Photograph by Manjunath Kiran — AFP/Getty Images
By Geoffrey Smith
October 10, 2014

Amazon.com (AMZN) is in preliminary talks to buy Indian online fashion retailer Jabong from Germany’s Rocket Internet AG, according to a report in India’s Economic Times.

A deal would be a marginal but potentially lucrative addition to Amazon’s footprint in one of the world’s biggest markets at an early stage of its development. It would also allow Rocket to burnish its reputation as an incubator and seller of internet companies after a difficult start to its life as a publicly-traded company.

Rocket’s shares have lost 17% since floating in Frankfurt last month, as markets around the world have sharply revised their outlook for the world economy. The Economic Times said Rocket is looking to get $700 million for its stake.

No-one at Amazon was immediately available to comment on the report.

Amazon’s main competitor in India, the Bansal brothers’ company Flipkart, recently made a similar move by buying Myntra.com, one of Jabong’s biggest rivals in online fashion retail, back in May. Both Flipkart and Amazon have annual sales in India of a little over $1 billion.

Jabong’s sales more than tripled in 2013, but were still only $72 million. The company made a net loss of $47 million. However, India has barely begun to shop online. Internet shopping accounted for less than 1% of retail sales last year, compared to over 11% in the U.S..

The number of Indian internet users is set to pass 280 million by 2018, according to IDC research. That would make it the world’s second-largest market in terms of users after China.

But Jabong, like Amazon (and Singapore-registered Flipkart), is hampered in the Indian market by laws limiting foreign investment. As such, it is forced to operate as a wholesale company and can only act in legal partnership with locally-based retailers–something that compresses its margins.

In its IPO prospectus recently, Rocket noted that “Jabong’s target margins are significantly lower” than the than those of most of the other “proven winners” in its portfolio of e-commerce sites.

India’s new Prime Minister Narendra Modi has promised to make the country more attractive to foreign investment, but has so far failed to follow through on hints of lifting the restrictions on retailers.

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