Sources told FE that Flipkart wanted to cement its position in the high-margin online fashion space, where Myntra is a leader with around one-third of the market share, to realise its full value in the public offering.
Flipkart co-founders Sachin and Binny Bansal, at the announcement on the acquisition last Thursday, said IPO was the way ahead but declined to reveal future plans.
According to sources, the acquisition, believed to be one of the biggest in the Indian e-commerce space, has given Flipkart the scale, size and scope deemed fit to go the IPO way.
The consolidation, believed to be orchestrated by common investors Accel Partners and Tiger Global, will help Flipkart gain around half the market share in the apparel e-tailing segment. Sources said by merging their common portfolios, the investors aim to reap a rich harvest at the IPO after remaining invested for over five years now. There were reports of some early stage investors exiting Myntra after the acquisition, while Flipkart has maintained that none of the investors would exit the company at present.
According to industry observers, the consolidation was a step forward to counter Amazons burgeoning presence in the country as well as opt for an overseas listing. I think the reality of this deal is that it will help Flipkart list. Its difficult to script a good story without high margins of the garments and it will help them give investors exits and get more funds, Suchi Mukherjee, CEO and co-founder of LimeRoad.com, told FE.
The deal has surprisingly failed to fray many nerves. According to Mukherjee, the online fashion market is way bigger and businesses can actually make an impact by maintaining high user engagement on their platforms, thus offering a differentiated experience to buyers. Its hard to build the fashion business by focusing on discounts alone. If your selling experience is not differentiated, its serious thinking by investors, board and the management, she said.
Apparels being a high margin business, gross margin ranging between 15-60%, Flipkart may have seen value in acquiring Myntra before opting for an IPO. The acquisition helps Flipkart ramp up its apparel business and occupy 60-70% of the online fashion space by leveraging that differentiated fashion experience that Myntra offered and Flipkart lacked.
Jabong founder and MD Praveen Sinha pointed out that the investor and entrepreneur interest in e-commerce had waned a little in the last one year. The bigger players stand to gain the most with this gradual revival in interest. The interest is coming back and its more focused on established players. They are getting investments to the tune of $50-100 million, Sinha said.
According to Sinha, the deal is unlikely to impact other fashion e-tailers. The acquisition will add to Flipkarts assortment but wont make a difference to us. We were already competing with Flipkart and Myntra separately. In terms of competition, its just an aggregation of two players who were already there, he told FE.
Given that the $3-billion Indian e-commerce market is expected to scale at least three times in the next couple of years, there will be room for more than two or three players to do brisk business. Distress buyouts will give way to power deals, Sinha said. But, I dont see many of them happening. One is good enough for the time being, he added.