Wedding bells in cyber sales heaven

What does consolidation in a fledgling industry where no player makes profits but founders and investors become millionaires overnight tell us? That fear and greed are creating value, based on global surpluses looking for profitable deployment and a business model that is trans-national in many respects. Flipkart’s acquisition of Myntra for a guesstimated $370 million has all these ingredients.

The combined entity will have larger heft, remove an area of value-destroying competition and prime itself either to compete with a new entrant like Amazon’s Indian operation or be acquired by it at an attractive valuation. In either case, India’s online retail industry will get a boost, in terms of investor appeal and volume of transactions.

Both companies have three investors in common: investment firm Tiger Global, early-stage investor Accel Partners and Belgian family office Sofina. Each has other investors as well. These common investors facilitate the consolidation process, taking into account the shadow over the bright tale of these young companies’ remarkable growth by Amazon. The global giant is constrained right now in deploying its normal business model by a regulatory ban on foreign direct investment in online retail, but will probably shrug off such constraints in the near future.

While Amazon’s relentless innovation and aggressive tactics backed by deep pockets can create a daunting challenge, there is no reason to believe that purely indigenous players cannot thrive in the same space. However, Flipkart will have to eschew practices such as shipping orders smaller in size than the cost of shipping for it to be taken seriously as a player aiming to stay on in the market place, rather than a company desperately chalking up ever higher gross merchandise value so as to boost its valuation for a potential buyer.

As the industry matures, the government can help in multiple ways, ranging from allocation of more spectrum for mobile broadband, introduction of a goods and services tax and easing of rules and rationalisation of tax norms for alternate investment funds.