SoftBank's $400-million investment creates a retail unicorn, almost

Japanese conglomerate SoftBank’s $400-million investment in exchange for equity in FirstCry has pushed up the valuation of omni channel baby products company to $800 million, bringing it quite close to the unicorn mark from just about $350 million earlier. As the unicorn tag (valuation of $1 billion or above) is a top aspiration of any niche internet company, the latest funding round has got the industry excited.  

There are two stories at play here: SoftBank and FirstCry. SoftBank has been in the market for a new retail bet. Sources close to Flipkart indicate that SoftBank’s exit from Flipkart, even though profitable for the Japanese company, was considered premature. SoftBank has been talking to several online retailers in the country with a view to invest in them for a while. But not many discussions have borne fruit. There were reports that SoftBank may invest $200 million in Mumbai-based fashion and beauty retailer Nykaa, for instance, but those conversations have not resulted in a round yet. In the case of FirstCry, the investor has walked the talk.

“SoftBank still believes there’s scope for several online retail companies in India, especially when it comes to verticals,” says the founder of an online retail company. That’s why SoftBank has been in the news when it comes to verticals, he explains. Paula Mariwala, founder and co-president, Stanford Angels, agrees. “So far, SoftBank’s strategy looks like it is to back the leader of the pack and that’s what they’ve done. But that’s not to say that there won’t be growth in FirstCry,” she says. 

Babycare has been a money spinner for companies across the world. According to people familiar with Amazon and Flipkart’s operations, they say, both companies have special focus on baby care products: both hygiene and apparel. Babycare, outside of electronics such as mobile phones, is considered one of the hottest categories in e-commerce companies.  And with India’s population increasing, the market for these products will only increase, analysts point out.

FirstCry has been steadily increasing its reach into the market. The company earned a revenue of almost $50 million in the last financial year, according to reports. “It seems to be expensive but SoftBank has valued the company not only on the GMV (gross merchandise value) but the fact that there will be non-linear growth based primarily on offline stores in tier 2 and 3 cities,” adds Mariwala.  

There’s a lot to like about FirstCry and the vertical, analysts point out. The sector caters to a very specific audience. An audience that is involved and is constantly increasing. According to Arvind Singhal, chairman and managing director, Technopak, the Indian customer wants to keep purchasing and is likely to get into a habit. Mariwala says that even though brands in baby apparel may not be a big hook, subscription products will be able to be a good consistent driver for revenue. And the more you buy, the more you consume. “The costs rack up very quickly and unlike before, with dual earning families their ability to spend is much higher,” adds Mariwala.

But it is not just the frequency that excites investors. It is also how long the customer lifecycle is. “In this category, the customer lifecycle starts from maternity clothes to the first three years of the child’s life,” explains Singhal. 

He adds that in this category, there’s also a huge market for private labels. Apart from some branded products such as diapers and talcum powder, the rest, including apparel, can all be private labels, giving companies in this sector huge margins. But won’t that be true of its rivals as well? “Technically, there are not too many rivals in this business,” says Singhal. The business has been difficult to crack, be it for the Mahindra group (which sold its retail arm to FirstCry) or Hopscotch. 

“The biggest rival if any will be Reliance Retail,” says Singhal. He explains that the Mukesh Ambani company has the supply chain and the captive audience to get a firm handle on this sector whenever it wants. “It is as easy as plug and play for them,” Singhal adds.

But this has been the case for a while. What triggered the investment now? The IPO of Alibaba-backed company Babytree in China could be a possible trigger, analysts suggest. But what about exit? At $800 million current valuation, a decent exit would probably come at $1.3 billion, which could be a challenge.