Stage set for battle of giants over India’s e-tail market

Amazon puts spanner in Future Group deal with Reliance

Business

October 19, 2020

/ By / New Delhi

Stage set for battle of giants over India’s e-tail market

The deal between Future Group and Reliance Industries has sparked off a retail war with Amazon

As Mukesh Ambani stitches series of deals to establish market leadership in India’s e-commerce and retail market, rivals, notably Amazon and Walmart, are not likely to stand by and watch.

After playing havoc with the Indian telecom market through his startup venture Jio, India’s richest businessperson and chairman of Reliance Industries Mukesh Ambani has set his sights on the booming retail business in the country. It has recorded double digit growth over the past three years, rising from about USD 950 billion in 2017 to over USD 1.1 trillion now. With a young and highly aspirational population, the market is all set to continue its heady growth for many more years to come, especially due to the rapid digitalisation of the Indian economy as data consumption jumps dramatically. Online retail has grown from about USD 32 billion in 2018 to well over USD 60 billion in 2020.

Over two years ago, even as Jio was rapidly gaining foothold in the telecom industry and picking up subscribers by tens of millions every month, Ambani began working on Jio Platforms which would connect Jio’s subscribers to myriad services that the Reliance Group could offer. Building a comprehensive retail network was one of the first options for Ambani. Though present in retail business for a few years through Reliance Digital, Reliance Fresh and Reliance Trends among brands, Ambani’s presence was extremely limited in comparison with brick and mortar players like Future Group, D-Mart or Aditya Birla Retail as well as with e-commerce giants like Walmart-owned Flipkart and the big daddy of global e-commerce Amazon.

Stitching up a deal to buy controlling stake in Future Group would allow Ambani to leapfrog ahead of competition and build a strong presence in the sector.

“With acquisition on Future Retail, Reliance has practically eliminated one of the competitors from the Market. The deal will help Reliance to get an access to about 2,000 retail stores across the country. For Reliance it’s a win-win situation. Apart from adding Future’s customer base, Reliance will also have an upper hand on bargaining better deals with its suppliers since now it has the complete value chain in terms of online / offline retail,” Naveen Malpani, partner, Grant Thornton, a consultancy tells Media India Group.

“With its omni-channel strategy, Reliance – Future (combined revenue INR 1300 billion) deal will not only pose challenge to e-commerce giants like Flipkart but also to retail giants like D Mart (INR 250 billion) and Aditya Birla Fashion Retail. (INR 87.88 billion),” he adds.

The stores will not only provide Reliance with access to the customer footprint of the Future Group which Reliance can then build upon. Reliance will also gain billions of data points that Future Group built over the years. Another advantage for Reliance of course will come in the shape of added weightage that it would have while negotiating with its vendors as it will command much larger orders. Better pricing for Reliance at purchase point will translate into higher margins as well as more competitive pricing in order to capture a larger market share in the offline and online retail market of the country.

Little surprise then that Amazon has decided to sue the Future Group saying it violated a contract by entering into the deal with Reliance. Last year, Amazon agreed to pick up a 49 pc stake in Future Coupons Ltd, which owns 7.3 pc of Future Retail. That deal gave Amazon roughly 3.6 pc in India’s largest listed retail entity. As part of the agreement, Amazon holds the first right to acquire all or part of the promoters’ shareholding in Future Retail, between three and 10 years after the transaction, i.e post-November 2022. The agreement also has a clause that restricts them from selling the shares to any third party or competitor without their consent.

About two months ago, cash-strapped Future Group that runs Big Bazaar, the largest brick and mortar organised retail store chain in the country, agreed to a USD 3.4 billion sale agreement with Reliance under which the Ambani flagship would buy the retail, wholesale, logistics and warehousing units, almost doubling its footprint as India’s largest retailer.

Reliance vs Walmart v/s Amazon

The emergence of Reliance in the sector with a strong footprint in bricks and mortar side of the business as well as potentially a strong footing in the digital side of the business. It is in this context that Amazon has challenged the deal, claiming that it had the ‘first right’ to acquire all or part of the promoters’ stake in Future Retail and that its agreement with Future Group also included a non-compete clause.

The war for a slice of the burgeoning retail industry comes at a time when Reliance Retail has been on a fundraising spree, garnering nearly INR 375 billion in less than four weeks from global investors. And adding its e-commerce outfit under Jio Platforms to over 14,000 retail outlets, Reliance is well-poised to enhance its footprint in offline and online retail segments.

On the other hand, Amazon founder Jeff Bezos has made the nascent Indian market, with its 1.3 billion consumers, a key focus of its global expansion. He has already pledged to invest USD 6.5 billion in the country. He’s also facing competition from Walmart, which spent USD 16 billion in 2018 to acquire local e-commerce leader Flipkart Online Services Pvt. and has further invested over USD 1 billion this year in the entity after selling its India operations to the e-retailer.

For Amazon, the Indian partner was crucial to strengthening its foothold after becoming the authorised online sales channel for Future Retail’s stores that sell everything from groceries to cosmetics and apparel. The war for a slice of the emerging market is reshaping India’s retail landscape, with Reliance, Amazon and Walmart Inc. looking to dominate the field. Also, Tata Group, the USD 113 billion conglomerate, is believed to be getting ready to enter the fray. This should set in place a rapid consolidation of the market with the big players remaining in the market. “We foresee further consolidations happening in the industry with niche/specialised players dealing in aspects like cosmetics, pharmacy, food etc. being acquired/amalgamated with the bigger players.  From a consumer perspective, this will be highly beneficial who stands to gain in form of higher discounts, better quality and services,” says Malpani.

Though the current battle between Amazon and Reliance is on the bricks and mortar side of the business, the fastest growth for the foreseeable future in the country will come from the e-commerce segment, especially in view of the coronavirus pandemic as customers have begun switching to online purchases of most of their needs, mainly to avoid the risk of contracting the infection. “While the pandemic has dented consumer optimism, e-commerce will be the faster and efficient way of getting retail sector back on its feet. On an overall basis e-commerce will be the ‘new normal’ for retail sector,” says Grant Thornton’s Malpani.

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