The Size of Amazon

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The size of Amazon's pocket will speak for itself soon enough'
When Flipkart and Myntra joined hands earlier this year, people asked a multitude of questions:
Why? Why now? What happens to their different business models? But the most important
question they asked was - is this enough to take on Amazon?

According to a recent report by KPMG, Amazon India has already garnered half the visitors of
Flipkart (6.78 million against Flipkart's 13.22 million). Venture capitalists and investors in the
industry feel Prime Minister Narendra Modi will soon allow FDI in multi-brand e-commerce. A race
has begun to consolidate their biggest e-commerce investments to weather the storm better.

But Amazon has mature technology platforms, financial support and the experience of having run
this model successfully in several markets around the world. There is reason to believe that - like
Google, Facebook, Twitter and eBay - Amazon too will hit the Indian market in full force.

Amazon has already come up as a true innovator for the 'hungry-for-more' Indian consumer - with
mobile apps, same-day delivery, superb brand recall in the age group of 20 to 35 years, and the
ability to deliver goods to the last man standing, covering more than 20,000 PIN codes! Its pace of
growth in such a short time is no magic. Amazon has been the top player across the world, and the
size of its pocket, coupled with no investor-driven hurry will speak for itself in the Indian market
soon enough.

'Merger will ensure Flipkart survives till India market matures'
That Amazon - the giant of e-retail with colossal sales and soaring shares - is not profi table is
common knowledge. After a debacle in China, it is going all out to make a success story of India,
delving into its deep pockets to gain market share.
In such a market, Flipkart's decision to buy Myntra makes a lot of economic, if not accounting, sense.
With their common investors (Tiger Global, Accel Partners and Sofi na), Flipkart and Myntra are
natural allies, and it would have cost them a bomb to stay relevant separately. Flipkart's dominance
lies in electronics and books, but the big margins lie in fashion and apparel, where Myntra has a lead.
Flipkart's superior backend and delivery mechanism can in turn benefi t Myntra. These synergies are
going to be crucial. Apart from saving on technological investments, together they can hope to
analyse mountains of big data better - the core strength of Amazon.In pursuit of revenue growth and
market share at any cost, these players too (like Amazon) are incurring losses despite soaring sales.
But Flipkart at least makes a profit per transaction, so the day it stops expanding and investing in
technology, it can become profi table. Pursuit of market share will come handy once the market
matures and then explodes as in China. The consolidation by Flipkart will go a long way in ensuring it
survives till then and doesn't get rolled over by Amazon.

Flipkart, India's biggest online retailer, has been in the news a lot since its $1bn funding
announcement on 29 July.
That is among the world's largest funding rounds for web businesses, exceeded by only a few firms
such as Uber and Facebook.
But some of its thunder was stolen the next day, when Amazon announced a $2bn (£1.2bn)
investment in its India operations.
"We see huge potential in India," CEO Jeff Bezos said in a statement. "It's on track to be our fastest
country ever to get to $1bn in gross sales."
Snapdeal is another big e-retailer. It is backed by eBay, which also has its own marketplace in India.
And Walmart's entry into Indian e-commerce is imminent.

BANGALORE: Amazon is in preliminary talks to buy Jabong, part of the US-based online retailer's plan
to bolster its presence selling fashion products, four people aware of the discussions told ET.

Jabong is one of the fashion portals that Amazon is interested in acquiring, and Jabong has other
suitors, the sources said, cautioning that a deal is not imminent. A regulatory filing by Rocket
Internet, which incubated Jabong, put the value of the fashion portal at 388 million euros, or $500
million (Rs 3,000 crore).

A person with direct knowledge of negotiations said that Jabong is holding out for much more — at
least $700 million. Amazon said it does "not comment on anything we may or may not do in the
future". Jabong did not reply to emailed questions.

Deal to be complicated

"After Myntra got acquired by Flipkart, Jabong is the ideal candidate," said a person who is working
closely with Amazon on the negotiation. A big chunk of the $2 billion that Amazon founder Jeff Bezos
has promised to invest in India is meant for acquisitions, this person said. Amazon is battling leader
Flipkart for dominance in one of the world's fastest-growing markets for online retail, expected to
reach Rs 50,000 crore by 2016 according to consultancy Crisil.

Last month, Bezos told ET that the value of goods sold by Amazon India in a year had topped $1
billion and that fashion was one of the "exciting frontiers" for the Seattlebased company. Jabong,
which counts Germany's Rocket Internet and Swedish investment firm Kinnevik among its investors,
is the secondlargest fashion portal in India after Myntra, which was acquired by Flipkart in May for
an estimated value of $370 million.

According to industry estimates, the Flipkart-Myntra combine has a market share of over 50% in
fashion retail and Jabong 25%. Fashionara and Limeroad are the other significant fashion portals. ET
has not been able to establish if they are in talks with Amazon. For Amazon, getting it right in India is
vital to its fortunes, especially because its presence in China is negligible where Alibaba dominates.

And the key to getting it right in India lies in fashion, the fastest-growing category for online
retailers. According to retail consultancy Technopak, fashion accounts for 25% of the online retail
industry's sales. To boot, operating margins in fashion are around 35% in an industry where gross
margins are in negative territory.

Amazon India started offering fashion products on its marketplace in May, and an acquisition offers
a swift route to scaling up. In the United States, Amazon chose a similar strategy to improve its
fashion credentials by buying Zappos in 2009. Shares of UK-based clothing portal Asos have been on
the rise after rumours of an acquisition by Amazon.

A deal with Jabong, while it may be desirable, will be complicated, said a source who is directly
involved in the talks. The complication arises from the fact that in September, investors Rocket and
Kinnevik began the process of merging five of their international fashion ecommerce companies,
including Jabong, into a single global entity.

Flipkart, India's biggest online retailer, has been in the news a lot since its $1bn funding
announcement on 29 July.

That is among the world's largest funding rounds for web businesses, exceeded by only a few firms
such as Uber and Facebook.

But some of its thunder was stolen the next day, when Amazon announced a $2bn (£1.2bn)
investment in its India operations.

"We see huge potential in India," CEO Jeff Bezos said in a statement. "It's on track to be our fastest
country ever to get to $1bn in gross sales."

Snapdeal is another big e-retailer. It is backed by eBay, which also has its own marketplace in India.
And Walmart's entry into Indian e-commerce is imminent.

A man browses the Flipkart catalogue in a showroom
Flipkart is India's biggest online retailer
A screen shot of Amazon.com
India's' online retail market is expected to grow rapidly in the coming years
Amazon entered India just last year, and has some catching up to do.

The company's India head Amit Agarwal would not mention a timeframe for either the investment
or the billion-dollar sales target, which Flipkart already achieved last year.

Flipkart was founded in 2007 by two former Amazon employees, Sachin Bansal and Binny Bansal,
both now 32. They started selling books and went on to electronics and other goods.

The firm now has 22 million registered users, and handles over 150,000 shipments a day. But it is
losing money - 2.82bn rupees ($46m; £27m) net losses on revenues of 11.8bn rupees for the year
ending March 2013.

Spending a billion dollars
Continue reading the main story

Start Quote

Backed by a major technology investment, this will change the face of online shopping and could
make us one of the biggest Indian companies in the world.”

Sachin Bansal
Co-founder and CEO, Flipkart
Deep Kalra, co-founder of travel portal MakeMyTrip, is impressed by the e-retailer. "They've superscaled. That isn't easy," he said. "Now they're building a war chest. This is a big money game."

So what will Flipkart do with a billion-dollar war chest?

They will probably spend much of it on marketing and marketplace development, says Alok Mittal,
who heads India operations for the US-based venture fund Canaan Partners. He points out that
Flipkart has also been buying companies.

In May this year, Flipkart bought rival Myntra.com, in Indian e-commerce's biggest merger (over
$300m). It has previously made other acquisitions.

In an emailed response, Flipkart co-founder and CEO Sachin Bansal said that the firm's focus was to
build an e-commerce ecosystem in India, where more than half a billion internet users are expected
to be online in the next five years.

"To get hundreds of thousands of entrepreneurs online, we have to solve logistics, payments and
other problems," he said.

Flipkart's latest round of funding puts its value at $6bn to $7bn, overtaking even India's biggest realestate company, DLF.

Investor Mahesh Murthy of venture capital firm Seedfund says that with each round of funding,
Flipkart has said that it now has enough cash to make it sustainable. "And then it's gone on to raise
yet another, larger round of cash." It could, he says, be accelerating its spend in a "last-man standing
game".

Continue reading the main story
Indian e-commerce sales

Man typing
2012-13 - $2.3bn (0.5% of total retail sales)

2014-15 - $8.3bn (projected)

Annual growth till 2014 (7 years): 56%

Source: Crisil

Or else, he says, investors, who own over four-fifths of Flipkart, could be trying to raise its valuation
en route to an exit.

Despite the hype, online retail was just 0.5% of India's total retail market of $415bn last year,
according to ratings and analytics firm Crisil.

But it has grown at 56% annually for the past seven years, to a projected $5.5bn this fiscal year, and
could reach $8.3bn next year.

Traditional retailers in many sectors are worried.

Especially technology and telecoms dealers, whose buyers are tech-savvy and have quickly taken to
buying online. Some report losing up to 35% of business to online competitors.

Scarily low prices
The first Saturday of August saw a large gathering at a south Delhi hotel, discussing a common
enemy - online retail. The meeting represented big domestic technology product sellers in India.

Their bugbear: low online prices, often below the dealers' own purchase prices. They are now
planning to explore setting up their own national web-portal for technology products.

Buyers love the low prices.

Delhi-based Gaurav Banka, 34, is fond of gadgets, and is a frequent online shopper who has made
purchases on numerous sites.

"I find the cheapest electronics on Snapdeal, and clothing on Jabong," he said. "But it's not just the
price. I look at seller reputation and delivery time." Mr Banka subscribes to the premium Flipkart
First service (similar to Amazon Prime), but buys mainly from one seller there.

Three young people hold mobile phones
Many buyers use their smartphones to buy items online

There is another reason for offline retailers to worry: their expensive showrooms. Customers come
to see products - and then buy them cheaper online.

I saw this in action in the Delhi suburb of Gurgaon, at a showroom run by electronics retailer Croma,
owned by the Tata Group.

There, Ritu Sharma, 23, asked to see USB hard drives, memory sticks and power-packs for phones.
She browsed for half an hour. Then she took out her iPhone, looked up the prices on her Snapdeal
app, and bought all three products online - from inside the showroom.

"Why did you do that?" I asked her.

"Why not?" she said. "I just saved 1,400 rupees. I'm heading out to spend it on a beer at Striker (a
pub)."

One of the worst-kept secrets in India’s e-commerce industry was finally outed yesterday as Flipkart,
a broad-based e-commerce firm in India, said it was buying fashion e-tailer Myntra in an all-stock
deal reportedly valued at about $330 million. Given that media had published nearly every detail
involved for the last few weeks—the New York hedge fund manager backing the deal, the law firms
involved and the price and other details—the announcement itself didn’t surprise anyone.
Yet I was taken aback at the number of pundits who spoke of the deal as a watershed moment in
Indian e-commerce, how India is at some apparent consolidation phase in e-tail, how this portends
better things to come, an inspiration to entrepreneurs for great exits, a great combination to fight
Amazon in India and so on. The spin doctors are working overtime.
Why?
Many of us in the industry have watched Flipkart acquire companies and see a pattern. A few years
ago, Flipkart acquired the music content assets of a VC-funded firm called Chakpak. The rest of the
firm was bought by another VC-funded firm, Trivone. Flipkart shut down the part it bought.
Meanwhile, Myntra, itself a VC-backed entity, acquired another VC-funded fashion brand, Sher
Singh. Flipkart then went ahead and bought yet another VC-backed e-commerce player, LetsBuy,
and shut it down too—despite its earlier assurances that it wouldn’t. All of this culminated in Flipkart
buying Myntra yesterday.
Again, we’re told that there’s no intention to shut it down.
Look under the surface, you’ll see that every single one of these firms—Chakpak, Trivone, Sher
Singh, LetsBuy, Myntra and Flipkart—was funded by the same VC, Accel Partners. The bigger firms
here—LetsBuy, Myntra and Flipkart—also had a second investor in common, the New York hedge
fund Tiger Global. Calculations indicate that at the time of the purchase, investors owned more than
80% of each firm, so the founders were probably down to low-single-digit shareholdings in the
merged Accel-Tiger e-commerce entity.

So this was perhaps less about finding a great acquisition opportunity and more about the funds
who own these firms taking five eggs from five wobbly baskets, putting them all into one larger
basket and hoping it wouldn’t wobble so much. Add that to the disclosure that the founders of
Flipkart are now on salaries of nearly $2 million each—an extraordinary number by Indian standards
for young first-time entrepreneurs running a loss-making company, and you’ll see that this is
perhaps less about entrepreneurial passion to hack it and more about trying really hard to make The
Great Indian Roll-up work for its investors. Hardly the watershed e-commerce moment that’s being
talked about.
And that’s a shame, really, as e-tail has grown steadily in India, month after month and year after
year, and it’s spread across more people in more parts of India and across more devices and socioeconomic categories. But we’re still waiting for our big e-tail story.
Perhaps it’s the BRIC curse. Many analysts have traditionally put forth the idea that Brazil, Russia,
India and China will have their own equivalents of Google, Amazon, Facebook, Twitter and eBay and
hence those are the firms one should fund and look out for in each country. It almost holds true, too:
the Google of Russia is Yandex, and of China is Baidu. The Facebook of Russia is VKontakte and that
of China is RenRen. The Amazon of Russia is Ozon and its Chinese equivalent is Jingdong or JD. And
the Twitter of China is Weibo while its eBay is Alibaba.
The analogy falls apart for India. The Google of India is Google, with a 95%+ share of the market. The
Facebook of India is Facebook. The Twitter of India is Twitter. The eBay of India is eBay. And hey,
there’s reason to believe that the Amazon of India could well be Amazon, too. India, with its Englishspeaking Internet base and open-to-business government is probably more part of the US-UK
internet brand ambit—the vast majority of Quora’s users, for instance, are from India. While China
and Russia are almost on different dot-com planets.
Winning in India will probably mean you have to evade the paths where the large US players are,
and build new ones. As JustDial and RedBus have shown. (Disclosure: I used to be an investor in
RedBus.) It’s commonly known that Amazon turned down an offer to buy Flipkart a couple of years
ago, and decided to go its own way. And Amazon’s seemingly done well since, growing to an
estimated one-third of Flipkart’s size in just a couple of years. Amazon’s also been the innovator in
India, with mobile apps, same-day delivery, and sending goods to the true hinterland of India–more
than 20,000 PIN codes, or postal zones—where even large consumer companies aren’t able to get
products on to shelves. Amazon also has deep pockets and is in no investor-driven hurry to exit.
Flipkart may not be so lucky. After raising almost $600 million, it’s still losing cash—and that means it
can’t technically list in India, per Indian stock exchange rules. So it’s moved its official base to
Singapore, which means it could list on a US exchange in the near future. But US markets might not
give it the kind of support that they gave two other large new-economy Indian firms that listed
there: Rediff and MakeMyTrip –originally positioned as “India’s Yahoo” and “India’s Expedia.” Rediff
has become a non-entity in India but curiously still has some support on NYSE. One media outlet
called it “the Google of the Ganges,” betraying a lack of understanding about both—the river and
the website. MakeMyTrip—also a Tiger investee—has done a little better on the US big board.
But both those firms didn’t have significant opposition from Yahoo and Expedia in India when they
listed. While Flipkart certainly will—with Amazon getting larger in its rear-view mirror and in the
eyes of global investors.
So what next for Flipkart? Well, there aren’t other companies within the fund’s internal portfolios to
flip it into. Or even to flip into it. eBay has chosen to back another rival in India, Snapdeal. And

Flipkart is on a timeline—it will likely run out of cash in a couple of years. A public listing is one
option. And there’s a bunch of folks the company can flip it to: Amazon is a potential buyer, if they
choose to bite on a large asking price. Or if the Chinese or Russian giants, or Japan’s Rakuten choose
to do so. Or something else will be cooked up among the guys who ponied up that $600 million
chunk of change.
E-commerce in India has been built by discounting. Venture capitalists have subsidized consumer
purchases till now. This very tool that Flipkart has used to grow past others is now a challenge as it
takes on Amazon, with much deeper pockets. But while the deep pockets duke it out, there’s one
person who benefits for sure–the Indian consumer. Discounts and offers are in store. But those will
plunge when the battle’s over and the last man stands up.

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