The bell rings ding-dong! There goes Jabong!!

Discounters always have a huge sales turnover. Wal-Mart is yet the largest organization in the World! It is reported that only one out of the top ten retailing companies in the World as on 2015 is an online retailer (amazon.com) and all others are yet brick and mortar retailers. Retailers struggle hard to organize their merchandise assortments, make customer deliveries and refill their shelves, but the brick and mortar ones excel in these functions. Most of the online retailers are mere ‘moderators’ of the business, having an establishment of humongous supplier linkages that facilitate customer deliveries without any inventory holding responsibility at their end. If one becomes successful in identifying deep pockets that could place trust on the business model one projects, any new online retailer may commence his business easily these days!

Today in the newspapers in Mumbai we read a huge full-page advertisement of a new online retailer of ‘customized’ products! The advertisement features a high-powered customized motorcycle on the front page but in the second page it shows products as simple as clothing and footwear for customization! The offered scope of customization is huge – items that range from high involvement purchases to even impulse buys! One has to wait and see how ‘customization’ is executed on such a wide variety of products. While customization partners may actually execute the business, the online retailer may just provide the platform for the business and the company’s role is that of a moderator who coordinates the business deal and collects the revenue! In short, such ‘moderating models’ of business may crop up in plenty in the near future, imaginably fashioning their own new valuation methodologies as well!

Mergers and acquisitions may become commonplace in the Indian online retail sector, these days. As many organizations have grown in product transaction value, they have discovered the new methodology of assessing the value of the company by its Gross Merchandise Value which is the sum total of the marked retail price of all the products put on the platform for sales. These online retailers could never go by EBITDA figures as they all presumably had negative gross margins. Investors are yet hopeful of making money some day and see the light of day!

At a reported negative EBITDA of Rs. 415 Crores ($ 60 million) on a total sales turnover of Rs. 940 Crores ($ 135 million) in the financial year ended March 31, 2016, Jabong went on the block. Myntra, belonging to the Flipkart Group clinched the deal according to recent reports, at $ 70 million. The buyer’s offer got the better of two offers – one at $ 35 million from the Future Group and the other at $ 50 million from Snapdeal. The erstwhile valuation parameters have been defeated perhaps for the first time. Jabong made a desperate attempt to make a sell-out as it was struggling hard to make both ends meet! Newspapers reported that it was a ‘hush-hush’ deal between the Flipkart Group’s Myntra and Jabong! The valuation of the company resulted in a worth that was considerably less than a quarter of its sales turnover! And what the other contenders offered was even much less; the offer from the Future Group reportedly being only a half of the deal amount!

The valuations of such companies may go down to even smaller fractions if profit further fractures and true value revelations may be made! Reality seems to slowly dawn over the online retailing madness of valuations and investments!

Judiciousness, I see thou unfurling, in the right time!

Dr. Gibson G. Vedamani