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Why Jabong acquisition makes sense for Amazon

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Why Jabong acquisition makes sense for Amazon

There have been media reports that e-commerce heavyweight Amazon might be ready to buy out Jabong as it looks to consolidate its position in India. Though the news has not been confirmed, it may not be improbable either. Amazon is currently fighting it out with Snapdeal and Flipkart to seize control of the highly lucrative and competitive e-commerce market. While Flipkart may be in the ascendancy, an acquisition of a known player with a sizeable marketshare may just change the game.

For Jabong, it could mean backing by Amazon’s considerable financial power, which will make it more competitive in the Indian scenario. In an earlier interview, Praveen Sinha, Co-founder of Jabong had mentioned that consolidation and foreign investment in the Indian e-commerce space might not necessarily be a bad thing for the smaller players. “With so many investors showing interest and ready to put in money, we will also see investments in new ideas and players that could not take off due to lack of funds,” he had said. According to a business portal, Jabong, which counts Rocket Internet among its investors, had raised $27.5 million in equity funding, with plans to raise $100 million overall this year.

All or nothing
Amazon is considered one of the largest e-retailers in the world and its financial might is beyond question. However, it has failed to stamp its presence in China, which, along with India, is the fastest growing e-commerce market in the world. With the more mature Western markets already saturated, India represents, perhaps, the single biggest growth opportunity for Amazon currently. The importance of the market was seen when Amazon CEO Jeff Bezos announced a $2 billion investment in India in September. The money is definitely there for an acquisition if Amazon feels it will further its cause. With Flipkart and Snapdeal both raising aggressive investments to fuel growth, the time might be right for buying a company with an established reputation and consumer base.

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The looming shadow of Alibaba
One of the major reasons why Amazon could not succeed in China was due to the Chinese behemoth that is Alibaba. The company has just launched its IPO in the US at a staggering value of $25 billion, the largest ever in the world. There is no reason to not believe that fresh from this success, Alibaba will not turn its attention to neighbouring India. It does have a presence in the country and has been quietly raking in money without the fanfare of its counterparts. According to a media report, it had earned profits of  Rs 1 crore in FY 2012-13; just two years into operations. This is remarkable considering every other e-commerce player in the country is racking up losses due to their aggressive push. One wonders what the scenario will be once Alibaba decides to up the ante in terms of promotions and marketing.

Jabong is making losses, but so are the others

The e-commerce industry in India is a volume game, say analysts and a look at the financial statements of the top players establishes it. It is a high-risk game that the e-commerce players are engaged in currently. Jabong just reported a net loss of Rs 293.4 crore for the financial year ended March 31, 2014, while Snapdeal reported loss of Rs 264.6 crore for the same period. Flipkart had, in December, reported losses of Rs.281.7 crore. The rules are simple—spend as aggressively as possible and get as much of the marketshare early on.

Though both Snapdeal and Flipkart are far ahead of Jabong in terms of sales, Jabong has as an Alexa ranking of 12, ahead of and Snapdeal and behind Flipkart’s rank of 7, making it one of the most popular e-retail destinations in the country. With Myntra now acquired by Flipkart, it is also the most suitable candidate for Amazon.

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Direct competition to Flipkart & Myntra
Arguably, the biggest competition to Amazon is in the form of Flipkart. With Jabong by its side, Amazon will have a direct competition to Flipkart’s fashion and lifestyle segment, which was boosted following the acquisition of Myntra. An Accel Partners study showed that fashion and footwear contributes to 35 per cent of total online sales and 28 per cent in terms of gross merchandise value (GMV). It is widely considered to be among the fastest growing segments in online retail and Jabong is the second-largest player in the field after Myntra.

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