Flipkart to control 70% of online apparel market after Jabong buy

The acquisition of Jabong will help e-commerce company Flipkart strengthen its position and control almost 70% market share in India's growing online apparel shopping segment.

According to sellers and executives who work in the online apparel commerce industry, Jabong commands around 25% of the online fashion market despite losing steam over the past year due to internal issues, top-level exits and the parent Global Fashion Group's decision not to pump in more money into the Indian entity.

Myntra and Flipkart together hold around 45% of the fashion e-commerce market.

Although Jabong has been making losses, its performance has been improving as it cuts discounts. Its revenue grew 14% to Rs 240 crore in the first three months of this year and it narrowed its operating loss.

The revenue numbers of previous financial years show that Jabong was bigger as a 'marketplace' compared with Flipkart-owned Myntra, even as the latter burnt more money during the year ended 31 March 2015.

Regulatory filings show that Myntra's revenue rose 70% to Rs 746 crore but its expenses climbed at twice that speed during FY15 due to employee compensation and an increase in inventory. Myntra's wage bill grew five times to Rs 210 crore and was bigger than what it spent on advertisements. Staff expenses surged due to a 30-fold jump in stock-based compensation.

Meanwhile, Jabong as a marketplace doubled its revenue to Rs 1,083 crore but bled far less in the same period.

To be fair, the financials of Xerion Retail Pvt. Ltd, which runs Jabong.com, and Myntra Designs Pvt. Ltd, which operates Myntra.com, are not strictly comparable.

This is because a comparison of the bottom line of the marketplaces of Jabong and Myntra needs to incorporate the losses of their associated vendors.

Jabong's key expenses, including its advertising bill, are borne by its main vendor Jade eServices Pvt. Ltd. On the other hand, Myntra's key vendor, Vector E-Commerce Pvt. Ltd, churned out a nominal profit.

Myntra and Jabong did not respond to emails seeking comment.

Myntra's vendor stronger

As a marketplace, Jabong is bigger than Myntra but the latter seems to be far bigger in selling products from the in-house vendor. Both the firms have separated what would be their internal vendor to comply with foreign investment norms in e-commerce.

While FDI in marketplaces--which essentially provide a platform for others to sell on the internet or app--is allowed, there are strong restrictions on foreign-funded e-tailers. To get around the norms, most e-commerce firms in India have created two-tier legal structures separating ownership of the front-end marketplace with the seller or vendor.

From that perspective, Myntra's vendor Vector E-Commerce was 50% bigger than Jade eServices in FY15. Jabong's key vendor Jade eServices was deep in loss while Vector E-Commerce clocked a nominal profit. As stated earlier, if the losses of both entities for the two ventures are combined, Jabong appears to have clocked a net loss of Rs 520 crore as against Rs 740 crore for Myntra.

The firms are yet to file the annual financials for the year ended 31 March 2016. But Global Fashion Group said on Tuesday Jabong posted an adjusted EBITDA loss of €56 million ($61.6 million, or Rs 415 crore) on net revenue of €126 million for the 12 months ended 31 March 2016.

This shows that Myntra, thanks to backing from Flipkart, which acquired it two years ago, pumped up competition at a time when Rocket Internet started focusing on cutting losses. Myntra, which recorded gross merchandise value (GMV) of Rs 2,569 crore in FY15, was aiming to reach GMV of Rs 6,436 crore by 2016, according to its balance sheet notes. GMV captures the value of goods sold by an e-commerce venture before discounts.

Jabong's number of orders on its site remained flat in the third quarter ended 30 September 2015 over the year-ago period. Although it grew the value of goods sold during the same period—reflecting a rise in the basket size of products purchased by consumers—the near-static number of transactions showed how the firm is facing a challenge as it slowly pulled down discounts to trim losses.

In the next quarter too, Jabong faced severe pangs. Not surprisingly, Jabong's parent Global Fashion Group, raised fresh funding from its existing investors at a sharply lower valuation. The transaction valued the company at €1 billion. This is a drop of almost 68% from its previous funding round in July 2015 when it was valued at €3.1 billion.

Jabong's deal with Flipkart comes at a far lower valuation that the asking valuation of around $1.2 billion, when it was looking at a buyout by Amazon. Talks with Amazon had failed over valuation mismatch.

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