E-tail is king: Amazon could buy Jabong for a whopping $1.2 billion

As the e-commerce space heats up, two major deals maybe in the offing. While Amazon is inching towards acquiring Jabong, Alibaba is watching Snapdeal very closely, and a deal may breakthrough anytime now.

After promising to pump in $2 billion into India earlier this year, Amazon is reportedly in an initial-stage discussion to acquire Jabong.com, backed by Rocket Internet, in a deal worth about $1.2 billion in order to face off against local giant Flipkart and eBay-backed marketplace Snapdeal.

At $1.2 billion, this would mark the biggest acquisition in the history of the Indian e-commerce. The Flipkart-Myntra deal was pegged at around $340 million.

This deal, if brokered successfully, will imitate the Flipkart-Myntra acquisition. However, Indian restrictions on retail foreign investment could stand in Amazon’s way but the new Modi-led government is reportedly open to loosening e-commerce-related restrictions.

According to a report in VCCircle , Amazon would keep Jabong as a separate property post the acquisition, which would be on the lines of Amazon’s acquisition of Zappos in the US.

“It is not immediately clear how the deal would be structured as Jabong is an inventory-based e-tailer, where foreign investment is not allowed at present. But others point out that if Flipkart can buy Myntra, Amazon can seal this deal too with some careful structuring, especially if Rocket Internet, Kinnevik and others can pour in money into Jabong,” the report added .

Currently, Flipkart and Myntra with a combined market share of 50 percent controls the market while Jabong controls 25 percent of the market and others, such as Fashionara, Limeroad.com and Zovi, the rest.

Jabong had reported a gross merchandise value (GMV) of Rs 509 crore from three million orders in the January-June period of this year, which was a three-fold rise over the previous year.

“E-commerce firms are focusing on fashion as a category because it has a huge potential for top lines and margins. Flipkart bought Myntra for the same reason. I think Amazon wants to replicate that. There are very few players in fashion e-commerce, hence the premium likely to be charged,” Technopark’s Arvind Singhal was quoted as saying by the Business Standard .

Amazon has already A signed an exclusive tie-up with Aditya Birla owned fabric and ready-mades brand Grasim to retail Grasim’s readymade shirts and special suiting/shirting gift packs on its marketplace. It also partnered Label Corp that operates several celebrity endorsed private labels. In October it sgned a strategic alliance with Future Group to sell products from Future Group’s portfolio of 40 fashion brands.

Fashion and apparel is the fastest growing category for e-commerce players in India and Amazonwants to obviously consolidate its position here before competitors like Snapdeal gain muscle. As Firstbiz had reported earlier, this product category gives one of the highest margins in all of e-commerce retail - an industry watcher said compared to 4-5% that e-commerce players earn in say, electronics and mobile phone category, fashion and apparel can generate double digit margins.

Ironically, Jabong’s founder Praveen Sinha last month had told _CNBC-TV18 i_n an interview that Jabong does not really need funds immediately and also claimed that his company “achived leadership in online fashion space last year itself. The focus now is on making the business sustainable and profitable.

Jabong raised $100 million dollars from existing investors in its last round of funding in December last year. Sinha had told CNBC-TV18 that his company is well funded as of now though it continues to see interest from potential investors.

He said in just one month, December 2013, Jabong sold goods with Gross Merchandize Value (GMV) of Rs 150-160 crore, but declined to provide current GMV sales. Jabong claims it is the largest online fashion store in India.