How do you kill two birds with one stone? Ask Mukesh Ambani, the Chairman and Managing Director of Reliance Industries (RIL). As global corporations are fighting a survival battle, Ambani has managed to pull off four large deals with Facebook, General Atlantic, Silver Lake, and Vista Equity Partners in the past few weeks. Through these investments, Reliance has raised a whopping Rs 67,195 crore - a large chunk of which will go to retire RIL's huge debt. Simultaneously, the deals have also propelled RIL's next growth phase: the $700-billion 'new commerce' opportunity.
In July 2018 when Ambani first announced the 'new commerce' venture, he said that it has the potential to redefine retailing in India and become one of the biggest new growth engines for Reliance in the years to come. Essentially, new commerce is an integration of RIL's digital and physical marketplaces, and the idea is to leverage the company's entire distribution stack to tap the large universe of MSMEs, farmers, and kiranas. With the Facebook deal, Ambani expects to leverage the wide reach of Facebook-owned WhatsApp to speed up the new commerce business.
So while Reliance has many apparent upsides from the deals, what's in it for its four global partners? The deals with General Atlantic, Silver Lake and Vista are more strategic that could benefit them if the valuations rise in the future as more investors join the Jio party. The partnership with Facebook, on the other hand, is deeper because it intends to explore mutual opportunities in areas like e-commerce and the offline-to-online (O2O) segment which has suddenly been gaining traction in the COVID-19 situation. It's clear that the stakes are really high for Facebook as compared to the other three, but in a way, they will all benefit if Ambani could execute his plans.
The Repositioning Game
The last two years have been particularly life-changing for Reliance Jio. How? After setting up a large 4G network across the country covering nearly 98 per cent of the population, Jio began acquiring (and partnering with) tech-focussed companies to enhance capabilities in areas like AI, IoT, 5G, robotics and drones.
More than a dozen investments have been made - ranging from a few hundred crore to Rs 700 crore for AI firm Haptik - with a single aim: to reposition Jio as a digital company rather than just a plain-vanilla telecom operator.
This aim also dovetails into Ambani's larger goal of moving RIL away from being an energy-focussed company. For years, RIL was perceived as an oil and gas major which doesn't have the ability to run a consumer business. In 2018, it started efforts to change that notion when the company embarked on a mission to earn over 50 per cent of its revenues from consumer-facing businesses in the next 10 years.
RIL entered the retail space in 2006 and the telecom business in 2010, the perception didn't change until recently (in 2019) when Reliance Retail became the largest retailer in the country, and Jio surpassed the incumbents in terms of subscribers numbers. Though in terms of revenues, the consumers businesses (telecom and retail) account for 29 per cent of the overall revenues, their contribution is likely to cross 40 per cent in FY21, and even higher in the subsequent years.
"These deals will help RIL reposition itself as a consumer/technology company," said a May 8 report by Axis Capital. "The recent round of investments has further cemented RIL's resolve to build upon the repositioning plank," says a telecom analyst.
But what's the need to reposition RIL as a consumers+tech company? In the words of RIL CFO Alok Agarwal, the repositioning exercise has huge benefits. How? In the recent earnings call, Agarwal said that three tech companies in the world command a market capitalisation of $1 trillion each. In comparison, all the energy companies don't even have a combined market cap of $600 billion. "So essentially, investors have taken to the tech and consumer companies - Amazon, Apple, Microsoft, etc - as new investment themes," he said. At an enterprise value of $74 billion (assuming exchange rate of Rs 70 per dollar), Jio Platforms (the RIL subsidiary where the deals are happening) seems to be marching in that direction but it still has a long way to go.
A recent report by Comparisun, an advice platform for small businesses, says Ambani could leapfrog into the trillionaire club by 2033, following Amazon's Jeff Bezos, Alibaba's Jack Ma, and two more tycoons.
RIL has indicated that Facebook's investment is just 50 per cent of the targeted "value unlocking" that RIL has in mind for Jio Platforms. Given that Jio Platforms has emerged as the new poster boy in the tech world, more global investors would be considering buying a piece of it.
Hong Kong-based brokerage firm CLSA says there are 11 tech companies in the world with over $5 billion of net cash position, including Apple, Alphabet, Alibaba and Microsoft, who could potentially invest in Jio Platforms going forward. That means that if more global investors buy RIL's repositioning story at higher valuation (as it has happened with General Atlantic, Vista and Silver Lake), the benefits will be reaped by all the existing shareholders.
How Facebook Got Lured In
Much like RIL, Facebook has not been satisfied with its current state. Despite earning a large chunk of its revenue from advertising (98.5 per cent), Facebook has been actively pursuing opportunities in the e-commerce space for the past four-odd years. Going back to its history, the social media giant focussed on building products for the first 12 years of its existence, and made itself a preferred ad platform for brands. But in 2016, it rolled out a consumer-to-consumer platform (Facebook Marketplace) followed by the 'Checkout' feature that lets users complete the transaction within the app.
Most recently, it has gone a step ahead with a new feature, Facebook Shops that allows businesses, particularly smaller ones, to sell their products right on the Facebook and Instagram platforms. While Facebook will earn ad revenues from these businesses, it can also earn commissions for facilitating payments. This is definitely a deeper engagement from Marketplace feature that allowed just listing, and advertising of products by sellers on Facebook. Of course, the idea to introduce Shops is to accelerate the e-commerce business since the existing Marketplace and Checkout features haven't really done well.
With Jio partnership, Facebook has set its sights on the growing Indian e-commerce and O2O markets. The tie-up is an extension of a half-hearted attempt made by Facebook last June with an investment in start-up Meesho that enables resellers and individuals to connect with buyers on social media platforms like Facebook and WhatsApp.
Analysts say that India is a large market for Facebook given the large user base on both Facebook (328 million) and WhatsApp (400 million). It's one of the most attractive markets to establish e-commerce presence given the vast demographic potential and absence of a single large established player. Currently, Amazon and Flipkart are two leading online players but their share is rather small in the overall retail pie. "There is no large established e-commerce player in India which is strong in O2O model," said a recent report from Credit Suisse.
For Facebook, the reason to invest in Jio Platforms is five-fold: to mine the data of Jio's 388-million subscribers, strengthen its e-commerce plans, push its WhatsApp platform for payments and businesses, tide over regulatory challenges, and using Jio's telecom infra backbone to rollout new-age products - Oculus VR and enterprise solutions.
For instance, WhatsApp business account is currently being used by a lot of online service providers such as MakeMyTrip and Lenskart to communicate with their customers. WhatsApp charges for every message sent to the user. With its integration into JioMart (a Reliance Retail subsidiary), WhatsApp can tap a large number of local kiranas and small and medium businesses (SMBs) to use its paid service to communicate with their customers. Thus, it translates into additional revenues for Facebook.
Raja Lahiri, partner at Grant Thornton says that an investor, through RIL, gets a platform and a funnel to the entire consumers, telecom, retail, and internet space in India. "Global investors understand the impact of RIL in India, and that it knows the local market well which will help them to participate in the digital opportunity here," he says. Indeed, one of the key reasons for Facebook's investment in Jio Platforms was to bring onboard a strong local partner who can help it solve the regulatory puzzle. For more than two years, Facebook-owned WhatsApp has been struggling for approval for a full-fledged rollout of its payments service, WhatsApp Pay.
Though experts say that there could be a potential friction between Facebook and RIL since they are both going after the same set of SMEs and merchants to build scale for their e-commerce portfolio. In the current arrangement, RIL's offline strengths (with Reliance Retail) and Facebook's vast online reach (with WhatsApp and Facebook) have got the partners together. But at some point, there would reach a point where RIL may feel threatened by Facebook's access to its SMEs and merchant base given that Facebook is going aggressive on its e-commerce vertical.
Taking on Amazon and Flipkart
Even though Amazon and Flipkart are leading the domestic online e-commerce space; their share is rather tiny in the overall retail pie. That's because around 88 per cent of the domestic retail sector is unorganised and just about 4 per cent is e-tailing, according to an August 2019 report by CARE Ratings. Most large online retailers work on the marketplace model, and a bulk of fulfilment is done through a handful of merchants.
But that could potentially change if JioMart's O2O model actually works. Take a look at the grocery (kirana) segment that JioMart plans to tap first. About 97 per cent of the grocery segment in India is unorganised. Grocery segment is important because it accounts for over 50 per cent of the monthly wallet share, especially for the middle- and lower-income consumers.
So while Amazon, Flipkart, Future Group, D-Mart, BigBasket and others are fighting for 3 per cent grocery share, Ambani is going after the bigger pie. And he's going to leverage the offline and online reach of Jio and Reliance Retail to connect the last-mile kirana merchant with a bigger audience.
Thus far, JioMart has rolled out grocery services in three neighbourhoods of Mumbai - Kalyan, Navi Mumbai and Thane - to deliver daily consumption items such as staples, soaps, shampoos and household items. Ultimately, the target is to tap 30 million kiranas across the country in addition to 60 million MSMEs and 120 million farmers.
Devangshu Dutta, founder of Third Eyesight, a consulting firm focussed on retail and consumer products, says that for any large corporate to grow in retail, grocery is the most important segment. Other experts say that grocery, though large, is a low-hanging fruit. More retail segments like medicine distribution, fashion and lifestyle stores, and food delivery are likely to be explored later.
But there's more to it. RIL is known for its backward integration capabilities from its early days. Starting as a textile player, RIL has moved backwards into the value chain over the years - from polyester to petrochemicals and refinery.
It has replicated a similar strategy in the retail business where it's sourcing groceries from a large number of farmers and small vendors in a farm-to-fork model. The direct sourcing of groceries could enable Reliance Retail to get into high-margin private labels business. The experience in the retail business is likely to be leveraged to benefit partner kirana stores by bringing down their cost of procurement, etc.
"There are multiple opportunities for Facebook and RIL. But I see businesses with less friction picking up first. It might start with integrated digital payments, and over a period of time, when there's a visibility of the merchants' credit profile, new lending products can be created. As such, small merchants like kiranas don't have enough financing options," says Dutta.
"Additional synergies are expected to arrive in the form of Reliance Retail pushing its margin-accretive private label products to these (kirana) stores and providing easy credit terms," said analysts at Motilal Oswal in a recent report.
The next big frontier that RIL would tap is SMEs. In India, there are over 50 million SME units that account for 37.5 per cent to the country's GDP. For RIL, the opportunities are two-fold: digitise these SMEs and provide them lending facilities. For instance, as per Cisco India, 70 per cent of these SMEs are offline. With Facebook's digital tools coupled with RIL's in-house capabilities, a large number of these SMEs can be digitised.
Then, as per ratings agency CRISIL, SMEs accounted for 25 per cent of the corporate lending in the country in FY19. The current lending to SMEs stands at over Rs 17 lakh crore. With data mining tools, and access to other high-quality data, Jio can develop new revenue stream of lending to these small businesses. It already holds a payments bank licence (with SBI) but it hasn't been able to make good use of it. With millions of merchants and farmers on its platform, it could create a bouquet of services around loans, insurance and mutual funds.
Even as these investments seem like a valuation game at the moment, the task before Ambani to make his 'new commerce' gambit work is going to be daunting. Since the nuts and bolts of Facebook deal are yet to come out, it's safe to assume that there will be moments of conflicts between the partners. But then, if the potential market to tap is huge - bigger than the one currently catered by Amazons, Flipkarts and Future Groups of the world - there will be immense room for growth.
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