LUXEMBOURG — The combination of exploding internet adoption and fast-growing fashion markets in emerging economies from Latin America to Southeast Asia presents a significant opportunity for fashion e-commerce players with the savvy to negotiate barriers like government bureaucracy, high import taxes, shipping costs and consumer concerns about payments and privacy.
German brothers Oliver, Marc and Alexander Samwer were early to the opportunity. The controversial press-shy founders of startup incubator Rocket Internet, often dubbed a “clone factory” for its practice of copying American business models and applying them in non-English-speaking international markets, are known for an aggressive approach that Oliver Samwer once likened to a “blitzkrieg”. Following the early success of Zalando — a German Zappos clone — the company launched a series of mass-market fashion e-commerce players in targeted markets in 2010 and 2011: Dafiti in Latin America, Jabong in India, Lamoda in Russia, Namshi in the Middle East and Zalora in Southeast Asia and Australia.
In September 2014, days ahead of its initial public offering (Europe’s largest tech IPO in 14 years), Rocket Internet rolled up the five fashion e-commerce companies into one entity: Global Fashion Group, or GFG. Rocket Internet and Swedish investment firm Kinnevik (which also owned a stake in Rocket) were the largest shareholders in the umbrella group: 23.5 percent and 26 percent, respectively. The newly formed company — with a leadership team based in Luxembourg, London and Singapore — had over 7,000 employees and was valued at $3.2 billion. In 2015, Global Fashion Group generated $1.1 billion in revenues, up 48 percent year over year.
Since then, things have been tumultuous to say the least. Rocket and Kinnevik have largely parted ways after reports of disagreements over strategy. In June 2017, Kinnevik completed the sale of its stake in Rocket Internet, one year after two Kinnevik representatives stepped down from Rocket Internet’s board of directors. But both companies remain partners in GFG, which saw $2.3 billion wiped off its valuation during its most recent funding round in April 2016. (In the first half of that year, like-for-like sales revenue grew 37 percent to $542 million).
Headlines focused on the correction, yet equally important was the scale of Kinnevik’s investment. The firm put up half the round or $189 million, increasing Kinnevik shares in GFG to a 35 percent stake.
If you talked to investors two years ago they would not have bet on [GFG], and they would have challenged our ability to deliver.
Now, with Kinnevik’s support, GFG is keen to shed its tumultuous past — and become profitable. “Some people wrongly picture GFG as a Rocket company,” said Romain Voog, chief executive of Global Fashion Group. “Rocket has [had] hard coverage in the past and we were also hit by that... If you talked to investors two years ago they would not have bet on [GFG], and they would have challenged our ability to deliver.”
“[The drop in valuation] is a function of the history and some volatility that is not only observed by GFG but many growth venture equity finance businesses, where sometimes valuations get a little bit ahead of reality,” added Kinnevik investment director Christoph Barchewitz. “GFG was getting to an inflection point from an early stage company to a more established business that was approaching profitability and really becoming a scale business, with roughly a billion in sales.”
But even before the deal was announced, GFG began selling off its operations in challenging countries in a bid to boost profitability. In March 2016, Dafiti sold its Mexico region to local investors. In April, Zalora sold its Thailand and Vietnam operations. And, in July, GFG sold its entire India business, Jabong, to Flipkart’s Myntra for $70 million in cash. “I want to invest my resources — which are human, time and cash — into building leading fashion players in each one of my markets — I’m not here to burn money, I’m here to make a profit,” said Voog. The company decided India’s e-commerce market had simply become too competitive, while the average purchasing power in Thailand and Vietnam remained low, he explained.
The asset sales have helped improve profit margins, but the company is still losing money. GFG generated revenue of $1.02 billion in 2016, up 27 percent year-over-year, but still lost more than $127 million on an adjusted EBITDA basis. Adjusted EBITDA margin improved from -26.9 percent in 2015 to to -12.5 percent in 2016.
In May 2017, Dubai’s Emaar Malls acquired 51 percent of Namshi, the Middle East business and the only profitable platform in GFG’s portfolio, for $151 million. The business operates from Dubai but its largest market is Saudi Arabia, which poses delivery challenges, explained Voog. “In order for us to keep on building the company… we needed a local partner that will help us secure infrastructure, secure delivery routes to Saudi Arabia. Having a very strong local partner is increasing tremendously our ability to reach our goal of becoming the largest, most profitable fashion player in the country,” he added. “Emerging countries require some pragmatism.” In the first quarter of 2017, revenue grew 18 percent to $315 million.
Emerging countries require some pragmatism.
Looking ahead, GFG plans to target major brands with global recognition and match them with untapped distribution opportunities. Currently, it sells 10,000 brands in 24 countries: only 35 percent of GFG’s brands are international names, including Topshop, JBrand and Tommy Hilfiger, while 50 percent are local brands largely unknown outside of their regions. The remaining 15 percent are private label brands.
“Local brands have been the early solution to the lack of access to global brands,” said Voog, adding that while many American and European brands are not sold in many of GFG’s regions, others have partnerships with local distributors. “It’s very hard to establish relationships with international brands.” But the presence of GFG portfolio companies in an array of fast-growing markets is a strategic tool for negotiating these relationships.
GFG also aims to attract brands with logistics and fulfilment services. Its program is called Fulfilled by Global Fashion Group — yes, much like Fulfilled by Amazon — and offers access to GFG’s collection of warehouses, photo studios, call centres and last-mile delivery systems, which are “the big differentiator in the business today,” according to Barchewitz.
“We need to keep being at the edge and best in class in terms of infrastructure as the service becomes more of a commodity,” said Voog. “I want to make sure we become the preferred partner for brands because I think that is one of our big moves to defend ourselves from any incumbent.”
GFG is facing fresh competition: Chinese e-commerce giant Alibaba is investing in Southeast Asia and growing the Aliexpress.ru marketplace in Russia; Asos has launched in Russia and China; and Amazon recently entered the Middle East by acquiring e-commerce firm Souq.com.
For GFG to outpace such strong competitors, access to capital is key. Kinnevik declined to comment on a potential IPO, though Zalando, which went public in 2014 and generated €3.6 billion last year, has set an example the company is likely to follow. “We believe in building a company in a way that it can become a long-term sustainable business, to the standard that it can become a public company — it sets a certain standard,” said Barchewitz. “We have a quite high tolerance for a long path to profitability.”