending by 2020.

Everyone wants to be a market leader and wants to acquire a larger chunk of the market. In this fashion specific category Myntra and Jabong being biggest rivals the deal sounds to be logical when it was seen that Flipkart is struggling in most other segments when compared with Amazon. So, this move is aimed at strengthening itself in fashion category where profit margins are high.

Competition in Indian e- commerce industry is very high. When it comes to fashion, there are lots of players like Flipkart, Amazon, Paytm, Snapdeal, Zivame, limeroad and a few bigger players are itching to come in. It is extremely difficult to survive here unless one has deep pockets. Jabong was already trying to reduce the cash burn by stopping discount sales still the losses were pegged at around 46 Crores in 2015.

Future

This move is targeted at the rival Amazon. The entire ecommerce industry in India faced losses of about 8,000 Crores in FY15 whereas the leading players like Flipkart, Amazon and Snapdeal collectively lost around 5000 Crores. Even in such an atmosphere, Flipkart still managed to increase its share from 44% to 45%, thereby capturing the maximum market share in the ecommerce industry.

And reportedly, Jabong managed to reduce its loss in the same FY15. Hence, Flipkart acquired Jabong and merged it with Myntra who is already playing the lead role in fashion segment. It looks to me as if Oligopoly in the ecommerce industry is slowly moving towards Duopoly – Flipkart and Amazon.

The resulting increase in the revenues through this merger will also help Flipkart in the next round of funding in terms of its valuation.

We might get to see more news of such mergers and acquisitions as the market is maturing and most of the smaller fishes will be gulped by the larger ones.

More about Flipkart

More about Jabong