On 22nd May, Flipkart acquired Myntra. It is a big story in e-commerce sector and speculations have been all around. The most interesting and perhaps best cited reason for the deal is that they now jointly want to take on Amazon, a company with 20 years of global exposure. Amit Agarwal, the VP and country manager of Amazon India, said in response, “We don’t get distracted by competition”.
Deal details :
Sachin Bansal, the co-founder and CEO of Flipkart, has said in a press conference, “It is a 100% acquisition.” Mukesh Bansal, CEO of Myntra is going to join Flipkart board and will head fashion division of Flipkart. Myntra will run as an independent unit. Although none of the “Bansals” (Sachin, Binny or Mukesh) revealed any details of the deal, according to the sources, Myntra could be valued at more than 300 million USD (approx. Rs. 1800 crore).
Growth of online sector in India:
The e-commerce sector of India has grown significantly for last 5 years. People have got over the inertia of online payment, all thanks to the e-retailers to introduce transparent and lucrative offers. With the reasonable pricing of broadband connections, the spread of internet has grown more than ever. To add to this, reasonable presence of even faster connections like 3G, 4G LTE have inspired more “netizens” of India to go for online deals.
Advantages for Flipkart :
Present e-commerce sector of India:
Total retail space for India is around 600 billion USD. Out of that, organized retail constitutes 40 billion USD or 6.67% of the pie. With the help of Govt. policies, the organized retail has a huge scope for growth. The total size for e-commerce is round about 2 billion USD or 0.5% of the organized retail. The number of online users in India is in excess of 150 million. Currently, only 20 million online users do online transactions. These are rookie numbers and are expected to grow rapidly. Now, with the steep growth curve of spread of internet, there is a sizeable market opportunity waiting to be tapped. Under such circumstances, the e-commerce market is expected to grow to a level as big as 20 billion USD over next three to four users.
Industry consolidation :
Both Flipkart and Myntra are Bangalore based company and were established in 2007. None of them has yet reached the breakeven point. And as Sachin Bansal puts it “growth is more important” and profit will follow. However, from the investors’ point of view, the story is a little different. Sooner or later, they will always look for returns. So Flipkart and Myntra cannot afford to grow indefinitely without looking for profit. Now, Amazon is the big fish in the market with very deep pocket. They have the luxury of going for growth without caring for profit in the beginning given in online space price discount war is a major deal converter. So, it is in the well being of both Flipkart and Myntra to go for the industry consolidation. Otherwise it would be a matter of time for Amazon to take the lead.
Beating the competition :
Amazon came to India in 2013. Although its Junglee division could not make significant impact, Amazon.in has progressed swiftly over time. And given Amazon’s deep pocket, global exposure, high efficiency, matured technology plaform and pool of experienced executives, there is huge potential for Amazon to become the market leader in the growing e-commerce space of India. Being ex-employees of Amazon, Sachin and Binny Bansals can realize the pressure of the threat. On the other hand, Flipkart is the market leader in books and electronic gadget business in online space. It has a Gross Merchandise value of approx. 1 billion USD. Myntra is a big name in online apparel industry. The total size of apparel industry in India is around 60 billion USD. Gross Merchandise value of Myntra is 200 million USD. The size of Myntra is half of the largest online fashion store, Shoppers Stop. So, if Flipkart and Myntra come together but still can work as independent entities, there will be a diverse range of product portfolio to compete with the likes of Amazon which has 15 million products across 24 categories in its 11 month presence in India. Also coming together and using mutual facilities will help increase the cost effectiveness. So they did.
The analysts can feel the heat of the new battle among the online portals, probably even more so for the soaring temperature of hot summer. But the fact remains this is the first of its kind of acquisition our country has seen. Will this add fuel to the need for new growth strategy of Amazon India? Is Amazon looking for an acquisition in India? When asked, the executives did not deny it and tried to avoid the question. Now that triggers interesting next phase of the online battle.