The acquisition of Jabong by Flipkart unit Myntra last week appears to be a marriage made in heaven. Jabong and Myntra are India's two biggest online fashion retailers. Though they will continue to run separately, the $70 million deal allows Flipkart, India's biggest e-commerce company, to boost market share in fashion — the second largest e-commerce vertical after electronics — and become the one-stop destination for online fashion in India.
The first reactions to the deal were that further consolidation is underway in the online retail space. Indeed, Jabong-Myntra itself could lead the consolidation wave. Ananth Narayanan, CEO, Jabong and Myntra, says the Flipkart group is open to more acquisitions for the right price and player.
"We do know India is an unbranded market, but we believe the market share for branded fashion will grow as the economy grows and people have more money to spend." Smaller online fashion retailers now face two challenges. One, they have to deal with a formidable competitor. Flipkart owns two of the most visited fashion and apparel e-tailers in the country.
Jabong and Myntra boast 15 million visitors a month, or about half a million a day, and chalk up a gross merchandise value (GMV, or the total value of inventory sold) of about Rs 10,000 crore a year. The combine will hold about 60-70% share of the branded apparel market online. In contrast, the GMV of most small players is less than Rs 200 crore a year. Smaller companies such as American Swan, YepMe and Voonik attract less than 2 lakh daily visitors.
Two, they risk a severe funding squeeze. Investors will be reluctant to part with money to compete with a combine that boasts superior brand recognition, logistics, customer experience and deeper pockets. Myntra and Jabong raised $150 million, according to VCCircle, a venture investment tracker, prior to the deal compared with smaller outfits' less than $50 million.
"With a formidable competitor in the fray , companies imitating Jabong-Myntra won't get funding and will have little option but to shut shop," says Sandeep Ladda, leader, technology and e-commerce, PricewaterhouseCoopers (PwC). Already, a clutch of online fashion retailers such as Fashionara, Freecultr, Zovi, Fashion and You have either shut down or are on the brink.
Does that mean this is the end of the road of the small companies? Not necessarily. Online fashion retail in India is vast and diverse at that with 839 startups vying for a slice of a growing market, according to startup tracker Tracxn.
The Indian apparel and fashion market is worth around $150 billion and online retailers have merely scratched the surface — their transactions so far are worth only $3 billion. According to consultancy KPMG, about 25% of e-commerce sales centre on fashion and lifestyle and its share will increase to 35% by 2020.
"No single company can aggregate it all in fashion," says Sandeep Agarwal, co-founder, Shopclues, a large online player that sells branded and unbranded apparel. "Fashion and apparel is not a 'winner takes it all' market. It's fragmented with room for both small, niche and large players to exist."
Size apart, the presence of hundreds of players in online fashion is also owing to the huge margins — gross margin of 40-50% an d net margin of 12-15%. Even with deep discounts, the huge margins enable online fashion retailers to experiment with prices.
The Meek Will not Inherit
Sreedhar Prasad, partner, e-commerce, KPMG India, says fashion and apparel startups fall in three broad buckets. One, the general apparel players that compete with large players like Flipkart and Amazon . Two, specialist verticals. And three, companies that are trying to differentiate using content, technology or/and customer experience. The first category is mostly "me too", the second and third cater to 'loyalty leads to business', with a high percentage of repeat buyers, according to Prasad.
"There's room for many since the market is growing but the 'me-too' players will have to really differentiate and have a clear model or else may end up shutting shop." Shoppers are not loyal. If a small e-tailer offers the same product as a large one, the smaller ones will find it difficult. The cost of custome r acquisition and unit economics favour the large seller.
To cite an example, the cost of customer acquisition for a small e-tailer is Rs 1,200-1,500 per customer (spent on promotions/cash back etc) while for a large rival it is less than half that amount because of the better reach of the latter.
"If there's no differentiation, customers will buy at bigger marketplaces due to the perception of better service, delivery, logistics etc," says Niren Shah, MD, Norwest Venture Partner, India.
Praveen Bhadada, partner, Zinnov, a consulting firm, also sees no future for me-too players. "For these players, value will be in personalization or building strengths in a niche."
Voonik is one such online retailer that is looking to differentiate. The company, which raised $3 million on July 29 from Temasek backed InnoVen Capital, taking total capital raised to $27 million, is focused entirely on the unbranded category. That way it steers clear of Myntra and Jabong, which sell more than 1,500 brands in total. "We have more than 20,000 sellers and we don't do discounts," says Sujayath Ali, founder and CEO, Voonik.
There are plenty of small players following a similar rulebook. Limeroad focuses on user generated fashion, RockNShop sells only select brands like Chiara Ferragn i, Chloe and offers customers EMI schemes, StyleTag does fashion flash sales, Zapyle allows shoppers to buy and even sell clothes, Flyrobe offers branded apparel on rent; YepMe is a private label, with 70% sales from its own site and the rest from marketplaces.
Not Just for Big Boys
Jabong-Myntra's Narayanan says despite its formidable size, there is room for multiple players to grow as he expects the market to expand from $3 billion to $40 billion in the next four years. ShopClues' Agarwal says India is a diverse market and no single player will dominate fashion. "India is not like the US market, where, say, the top 15 brands command a 60% share of men's shirts. In India, top brands (like Zodiac, ColorPlus, Wills etc) have a less than 5% share in men's shirts."
For example, StitchFix of US market and Asos in the UK dominate online fashion in their countries while Amazon, present in both these markets, gets less than 10% of its GMV from fashion. Simi larly, e-commerce giant Alibaba has a 60% share of the Chinese market, but Chinese online discount etailer Vipshop also sells fashion worth $8 billion.
Suchi Mukherjee, founder, Limeroad, an online retailer that sells brands like Vero Moda, Only and Ritu Kumar, says lifestyle is not sold in horizontals (like Flipkart, Snapdeal etc) and it's not a search business. "Looking for a razor, USB, mobile, socks etc is not the same as looking for fashion wear. Most fashion is sold on discovery and we help people discover new, user generated content. My competitors are not the horizontals."
Mukherjee insists people don't buy fashion products by typing on the search bar but by browsing and discovering styles. Narayanan agrees. That's why Flipkart has kept Jabong and Myntra separate, he says.
Vivek Gaur, CEO YepMe, says Amazon did not win fashion anywhere. "We are like the telecom business back in the 1990s. Less than 40 million people out of more than 450 million internet users shop online. We have a long way to go." YepMe, a private label funded by Capicon, JS Capital, TCS Capital (a hedge fund in New York) and Malaysia's Khazanah, has an omni channel strategy. It plans to open 400 stores by the year end.
It will be this ability to differentiate, to adapt that will help smaller players survive. "Companies need clarity in unit economics, clear path to profitability, and have a differentiating factor which evolves over time," says KPMG's Prasad.
Not everyone succeeds. A few companies like Fashionara tried hard to build scale but failed. Post the Jabong-Myntra, Flipkart's bigger competitors like Amazon, Snapdeal, Shopclues and Paytm will all be looking to up the ante. Flipkart itself will not sit idle. "Curation and selection are the key and we will focus on that," says Narayanan. Days before the acquisition, Jabong had reduced the number of brands from 2500 to around 1500, in a bid to focus on high selling items.
"We are looking at how to get a big share of the pie (that is $40 billion by 2020)," says Narayanan. For now, the pie is big enough to feed even the raft of small players. The future is a different matter.
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