The Big Question in Indian Internet Retailing: Will Flipkart Merge with Myntra?

Shabori DasAnalyst Insight by Shabori Das – Research Analyst

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The internet retailing channel in India is in a transitional phase. It is at a point where it is becoming one of the most used retail channels in the country, especially among the urban population. Both Flipkart and Myntra entered internet retailing in India in 2007 and have been able to change consumer perception of the channel. This has led to an increase in acceptance of online retailing and improved sales in this channel for many industries. Now there is speculation that these two companies are planning a merger in the next couple of months. This development would be the biggest partnership in online retail in India since its inception.

Flipkart and Myntra are two of the strongest players in internet retailing in India. Let me first introduce the companies to you. Flipkart is almost synonymous with internet retailing in India. The company came into existence in 2007 and gradually changed the face of online retail via its free shipping of books. Flipkart eventually entered other categories such as consumer electronics and appliances, beauty and personal care, personal accessories and eyewear, housewares and finally apparel and footwear. The company’s is currently valued at approximately US$1.6 billion and there is speculation that it plans to launch an IPO in the next fiscal year by offering its shares on the NASDAQ stock exchange in the US.

Myntra, which was founded in the same year as Flipkart, entered the channel via apparel and footwear sales only. The company then eventually branched out into beauty and personal care and personal accessories and eyewear. However, it remains primarily an online apparel retailer. While Flipkart revolutionised the concept of internet retailing, Myntra was responsible for changing the face of apparel online shopping in India. The company was one of the first to offer consumers their money back in the case of a return within 30 days rather than just a credit note.

What is the Reason Behind the Merger?

Indian online retailers start their operations with basic capital just to get the business started. However, the general practice following initiation of the business is for companies to raise funds with the help of private equity players and venture capitalists in order to keep the business going. The reason behind this practice is that, despite the high revenue generation, no online retailers thus far have made a profit, including Flipkart and Myntra, both of which have continued to incur losses.

Since its inception Flipkart has managed to raise funds worth US$560 million, of which, in 2013 alone, the company raised US$360 million in two rounds. Myntra, on the other hand, has so far raised US$125 million. As of 2014, both companies have three common investors, namely Accel Partners, Tiger Global and Sofina SA.

The three main theories behind the merger are as follows:

  1. Flipkart plans to extend its offering in apparel. This is because fashion, which includes apparel, footwear, personal accessories and eyewear, is the only category which successfully delivers an operating margin of over 30%, and hence is one of the most lucrative. Flipkart entered the category only in 2012, whereas Myntra has developed its expertise and leadership in the category since its inception. Hence, the merger will help Flipkart develop its fashion portal.
  2. Myntra is aiming to become approximately a US$2,800 million fashion company by 2020.To reach its target, the company needs further funding of around US$100-150 million. Flipkart has agreed to pump in this extra amount once the merger is finalised.
  3. Flipkart and Myntra together will be able to form the biggest online retail company in India, thus helping to build a strong front against international leaders such as Amazon and eBay.

Hence, the merger is more symbiotic in nature than just one company helping another. Both companies are positioned to benefit hugely from this partnership.

Challenges Ahead?

In addition to these expectations, the Enforcement Directorate (ED), a government law enforcement agency, is examining Myntra following charges of violating the Foreign Exchange Management Act. One of the norms of this act does not permit online retailing companies to have foreign funding when the business model is directly business to customer. As a result of this norm, which is applicable both in multi-brand and single-brand retailing, even Amazon is working in the country using a marketplace model, whereby different companies can use Amazon as the main portal to advertise their products. Flipkart, which uses a marketplace model, went through a similar examination, and now the Enforcement Directorate is in the process of reviewing Myntra’s operations, which use a hybrid model whereby the company is involved in both business to customer and business to business sales. Even though both companies have made public statements that their operations are in line with legal norms, this government review has slowed down the merger process.

Possible Outlook of the Merger

The Indian online industry will continue to grow strongly over the next five years as internet penetration in the country is set to increase by 10% annually, with the percentage of the population using the internet set to rise from 14% in 2013 to 23% in 2018.

The growth of online retailing will be driven by a combination of apparel and footwear, personal accessories and eyewear and beauty and personal care due to the higher operating margins offered by these products. Hence, the merger will allow both companies to possibly cut down on their logistics and operating costs by sharing infrastructure costs, and in the meantime expand their product offerings in fashion, especially apparel and footwear. It will be India’s answer to Amazon and eBay, both of which have increased the level of competition in the market in a very short space of time.

Both companies are still in talks to finalise the deal, although neither have declared any final word on this. Flipkart was valued at US$2.5 billion in April 2014 and Myntra at US$330 million. The latter is pushing for its valuation to increase to at least US$400 million. Furthermore, Myntra’s founder, Mukesh Bansal, has mentioned that the two companies would continue to work independently. Furthermore, the fashion categories of Flipkart would also be handled by him independently.

The interesting thing to watch out for will be, firstly, how the two companies will maintain their individuality and work independently. Secondly, can the companies together finally break even and hopefully even start making a profit? And thirdly, will the combined power of Flipkart and Myntra be sufficient to compete with global internet players? I think it will. With Flipkart’s impeccable delivery system and Myntra’s apparel line, Amazon and eBay definitely have something to worry about if the merger takes place. However, the Indian legal system takes time and so it might be at least a couple of months before we get confirmation as to whether the merger will happen or not.