E-commerce

Jabong – the un-making of a unicorn

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The general expectation around startup valuations, especially of those backed by huge funding, is that the curve goes to the top as it moves right.

That general consensus is that this is the right way to build a startup towards a well-deserved exit.

On the other hand, this is the wrong way:

Early 2015: Called off discussions with a potential acquirer to exit for $1.2B

Mid 2015: Turned down offer to get acquired for $150m

Mid 2016: Sold for $70m

This is the story of Jabong.

After investing over $200 million in Jabong, over the last four years to grow the apparel e-commerce website, Rocket Internet and Kinnevik sold it to Flipkart-owned Myntra for a mere $70 million yesterday.

This precipitous drop from $1.2b to $70m (nearly 95% if you are arithmetically inclined) is fascinating in itself simply as an illustration of how so much can change in such a short time.

But the real story of why a once-could-have-been-unicorn sold for chump change is a deeper one.

A story of two parts.

Part 1: The “RICG” factor

Jabong’s sale price of $70m is interesting with reference to two other numbers.
Jabong’s revenue for the fiscal ending March 2016 was nearly $140m. So this sale price of $70m represents a valuation of just 50% of annual revenue – an unbelievably poor multiple.

Then there’s GoJavas – the logistics and fulfillment division that was incubated within Jabong, but curiously ended up being spun out and sold with its parent none the wiser.

We wrote about it here. (If you haven’t read it, we strongly recommend you do)

During its most recent investment from Snapdeal, GoJavas was valued at Rs.600 crore or $90m  i.e. nearly 1.3 times the value at which its parent Jabong was sold.

From a book valuation of over $500 million in 2013, to widely reported asking valuations of $1-1.2 billion in 2014; $500-800 million in 2015; to finally a sale price of $70 million in 2016, Jabong’s unbelievable fall is traceable directly to what we’ll call the “RICG” factor, or the “Rocket Internet Corporate Governance” discount.

Graph of Jabong valuation

The “RICG” Factor

In business after business it incubated in India, Rocket Internet has been bilked by all and sundry thanks to a potent combination of parachuted executives with no skin in the game; its desire to pump in money to win market share; and the lack of any corporate governance oversight.

Before GoJavas there was FoodPanda which Mint wrote about.

The sheer scale of fraud that was happening within these companies was mind-boggling. So much so that one can almost feel the anguish in Oliver Samwer’s voice below as he threatens to sue those responsible for “stealing” an entire business – GoJavas – from right under his nose. The snippet is from a confidential PwC audit report that Rocket Internet commissioned to investigate Jabong’s former CEO, Praveen Sinha.

Extract from PwC's report on Jabong

Extract from PwC’s report on Jabong

This appalling lack of governance is a large reason why Jabong ended up with such a poor valuation that even to a casual observer is not in line with the numbers presented in its financial statements – clearly the pattern of improving operational efficiency and increasing gross margin wasn’t enough to compensate for the corporate governance discount.

Then there’s Rocket Internet.

Rocket Internet was once the model for a German blitzkrieg of innovation and execution, but today is a stark parable of value destruction. Of the eight startups that it had built in India (Jabong, Foodpanda, Fabfurnish, Printvenue, HeavenAndHome, 21Diamonds, OfficeEyes, CupoNation), only two remain standing – Foodpanda and CupoNation. And even though CEO Saurabh Kochhar has recovered FoodPanda from much of its earlier rot, we learned that Rocket Internet has been aggressively and unsuccessfully scouting for buyers for even this business.

Jabong’s seemingly-tragic denouement marks the practical demise of Rocket Internet in India.

It also demonstrates that the clone/fast-follower, remote-control approach is a losing strategy at least in India especially so if the titular founders are hired guns rather than committed leaders who are driven by an abiding sense or purpose and passion rather than an imperative to make a fast buck.

Part 2: The shifting sands of e-commerce in India

Let’s now shift to the buyer part of the equation.

Before we attempt to specifically answer why Flipkart bought Jabong, it might be worthwhile to take a brief detour on the shifting sands of e-commerce in India.

Over the last six months or so, e-commerce in India has seen one major shift – one that de-emphasizes the GMV focus that governed all aspects of the business hitherto. Until the beginning of the year, the only imperative for e-commerce companies in India was to grow the Gross Merchandize Value of the goods transacted on their platforms and this obsession prompted a slew of harmful ways to “buy growth” – deep discounting, unprofitable unit economics, dependance on low/no-margin categories such as mobile phones and even outright pernicious practices such as round-tripping and double booking.

But now there is a clear shift towards measured growth and profitable margins and a fresh emphasis on operational efficiency and sane marketing spends.

Plus a focus on high-potential, higher-margin categories.

Online fashion falls squarely in this category.

Against this backdrop, one would imagine that a strong brand like Jabong would elicit competitive bidding from the powers-that-be.

But curiously enough, Amazon, the global e-commerce powerhouse, never got into the game. Clearly, Amazon realizes that fashion and apparel is its weak spot in India – look no further than the enormous media blitz that Amazon is throwing money at right now to advertise its fashion offerings.

But Amazon is also a company that doesn’t do many acquisitions, preferring instead to take the long view and build things out on its own. Combined with the abysmal corporate governance standards at Jabong, Amazon was out.

Among the other players said to be in the race to acquire Jabong, Future Retail and Aditya Birla Group-owned Abof were interested bidders early on but withdrew when GFG’s asking price became cold, hard cash in the $50 million+ bracket.

“Traditional Indian companies rarely make acquisitions for revenue or market share. They only acquire things like licenses or infrastructure & assets. Their mentality is, “I can build this myself,” said a C-suite level executive with one of the largest e-commerce firms.

That leaves Snapdeal.

Of the large e-commerce companies, Snapdeal is the only one which has no distinct fashion or apparel offering, thus making Jabong an ideal acquisition to fill that gap. That Flipkart managed to buy Jabong for only $70 million in cash implies that Snapdeal either could not, or did not want to spend even that much in order to strengthen its competitive offerings in a large, growing, and most importantly, high-margin segment.

Sources say that Snapdeal was very keen to acquire Jabong and did make an all-cash offer, albeit lower than what Flipkart offered. But the fact that it allowed Flipkart to come in at a very late stage, three days is what we hear, and close the deal inadvertently reveals Snapdeal’s constraints. Despite its recent public grandstanding about having not even touched its last funding round corpus, it is quite clear that Snapdeal doesn’t have the liquidity leeway one would expect a company of its size and stature to have.

It will be fair to assume that with Jabong slipping out its hands, Snapdeal has written off its chances for any sort of meaningful market share in fashion and apparel e-commerce.

As an aside, it’s worth noting that Jabong’s parent GFG chose to sell it at a steep discount for all-cash, no-equity. Most large startup and e-commerce acquisitions in India have till now been a mix of equity and cash, with the rising paper valuation of the merged entity paying for the stock dilution that finances the acquisition. But Jabong’s all-cash deal is a new curveball we’re going to watch more closely.

Why Flipkart bought Jabong

While one is tempted to believe Flipkart’s pronouncements about the Jabong acquisition being a “historic” strategic move, the facts of the matter reveal that the acquisition was largely an opportunistic one – more tactic, less strategy.

As per sources, Flipkart came into the reckoning late in the cycle – only after talks with Snapdeal reached an impasse – and closed the deal in three days flat.

The fact that its owners wanted to exit Jabong was a public fact – clearly, this was a case of Jabong being sold rather than it being bought. Any strategic reasons that one would look for in terms of why Flipkart bought it are therefore ex-post facto retro-fits.

Be that as it may, It is easy to see why Flipkart saw a “good deal” in buying Jabong for $70m. As per sources, Flipkart is currently burning $2m per day – so a $70m price tag is less than three months of burn for Flipkart which makes the buy versus build decision far more palatable.
So what did Flipkart actually get with this acquisition?

For Flipkart, Jabong will largely be an acquisition of a customer base, of which at least 2-2.5 million are considered high-value by those within the company. Additionally, Jabong has a good brand recall especially in the Delhi/NCR region and additional tuck-in expertise in buying and merchandising of fashion brands.

If Flipkart intends to shovel Jabong into Myntra, over the next few months Myntra is likely to first focus on bringing down Jabong’s monthly “burn rate”, estimated at between $10-12 million, and then gradually wind things down after extracting customers and supply-side know how. In addition, there are possibly some scale economies that will come to bear, especially on the logistics side.

On the other hand, if Flipkart intends to keep Jabong running as an independent entity (at least until it figures out how to digest it whole within Myntra), it is likely that it will attempt a 1-2-3 gambit with Flipkart fashion, Myntra and Jabong offering three distinct categories of goods. As per sources, Myntra is already seriously considering expanding from fashion to a broader lifestyle category that includes home accessories and other similar nascent categories while simultaneously building its private label/brands business. Flipkart itself would offer fashion good targeting the masses – lower priced, higher volume apparel for instance. That leaves Jabong which could be positioned as the premium fashion destination for India. Jabong already retails many high-street fashion brands – several of these exclusively. Some of the international labels available on Jabong include Lacoste,  Bugatti Shoes, Timberland and Swarovski.

According to senior sources in these companies, Flipkart (together with Myntra) was already commanding around 65% of the fashion and apparel market held by large e-commerce firms. And with the addition of Jabong, that could go to nearly  75%.

Fashion E-commerce Market Shares

Fashion E-commerce Market Shares

The Jabong acquisition could be the last piece of the jigsaw puzzle for Flipkart in its battle against Amazon – doubling down on what is fast becoming its defensible moat. Globally, Amazon has yet to conclusively conquer the fashion and apparel space in spite of its dominance over so many other sectors. Flipkart knows this. With Myntra it bought a stellar execution team, market share and brand recall. Now with Jabong, Flipkart feels it has something that is a sustainable advantage over the long run.

So while the denouement of Jabong might have been a tragic tale for itself, it could have inadvertently handed Flipkart a lifeline in its epic battle against Amazon.

Postscript

  1. The Jabong acquisition has the unmistakable touch of Lee Fixel of Tiger Capital – the swift closing move, the aggressive valuation coming over the top of the other bidders and the perceptible reluctance to see a competitor acquire a key piece of the puzzle. Lee’s proximity to Kinnevik (Tiger Global and Kinnevik are co-investors in Quikr for instance) might have also helped Flipkart bypass the lower levels of decision makers and directly strike a deal with the powers-that-be.
  2. While it may have been a coincidence, the timing of the Jabong acquisition announcement completely took away the spotlight from Amazon announcing the India launch of Prime, its subscription service. In the US, Amazon Prime has proven to be a key factor driving customer loyalty and repeat transactions. While this may still happen in India, Flipkart has at least for the time being, saved itself from reading media commentary along the lines of “the launch of Amazon Prime in India is the final nail in Flipkart’s coffin”. Of late, Flipkart has been admittedly losing the “narrative battle” to Amazon in Indian media coverage and this acquisition announcement gives them respite on two counts.
  3. Finally, the fact that Flipkart acquired Jabong as a going concern rather than just buying its assets and brand means that it affords them an interesting gambit that they can choose to exercise as the new owner of the company. This is with reference to the ongoing investigation around the GoJavas deal where the counter party is none other than Snapdeal. If more skeletons tumble out of that particular closet, it gives Flipkart the equivalent of what Diageo had on Vijay Mallya post the UB acquisition – a potent tool to embarrass a putative competitor.
This story was updated. Added a postscript at 8.00 p.m IST, 27-July

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