Merger, no. IPO, yes. Mukesh Bansal’s plans for Myntra

MUKESH BANSAL, 38, figured what scale in e-commerce really means back in September 2011. The co-founder and CEO of fashion website Myntra.com and his three colleagues were in Beijing, courtesy private equity fund Tiger Global. Early that year, Tiger had led a $14 million (Rs 86.6 crore at current rates) investment in Bangalore-headquartered Myntra. Lee Fixel, one of Tiger’s partners, renowned for his risk appetite, pushes his investee companies—he sits on around 20 e-commerce boards around the world—to learn from each other’s businesses. For Bansal, this was an opportunity to see how outfits like 360Buy (Jingdong Mall), Vancl, and Dangdang.com, the rising stars of Chinese e-commerce, worked. Tiger had invested in them over the previous seven years, and, in some instances, even taken them public.

Dangdang, for example, had listed on the Nasdaq in 2010; last year it clocked revenues of over $1 billion. In the warehouses of every player that Bansal and his crew visited, there was one stat that blew them—the staggering number of orders they were processing, displayed on huge screens.

Those days, Myntra was clocking 500 orders a day. But here was 360Buy, doing 100,000! “It was a mindset shift of what kind of scale is humanly possible,” recalls Bansal. “When you are doing some 100 transactions per day, it is difficult to think of 10,000 per day. We could visualise what kind of company we need to look like, and understand what goes into building scale.” Size wasn’t a notion in Bansal’s head anymore—it was out there, staring at him.

Bansal came away with his mind full of possibilities. He had spent the rest of the week-long tour uncovering what it took to process such volumes. His “biggest takeaway”—to handle growth, he’d have to plan capacity ahead of time. A few months later, he scrapped plans to scale up to a 10,000 sq. ft. warehouse in Bangalore. He pushed for 50,000 sq. ft. instead. Today, he has 100,000 sq. ft. of space spread equally across Bangalore and Delhi, and has just got board approval to take that to 400,000 sq. ft.

Then, on Dec. 11, 2013, Myntra sold over 100,000 items in a single day. It was day one of the three-day Google-sponsored Great Online Shopping Festival. Web traffic surged as order volumes tripled. Myntra’s technology teams were ready with more servers added; the warehouses were already in action. Within a few hours, word spread among employees that they’d all be working on Saturday (Dec. 14). The Bangalore warehouse worked three shifts, with nearly 300 persons per shift.

Myntra usually processes between 13,000 and 15,000 orders a day, which translates to nearly 40,000 items being shipped every day. Each order may contain multiple items. (Flipkart, the online megastore, ships over 100,000 items a day.) During the shopping festival, Myntra shipped 40,000 orders, or 100,000 items, in a single day, before it stabilised to 40,000 a day towards the weekend. It was clear that Bansal’s resolve in Beijing to build scale was now at work.

Myntra has plenty of competition: Jabong, Yebhi, marketplace website Snapdeal (apparel comprises 60% of items sold), and Flipkart, which entered fashion last year. Clothing entails higher profits than other goods because the consistent size and weight of each item helps in predictability of despatch and hence creates supply chain efficiencies. It is also why apparel is such a competitive category, accounting for around 30% of the e-retail market.

The broad consensus now is that fashion e-commerce has become a two-horse race between Myntra and Jabong. The former is known for its steady rise, the latter for its speed. “Myntra has paced itself. The team is solid. Entrepreneurs who get to where Myntra is, run fundamentally strong businesses,” says Ashish Gupta, managing director of Helion Venture Partners, a co-investor in private label fashion portal Exclusively.in, which was sold to Myntra in November 2012.

More significant, among the big e-commerce players, Myntra is the only one talking about a primary issue. Bansal says it could happen as early as 2016. Those who know him say he isn’t given to empty talk; prudence is his defining trait. He’s someone who waits to get 500 orders a day from a particular town before committing Myntra’s delivery network; till then he uses a third party. Bansal doesn’t spell out the size of the issue, but does declare that the capital will be used to fuel Myntra’s growth. By 2016, he wants Myntra’s gross merchandising value, approximately $150 million at present, to touch $1 billion.

He now has the wherewithal to scale up to those targets—a far cry from March 2011 when Myntra was a Rs 2.5 crore online company, selling personalised apparel. Investors believed in the team, but wondered if Myntra should morph into a deals site like Groupon for scale. Tiger Global’s Fixel suggested that the Myntra team travel to Brazil, where the fund had invested in NetShoes, an e-commerce company. After a week-long study at NetShoes, Bansal transformed Myntra into a fashion e-retailer—and hasn’t looked back since.

THE FIRST PHASE was building infrastructure—technology, warehouses, and logistics. The next was improving selection: more brand partners, cataloguing the merchandise, etc. Both phases have resulted in building volumes. Now, in the third stage, profitability is key.

While profits aren’t a necessary prerequisite to listing—Amazon famously made its first profits many years after listing—Bansal would like it to be so. “We will have turned profitable; business will still be growing at 40% to 50% [as it does today]—that should fetch us a good valuation.” Indeed, of the four big e-commerce companies, Myntra is the only one where conversations on profitability are beginning to take centre stage. None are listed, so it’s difficult to gauge the kind of money they are making. (Of the four, Bansal is the only founder who speaks about profits. The rest place far more emphasis on scale. Jabong’s founder Praveen Sinha claims that his outfit, though younger, is already larger).

Bansal’s willingness to embrace a different narrative may have something to do with his investors. “They are very different from each other, but are also able to collaborate to create value for Myntra. They have found the right balance to use each other’s strength,” he says.

Tiger Global has the best global e-commerce perspective, having experienced emerging markets since 2004. Fixel has the ability to think long term, and invest deeply now for something that may yield returns down the line. “They emphasise the importance of market share and dominance,” Bansal adds.

Another investor, IDG Ventures, is unhurried, and manic about frugality. Its managing partner, Sudhir Sethi, likes talking of his first meeting with Bansal in 2010. “A new-age business in the middle of a vegetable market,” recounts Sethi, explaining that the Myntra office then was located in the middle of a vegetable market, with a small tea joint to the right of the entrance. The stairway to the first floor had just enough space for people to move in single file. (The company has since then moved to two new offices.)

Then there is Accel Partners and Kalaari Capital that focus on growth challenges. These two and IDG have equal stakes, and balance the power that Tiger, the largest investor, can wield on the board. With this mix, Myntra is more focussed on certain, predictable growth, rather than scale at any cost.

It’s not immediately clear if Bansal’s measured approach to scale up rather than a mad scramble will ultimately prove beneficial. After all, PE folks admit in private that in the coming battle with Amazon, only the largest will survive. The mother of all e-retailers is currently functioning in India as a marketplace, like eBay, for sellers to transact, due to the lack of regulatory clarity. Once that’s sorted, Amazon could well upend the market.

For the moment, however, Myntra’s strategy has put it in a sweet spot. In early February, PE firm Premji Invest pumped in Rs 300 crore ($50 million). Azim Premji, who oversees the fund, wasn’t directly involved in the negotiations, but has long leaned towards profitable growth rather than blind scale. It validated the growing view among Myntra’s investors: It is frugal, has brand power and solid growth. In all, Myntra has raised $125 million in six rounds of funding since 2008. And while Bansal is mum about valuation, media reports put it at over $200 million.

Myntra’s standing was further burnished by the fact that Premji Invest went ahead with the deal even while rumours were swirling that Bansal’s company was merging with Flipkart. Tiger and Accel are investors in both, and combining them to create a local giant that can stand up to Amazon smacks of investor savvy. Asked to comment, Bansal says it is common among bankers to speculate about M&A permutations involving the top five players (Amazon included), before conceding that the combination can “potentially” create a very powerful company in e-commerce. “But today, we feel that the independent path is best for the company. We are at the best time in terms of momentum and market leadership, and with a very clear plan to scale up the business. So this is really not the right time for us to be thinking about selling. I can’t categorically rule out ever considering offers from Amazon or Flipkart. But today, I see the path to IPO with two years of solid execution.” He’s keeping his options open, though it’ll be for his investors, particularly Tiger and Accel, to decide.

If FDI in online retail is allowed, Amazon will be hard to ignore. That aside, one factor that investors fear is that growth in e-retail could slow from over 200% to 75%, which will upset calculations. Dealing with that loss of momentum—not to mention Amazon—can prove more than a handful for both Flipkart and Myntra. A Flipkart spokesperson dismissed the merger talk as rumours, declining to comment further.

In all this, Bansal hasn’t lost sight of the big picture. By his reading, “the bigger game is that in the next three years, five of top 10 retailers in India will be online players. And the online guys will still be growing at a higher pace than the offline players such as Reliance, Tata, Birla, and Shoppers Stop. Online retailing will end up completely changing how retail happens.”

With that in mind, he has introduced private labels (they account for 18% of revenue), roped in Bollywood (Salman Khan, Hrithik Roshan, and Kalki Koechlin), and is building an organisation that depends less on him. Many of his recent hires, such as chief operating officer Ganesh Subramanian (ex-Arvind Brands), marketing head Vikas Ahuja (ex-Nestlé), or chief product and technology officer Shamik Sharma (ex-Yahoo), reflect that. Subramanian says Bansal believes in creating the culture of a corporation, “and not just getting things done”. In the world of startups, it’s a big shift.

BANSAL WAS A TYPICAL middle-class boy who grew up in India of the 1980s, where everything—from cars to telephones to fine apparel—was in short supply. His father worked at Bharat Heavy Electricals. Bansal’s school years were spent in Haridwar, and as a boy, he was a loner who loved to dabble in sports as varied as table tennis, cricket, volleyball, and football. When he was 26, he started playing golf, the one sport he feels committed to, and where he can be by himself.

For kids of his generation, a good education was the ticket up, and Bansal made it to the Indian Institute of Technology (IIT), Kanpur. During his IIT years (1993 to 1997), he loved reading the Harvard Business Review and Fortune at the college library. He also discovered myriad works in psychology, arts, history, and humanities. The single book that stands out from then is Sam Walton’s Made In America. These days, a Kindle is his constant companion. He prefers non-fiction by the likes of Bill Bryson and Jared Diamond, and loves the works of futurist Ray Kurzweil, who became Google’s director for engineering last year.

Deloitte Consulting hired Bansal from IIT as business analyst. He moved to Chicago, expecting cross-industry exposure before pursuing an MBA. In less than two years, he began to despise the “big company” culture. He felt liberated in the Bay Area and moved to the West Coast. By the turn of the century, he was working in San Mateo with comparison shopping website Nextag.com as software engineer. It gave a spectacular exit in 2007, when PE fund Providence Equity Partners acquired a majority stake for about $830 million. By then, Bansal had worked at three more startups, growing to director of product management at enterprise software company Newscale. He saw startup failures and successes in equal measure. He never did that MBA: He returned home and started Myntra in 2007.

Like most techies, he didn’t aspire to lead. Subrata Mitra, a partner at Accel, remembers meeting Bansal for the first time in 2008. Accel India was Erasmic Venture Fund then, and it backed the team of former IITians. Over time, Mitra noticed Bansal rising to lead Myntra as it changed its business model. “Throughout, he has been rational, mature, and cool-headed,” he says, adding that Bansal was always learning new things (like women’s fashion, which once contributed an overwhelming share of Myntra’s business). These days, he also cares to dress smart.

Futurist Kurzweil, who aspires to live forever, continues to be a heavy influence. “Not a bad thought, right?” Bansal says, referring to immortality. Shortly after reading Kurzweil’s Fantastic Voyage: Live Long Enough to Live Forever, Bansal grew obsessed with physical fitness. At a gym near his house, he works out an hour every day. In March last year, he met Kurzweil at Singularity University in Moffett Field, California, for a week-long executive education course focussed on “exponential technologies” which will have a dramatic impact on the future of society in the next 20 years. “The key thing was learning to think exponentially versus linearly,” he says.

At heart, Bansal believes in laissez faire. “Fundamentally, I am a big believer in free trade and globalisation. Its positive impact outweighs the negative,” he says. So, he doesn’t principally oppose Amazon’s entry. “Each country needs to decide the core capabilities it wants to build and [where to] promote indigenisation in entrepreneurship, innovation, skill base, etc. Some controlled protection for a period of time is not a bad thing as long as it is done in a very transparent way. Local people should have the opportunity to catch up. If they survive in the free market, great. If they don’t, that is also good for the country.”

IT'S 10 A.M. IN the Krishna Reddy Industrial Area. At Myntra’s warehouse in Bangalore, 10 men and women are locating items from the 70,000 units stored in shelves across 102 aisles. Each worker uses a handheld device to locate an item and then confirm that it has been picked. Someone else mans a trolley that collects these items. Each trolley takes approximately seven minutes to complete a run between the far ends of the aisles. The items are collected, checked for quality, packaged in a standard format, and sent to the delivery section. It’s clockwork. This is the beating heart of Myntra’s execution engine.

The market for e-retailing apparel and fashion is estimated at Rs 17,320 crore, growing at 110% annually. Several companies have entered the space, attracted by the potential, but casualties abound. Many outfits have shut in the last two years, including promising players like Fashionandyou; for others like 99Labels, funding has dried up. Against this backdrop, Myntra clocked over 300% growth to Rs 263.5 crore in 2012-13, according to accounts filed with the Ministry of Corporate Affairs. Based on the third quarter of 2013-14, investors estimate Myntra will breach Rs 900 crore this fiscal.

Myntra boasts 8.5 million registered customers, of whom 55% are from small cities and towns such as Lucknow, Ludhiana, and Indore. It is present in 600 cities. The non-metro base is important because Bansal’s data finds it to be more loyal. Overall, the average order has risen from Rs 1,300 in April last year to nearly Rs 1,750 by December. Bansal has been stubbornly opposed to undercutting, preferring to focus on building Myntra’s brand identity as a platform for customers to be up to date in fashion. “Early on, we took a call: We don’t want to be in the apparel liquidation [selling stock at throwaway prices] business,” he says.

Myntra turned profitable on a transaction basis in early 2013. This means, on the average transaction, Bansal was spending less than the average cost of fulfilling an order and shipping the item. This was a significant first at a time when investors feared that e-commerce players were losing money per transaction by offering huge discounts. Myntra was making a profit despite the discounts it gave.

On average, Myntra wants to keep its discount rates four or five percentage points lower than competition to preserve margins. It doesn’t mind single-digit discounts, the average is 20%. (It can be higher than 30% over a six-month season.) Brands like Puma dispute this, as managing director Rajiv Mehta says fashion websites are killing prices.

“It is not good for the brand, and impacts my shop operations [which carry fixed costs] when customers say a website charges less than the shop.” Bansal counters this by saying e-commerce creates much more demand than what a brand can generate across a few shops. “So online discounts will be more than those in stores,” he says, adding that Myntra alone has contributed to 13% of Puma’s revenue in the past fiscal. Bansal believes that customers come not just for price, but equally for range, and convenience.
Nike likes the shopping experience Myntra and Jabong have created, alluding to the former as a “fashion website” where Nike is a ‘featured brand’ distinct from other brands.

“We are particular about how we present the brand,” says Avinash Pant, marketing director of Nike India. “And it’s worked well with our e-commerce partners.”
When Jabong rose in early 2012, causing panic in the fashion category, Myntra did not respond by lowering prices. Instead, Bansal took time to study the Delhi market (Jabong’s main market then), and by July had his second warehouse up and running in Gurgaon, near Delhi.

Myntra is building a symbiotic relationship with its partners. It has fewer of them—600 to Jabong’s 1,000. That means each has access to more customers. And it has been helping them figure out e-commerce better. Two years ago, Myntra hosted its first event for brand partners. Apparel sellers weren’t convinced that clothes would get sold online. After all, fashion relied heavily on touch, feel, fit, etc. There was no trust, says COO Subramanian. “Vendors wondered if they should place their money with us.”

Bansal invited 100 of them to the Myntra office on the third floor of Bangalore’s AKP Tech Park, so they could see what actually went on in an online venture. “Our thinking was: Let’s tell the world what we are up to,” Subramanian recounts. Myntra’s managers made presentations on online fashion, Bansal explained the impact that global fashion portals such as ASOS and Zappos had on sales, and some partners present were recognised for their early contribution to building Myntra. It had even roped in Google India head Rajan Anandan, an Internet evangelist, to speak on how e-commerce will play out in India. He spoke of the quantum rise in shopping search queries on Google, and how smartphone users were growing. (Mobile users comprise 20% of Myntra’s registered customers, up from 5% in 2012. Bansal is contemplating a mobile app, but is in no hurry to launch one.)

Last year, the event had 250 participants, and was organised at a local hotel, where partners exchanged stories of what went right, and identified areas where Myntra could do more (like brand differentiation). Some of them had seen their business grow 20 to 25 times.

One of Myntra’s big demands is that its partners give it a longer credit period. Some players extend it to nearly 70 days. The industry average: 40 days. These days, Myntra doesn’t settle for anything less than 60. Bansal has been known to wait for brands to come around. “They may go to competition, but we are willing to wait. It often leads to a six- to nine-month delay, but it ultimately benefits our working capital management,” he says.

A longer credit period means there’s no cost of goods sitting in Myntra’s warehouses, which is otherwise a limitation for e-commerce outfits built around the inventory (as opposed to the marketplace) model. Subramanian says that now “we manage business with close to negative working capital”. He adds: “We have also been managing our inventory very tightly, which helps us stay fresh with the fashion.”

It’s the approach that IDG’s Sethi loves. “Mukesh is stingy in his spending, making Myntra one of the most capital efficient e-commerce companies in the country today. He is still a market-facing, service-oriented, and analytics-based decision maker.”

Even if operations are humming, Myntra still spends a fair amount of money on what the industry calls ‘customer acquisition’. Each month, it adds 200,000 customers. What this takes is organising marketing activities across India. In December, Vikas Ahuja spent time in Lucknow and Allahabad, selling the Myntra story. At cinema halls there, Myntra showcased apparel samples to customers, and encouraged them to visit the website. “Most of our branding initiatives are geared towards ensuring Myntra has the mindspace of new online buyers, and the rest towards growing our private labels,” says Ahuja.

It also means selling the brand on mass media, particularly TV. This is crucial to build volumes and loyalty. “TV advertising brings legitimacy to a brand in new markets,” says Ahuja. But while marketing spends in absolute terms won’t come down in the next two years (Myntra doesn’t disclose the figure), TV spends as a percentage of revenue are getting smaller. Myntra’s marketing costs are 10% of revenue, against 50% in mid-2012.

By increasing sales volumes continuously at 40% every quarter in the past year, Myntra expects to attain marketing break-even in early 2015. This means that every month, its gross merchandising value will equal all the direct costs related to fulfilling orders (logistics, call centre, etc.) and its marketing costs. “Right now, our margins cover the digital marketing costs, but not our mass media costs,” Bansal says.

This leaves a final crucial milestone—recovering capital expenditure such as on its warehouse and logistics infrastructure—to break even in two years. Investors peg Myntra’s current run rate at $155 million. In 2016, they expect it to surpass $1 billion in gross merchandising value, which will usher it into black.

IF MUKESH BANSAL is the familiar face of Myntra, he is quietly backed by another co-founder, Ashutosh Lawania. Of the three, who started Myntra, Bansal and Lawania are the two remaining. The other, Vineet Saxena, left in March 2011 to start another portal, VioletBag, which sells cosmetics and accessories.

In many ways, as Bansal has evolved into the CEO of a fast-growing company, Lawania, 36, is the floating entrepreneurial spirit at Myntra. In 2011, he set up and built the engineering team as Myntra turned towards selling fashion brands. He was involved in building and launching the website. When Myntra hired tech boss Sharma, Lawania moved to helping out with sales and marketing.

Lawania, another IIT Kanpur alum­—he met Bansal through the alumni mailing list—is a lateral thinker with an engineer’s mindset, used to reducing complex problems to their bare essentials. To understand Myntra’s future, it helps to know what Lawania is thinking.

These days, he is busy building a marketplace model for Myntra, to be launched in April, which aims at replicating two offline marketplace trends on the website. The first is the kind of niche apparel available at shopping destinations such as Linking Road (Mumbai) or Commercial Street and Chickpet (Bangalore). “Can we connect a person sitting anywhere in India with the best suppliers of Kanjivaram silk, or chikan kurta from Lucknow?” asks Lawania. That is the problem he is exploring: connecting niche, unbranded suppliers with online buyers. Rather than scale up across hundreds of niche apparel suppliers, he seeks to curate distinct categories and find a select group of suppliers for each.

Another idea, also to be kicked off this April, will see Myntra connecting buyers in big cities with a selection of fashion boutiques. The focus is on profitability because these items will be priced higher, which means Myntra’s margin per item in absolute numbers will be higher than with branded apparel. It will also deepen Myntra’s identity as a fashion destination. A marketplace team of 50 is working on merchandising, cataloguing, operations, logistics, etc. Myntra has been screening over 200 boutiques in Bangalore and Mumbai, of which 50 to 100 will be selected.

In one conversation with Fortune India, Bansal lets it slip that he admires Zappos, the online shoe company Amazon acquired in 2009 for $807 million. He avidly follows the moves of its CEO, Tony Hsieh, and has read all the articles there are on Zappos. So what’s it about Zappos that he likes best? Two things really. How it obsesses over customer experience, and how that obsession percolates across the company. Says Bansal: “In Zappos, the whole culture is very deliberate and engineered. It is not an accident. Zappos teaches you that if you are in charge, you can decide what kind of company you want to build. You don’t take anything for granted.