When Mukesh Bansal stepped on to the stage and #flipkart‘s Sachin and Binny Bansal joined him, the industry’s worst kept secret was finally out: Flipkart had acquired Myntra. The deal, estimated to be over $350 mn in value, was finally sealed– nearly 4 months after the companies started talks in January 2014.
But it didn’t begin there. About a year ago, Mukesh Bansal and Sachin Bansal met up to talk about a possible partnership or even a strategic investment. “It didn’t make sense at that point of time,” recalls Sachin Bansal who had decided to pick up from where they left some other time.
The two had known each other for 7 years, although they weren’t exactly friends. Both had started out in 2007 as tiny e-commerce companies run out of nondescript apartments south of Bangalore.
In seven years, the Flipkart & Myntra were selling millions of dollars worth of merchandise to the Indian consumer, whose appetite for online shopping seems to be just picking up.
Although fierce rivals, the two had a lot of respect for each other. “We have learned from Myntra,” says Sachin Bansal, who calls Myntra a pioneer– one of the first new generation e-commerce companies in India.
Both were growing at breakneck speed, Flipkart clocking a billion dollars of gross sales in 2014 and Myntra with a 30% market share in online fashion retailing. Flipkart, the larger rival had raised $ 360 mn from investors and was almost a year into retailing apparel and fashion merchandise.
“Myntra had gone significantly ahead using less cash. They continued to be the market leader in the Fashion category,” admits Sachin, who had decided to enter the Fashion category in 2012 and had begun investing heavily into it (read our QnA with Sachin Bansal @UnPluggd).
The two were now locked in a head-on battle for a larger market share, quickly burning through cash and making losses in the bargain. “At that time what we were doing looked pretty similar. But what we are doing now is quite different and complementary,” said Sachin.
The Game Changer: Amazon’s Entry
In June 2013, Amazon entered India, a $450 bn retail market and started quickly ramping up operations. Egged on by common investors, Tiger Global and Accel Partners it slowly started making sense for Flipkart and Myntra to join forces. In January 2014, the two companies revived talks which ended in the acquisition earlier this week. In November, we’d written why the two companies must explore synergies.
Both Sachin and Mukesh deny that the acquisition was driven by common shareholders. “Doing something only for the common shareholders isn’t fair,” he says. When talks progressed, Flipkart’s 10 member board decided to keep the common shareholders out. “They were not part of any of the negotiations or deal terms,” he said.
Kalaari Capital and IDG Ventures are also large shareholders in Myntra whereas the South African media conglomerate Naspers is a large shareholder in Flipkart. In July 213, when Naspers picked up an additional 8.6% stake in Flipkart, the retailer was valued at over $1.6 bn.
“We weren’t talking of an acquisition in the beginning,” says Sachin. But soon enough, they discovered that Mukesh Bansal was thinking of a long term play, just like they were. He was not going to give up that easy. That would mean a long drawn out battle which could hurt both the companies and common investors.
But with an acquisition, the price competition is now set to come down. In Indian ecommerce, prices have been driven down by competition to a large extent. Deep discounting is also a common practice.
“It flows from the philosophy that the Walmarts of the world have had in the past and that will continue but a little bit of competition comes down,” Sachin pointed out. Flipkart and Myntra will operate as separate entities.
For the consumer, very little is likely to change. Flipkart, which has 18 million registered users and 3.5 million daily visitors, is likely to start selling Myntra’s private labels on its site while Myntra continues to focus on the Fashion category.
“This acquisition is about scale..and independently going in our directions much faster,” says Binny Bansal, the other co-founder at Flipkart.
On the backend, Flipkart and Myntra will combine their strengths over time. Flipkart’s logistics arm and payment gateway will now provide service for Myntra. The two companies also have much to learn from each other in terms of their knowledge and culture. “The knowledge itself will be the biggest value from the deal,” he says.
Walk into the two offices and you can feel the difference. While at Flipkart, one can spot young engineers and code scribbled on whiteboards, Myntra’s office is a lot more chic and its easy to spot fashionably dressed young men and women.
The New Role Models: Alibaba
In 2010, Sachin and Binny Bansal started meeting the Chinese online retailers. They found that market conditions in the early days of Chinese ecommerce was very similar to that of India now. “They used to have the same constraints that we have in India,” he says. Logistics and payments were a big part of the problem.
For a very long time, Flipkart wanted to be the Amazon of India. But increasingly, they have realized that they are more like Alibaba of China which was recently valued at over $100 bn and filed for an Initial Public Offering in the United States.
The size and scale of Alibaba dwarfs rivals. In 2013, Alibaba’s retailing websites Taobao, Tmall and Juhuasuan had 231 million active buyers in 2013. It had sold nearly $250 bn worth of goods. Alibaba’s payments company processed $519 bn in payments, a majority of which was for third party sellers and companies that don’t belong to the Alibaba group.
In comparison, India’s online retailing market is estimated to be about $3.1 bn in size. It is estimated to go up to $50-60 bn by 2020. Eventually, Flipkart will have to look at an Initial Public Offering and it is likely to be in the United States, which has shown great appetite for the Chinese stocks. JD.com’s $1.78 bn IPO this week was oversubscribed 15 times in the US.
An IPO is clearly in the horizon for Flipkart but it will have to wait its turn until it begins its journey to profitability. “We could stop investing in growth and turn profitable if we want today. But that would be the wrong strategy because there’s still a lot of growth out there,” says Sachin, debunking the greater fool theory which some industry observers say has been playing out in the ecommerce business.
Wait, there’s more to the story!
Flipkart’s acquisition of Myntra is a landmark deal for Indian startups and the ecommerce industry. The two could be writing the future of Indian ecommerce! You can hear out the two cofounders : Sachin Bansal and Mukesh Bansal at UnPluggd this Saturday for an exclusive UnPluggd conversation with Ashish Sinha, Founder of NextBigWhat.
It doesn’t get any bigger than this! Block your seat!!
Date: May 24th (Saturday); 9 AM – 6 PM, followed by networking evening.
Venue: MLR Convention Center, J P Nagar, Bangalore.
Contact Details: Ashish [+9 196324 26043] OR Ankit [+9 198459. 86241].
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