Business Today

Retail Battlezone

With e-commerce poised for exponential growth in India, the country is fast emerging as the new battleground for global retail giants. Can local players withstand the onslaught?
twitter-logoAjita Shashidhar | Print Edition: June 17, 2018
Retail Battlezone
Walmart CEO Doug McMillon (L) with Flipkart Group CEO Binny Bansal

The two American retail giants have fought pitched, bruising battles on their home turf, and in markets around the globe. Walmart, the world's largest retailer, and Amazon, the e-commerce behemoth, have crossed swords once more, this time in the fastest growing major economy, India.

Jeff Bezos-owned Amazon, with its smart technology-backed consumer solutions, has always had the upper hand. It has left Walmart little choice but to join the digital bandwagon to grow. In the last couple of years, Walmart has made a bevy of online acquisitions across the world, from in the US to in China. The most recent is, of course, the $16 billion (Rs1.07 lakh crore) investment in Indian online retail major Flipkart - its costliest acquisition so far. Despite these expensive investments, Walmart has consistently struggled to make its e-commerce strategy a success. In 2017/18, Walmart's net income dipped to $10.5 billion (from $14.2 billion). Amazon's, on the contrary, grew by 28 per cent in 2017.

Amazon has outwitted Walmart in almost all the markets the two have competed in. In the UK, Walmart had invested in Asda, a supermarket chain, and business was kind of chugging along until Amazon tied up with grocery retail company Morrison and started delivering grocery at the doorsteps of consumers. Walmart sold Asda to Sainsbury last year for $10.1 billion, keeping a 42 per cent stake for itself. Similarly, in Japan, Walmart had acquired retail chain Seiyu and was struggling to make a success of its proprietary EDLP (Everyday Low Pricing) model. When Amazon entered the market in 2017, Walmart hurriedly tied up with online retailer Rakuten to provide online grocery delivery. In China, Walmart didn't have to fight it out with Amazon but had to be happy playing second fiddle to market leader Alibaba which has an 80 per cent share of the retail market in the country.

Amazon has a clear upper hand in India too. To begin with, Walmart has invested in a business that might have grown by over 30 per cent in the last one year but it has incurred a whopping Rs8,771 crore loss (on revenue of Rs19,855 crore) in 2017/18. In fact, Flipkart's losses last year were almost half of Walmart's total profits. If it keeps losing money, it will show up in Walmart's bottomline.

Amazon entered India a good five years after Flipkart launched its business but is neck and neck with it in market share. While Flipkart's gross merchandise value (GMV) is at $7.5 billion (Rs48,750 crore, which includes $2.2 billion, or Rs14,300 crore, of Myntra and Jabong), Amazon's is $5 billion (Rs32,500 crore). Amazon also has an edge in terms of being more diversified. While Walmart is only about retail, Amazon likes to call itself a technology company which also offers online retail. Its various tech offerings such as Kindle, Firestick, Alexa as well as Amazon Prime (which has over 100 million subscribers all over the world), contribute significantly to its revenue. In fact, its non-retail businesses such as advertising and Amazon Web Services (which leases computing power and data storage to companies) are the fastest growing businesses. Its advertising business in the first quarter of 2018 grew by almost 100 per cent while Amazon Web Service grew by 40 per cent.

But Amazon, too, is very much in the red in India. It is known to have clocked losses of over Rs3,000 crore (on an aggregate revenue of Rs15, 684 core) in 2017. While the company is profitable as a whole, almost all its international businesses are loss making. Amazon's international business losses are known to have gone up by 29 per cent in the March quarter to $622 million. Still, Amazon's market capitalisation ($787.74 billion) is much higher than Walmart's ($244.61 billion) despite the latter's revenue being three times more.

The sheer size and scale of the Indian market has tempted the two retail giants - a 1.3 billion population, an e-commerce market worth $38.5 billion (Rs2.5 lakh crore) and surging, and internet economy at $125 billion(over Rs8 lakh crore) and expected to double by 2020.

No wonder, Amazon, after committing a $5 billion (Rs32,500 crore) investment in 2016, has injected another Rs2,000 crore to fulfill its online grocery retail ambition. "We are delighted and humbled by the customer response to Amazon in the last five years. India continues to be one of our fastest growing regions, and we remain focused on investing and innovating here to transform how India buys and sells, and enhance the daily lives of our customers," says Amit Agarwal, Senior Vice President & Country Head, Amazon India.

Similarly, Walmart has been eyeing the Indian consumption basket since early 2000. But unfriendly retail policies that don't allow foreign direct investment in multi-brand retail have consistently been playing spoilsport. Walmart entered the country through a JV with Bharti Retail in 2007 and set up cash and carry stores. It eventually went on to set up its own wholesale (100 per cent FDI is allowed to set up cash and carry stores) Fair Price stores. But a presence in wholesale retail has its limitations. In fact, Walmart's India entry through Flipkart (with a 77 per cent stake) has been rather expensive. "I am surprised Walmart invested so much on Flipkart," remarks Arvind Singhal, Chairman of retail consultancy Technopak Advisors. A former CEO of a leading cash and carry retail company claims, on condition of anonymity, that Flipkart has billions of dollars of obsolete inventory that Walmart wouldnt know about. "They will discover many more hidden losses," he says. But Walmart is determined to have a dominant share of the Indian retail pie and not be a fringe player, replicating its China strategy.

Amit Agarwal, SVP & Country Head, Amazon India (L) with Jeff Bezos, Founder, Chairman & CEO, Amazon

Walmart had acquired Chinese online retailer Yihaodian in 2011, which just had a 2 per cent share of online sales in the country. So, in 2016, it picked up a 5 per cent (now 12 per cent) stake in and has since then managed a more respectable 20 per cent share of the Chinese online retail market. "The Flipkart investment is an opportunity to partner with a local e-commerce leader with strong leadership and a culture of innovation and service. We believe the combined capabilities of Flipkart and Walmart will create India's leading e-commerce platform. Flipkart will leverage Walmart's omni-channel retail expertise, grocery and general supply-chain knowledge and financial strength, while Walmart will benefit from Flipkart's talent, technology, customer insights and agile and innovative culture," says a senior Walmart executive. Out of the $16 billion deal, the retail major is supposed to infuse $2 billion directly into Flipkarts business.

While the industry at large is sceptical about Walmarts ability to make a dent in the Indian e-commerce market considering its past track record, the Indian retail industry will see some massive amounts of money being spent by the leading players in the coming months.

Multiple Play

Unlike the US and China, where the likes of Amazon and Alibaba have complete monopoly of the e-commerce market, India will have multiple contenders. "India will be a unique and different battle ground from anywhere else in the world, where typically there is one dominant player and the second player has a 10-20 per cent share," says Govind Shrikhande, MD, Shoppers Stop. Chinese retail behemoth Alibaba has already invested in Snapdeal and Paytm. "Snapdeal is India's only independent and genuine marketplace of significant size, which offers both scale and a safe space for small enterprises to sell online. Unlike other inventory businesses masquerading as marketplaces, we do not compete with our sellers by buying inventory or distorting prices," points out a senior executive of Snapdeal.

The e-commerce company was one of the first movers along with Flipkart in India, but has considerably downsized its business after accumulating huge loses. Alibaba has a 3 per cent share in Snapdeal and a considerable stake in Paytm. In 2017, Alibaba increased its stake by investing $177 million (Rs1,150 crore) into Paytm Mall. The online market place was demerged last year from the online wallet and digital payments firm One97 Communications, that owns the Paytm brand. Alibaba initially picked up a 40 per cent stake in Paytm as a whole along with its payment arm, Ant Financial, which has now gone up to 62 per cent.

There was speculation about Alibaba wanting to merge Paytm Mall and Snapdeal last year but the Chinese retailer has been rather quiet of late. Is it waiting for norms allowing FDI in multi-brand retail?(Right now the FDI norms only allow foreign investment in e-commerce market places, cash and carry retail and single brand consumer facing retail entities)? Only time will tell.

Kishore Biyani Chairman, Future Group (Photo: Rachit Goswami)

In fact, Alibaba has both online and physical retail presence in China. And doing only online business in India is indeed an expensive proposition. "Both the US and China dont tax online sales, so they are able to offer 12-18 per cent discount to the customer without taking it out from their pocket. In India, online and offline have similar taxes, so there is actually no benefit of buying online. Therefore the online platforms have no option but to deep discount in order to attract traffic," explains Shrikhande of Shoppers Stop. Also, the way online commerce functions in India is quite different from the rest of the world. "The US and China is all about assortment and convenience and all about multiplier effect rather than discounting. The model of profitability is different in India. It is going to be difficult to make money because you continue to discount which is not the case in the US or China," Shrikhande further explains. None of the e-commerce market place businesses in India are profitable.

While the Amazon India spokesperson claims that their assortment of 170 million products and a network of over 3 lakh sellers gives them scale and therefore they will not need to discount, the fact remains that the Indian e-commerce ecosystem has already spoilt the consumers with deep discounts and to hold on to them the global biggies will also burn cash and play the discounting game. The Walmart India spokesperson refrained from commenting on their strategy.

Indian Musketeers

Whether Walmart would be able to outwit Amazon in India is anybody's guess but both the global majors are flush with capital and wouldn't really care about profitability in a bid to capture the Indian market. This will certainly imply that Indian retailers will come under considerable stress, at least in the short to medium run, as most of them are starved of capital. The Indian retail industry doesn't offer a level playing field, complains Kumar Rajagopalan, CEO of Retailers Association Of India (RAI). Rajagoplan believes that there is a complete lack of understanding of retail in India and our FDI norms are the most complex in the world. Instead of the FDI policy focusing on brands coming from outside the country, the Indian government should have given impetus to Indian brands for becoming global, according to Rajagopal. "We told our retailers that you are poor, so we will create protectionism policies for you which effectively is not protectionism. It was a policy that allowed leakages, it allowed for some guys to come in a round about manner and create competition at a large scale. We have not allowed small kids to grow but allowed outsiders to come and fight with with the small kids. We have small kids fighting with large professional wrestlers from outside of the world. That's the unfortunate situation," points out Rajagopalan. "The government has been foolish to discourage foreign investment in physical retail," agrees Singhal of Technopak

So, how are Indian retailers coping with the situation? Most of the big Indian retail companies - be it Reliance Retail, Future Group or D-Mart - are physical retail companies who are trying to venture into e-commerce through an omni-channel presence. Reliance Retail has digital platforms, such as (fashion) and (grocery), where it has aggregated inventory from its various physical stores and delivers to its consumers at the click of a button. Similarly, Future Group has recently launched digitally enabled neighbourhood grocery stores (where consumers can't just shop at the store, but also order online) under the Easyday brand. It also has a partnership with Amazon to deliver fresh food across five cities. D-Mart, Indias most profitable chain of grocery stores (valued at Rs85,000 crore) has D-Mart Ready, it's omni-channel venture. None of the Indian retailers is willing to admit that business won't be as easy for them.

Govind Shrikhande MD, Shoppers Stop (Photo: Rachit Goswami)

Kishore Biyani, Chairman of Future Group, claims that he is more than prepared to counter the global majors. "Flipkart and Amazon have been around for a while and have always been well-funded. I don't see any big shift happening in the way they do business just because Walmart has entered the fray. We are well spread and know our consumers and market really well. If anyone should worry it is them (the global retailers) and not us," says Biyani. However, Biyani has been talking about selling a 10 per cent stake to a foreign retailer. When he had announced his ambitious Retail 3.0 strategy late last year, where he rolled out a plan to offer technology-enabled retail services through his neighbourhood retail format EasyDay, he had talked about aligning with a partner to set up a marketplace model through which he could not just sell grocery but other merchandise, such as apparels, as well. "Besides grocery, we can put up a marketplace where everything is available. That will be in the second phase. We can build our own marketplace or align with somebody," Biyani had said. The Rs18,000 crore retailer has close to 15 million sq.ft. of retail space across its 1,035 odd stores.

However, it is Reliance Retail which is best placed to fight the global retailers as it is cash rich. The company became a $10.6 billion (Rs70,000 crore) entity in 2017/18 fiscal, the first Indian retail company to achieve such a scale. Its PBDIT grew 114.5 per cent, from Rs1,179 crore to Rs2,529 crore. With a retail network of 4,000 stores and a formidable telecom presence through Jio which has 160 million users, Reliance Retail has both scale and capital. "If at all there is anyone who can truly challenge Amazon and Walmart in the online space, it is Reliance. Some of the other big retailers may have scale or may be immensely profitable, but none have an online presence," says an industry expert.

But Reliance Retail Chairman Mukesh Ambani, says a company insider, is not too convinced about the e-commerce business model, as he believes that the valuations are too opaque. The company, according to this insider, has test-marketed its online grocery retail business and is ready to roll out, but Ambani plans to wait and watch. The company right now is making its various physical retail businesses multi platform by technologically empowering them. "Technology is bringing disruptions across businesses. Retail is not isolated from the impact of technology. Retailers will have to leverage technology advancements to enhance value proposition and create competitive advantage. Convergence of multiple channels will be one important aspect of retail business," says a senior Reliance executive.

Ambani himself has reiterated his commitment to the retail business at the recent shareholders meet. "In the next decade, consumption spending in India will grow four times and organised retail six-eight times. In our retail business, we have market leadership through size, scale, number of customers, multiple formats and a commitment to provide value to customers every day. We will continuously expand Reliance Retail's geographic spread and fulfillment capability. We will position it as retailer of choice in both urban and rural India. I have asked the leadership team in our consumer businesses to set themselves a target of achieving profitability similar to our energy and materials business within the coming decade," he said.

The smaller Indian retailers, though not willing to admit that Walmart and Amazon could be a serious threat to their brick-and-mortar business, are quietly tweaking their strategies. Value retailer V-Mart, for instance, is looking at penetrating Tier-IV towns such as Chakia in Bihar and Gaurigunj in Uttar Pradesh (UP). Lalit Agarwal, Chairman and MD of V-Mart, claims that his company understands tastes and preferences of small town India much better than anyone. "Stores in smaller towns have totally different procurement, supply chain and store marketing needs which will be difficult for a global retailer to understand." Agarwal says that small town India is largely a brick-and-mortar retail market as a store visit for a consumer in a place like Gauriganj in UP is more a recreation. "Make sure that the assortment is right. The products have to be well-styled, well-priced as well as of excellent quality. A garment that a small town customer buys is washed at least 35 times a year since he/she has limited affordability. So, if the quality isn't good, the customer won't come back. I don't think any ecommerce company would understand these finer details," explains Agarwal.

On the other hand, Falguni Nayar, Founder of online cosmetic retail company Nykaa, seems undeterred by the all the noise on e-commerce battles. "Speciality beauty retail stores like Sephora have done extremely well in the same markets where Walmart and Amazon operate. Beauty retail requires an inventory model where the retailer has to be obsessed about the quality of products it sells." Retail isn't a winner takes all business, therefore there will be other retailers too, says Rajagopalan of RAI. "The Indian retailers need to get the basics of retailing right, which is make sure that their assortment and availability is right, and also ensure they create attraction for customers to come in."

Lalit Agarwal Chairman & MD, V-Mart (Photo: Reuben Singh)

In the absence of FDI in multi-brand retail, many retailers like Future Group would also want to sell 5-10 per cent of their stake to one of the global e-commerce companies. This will be a win-win for both as the e-commerce companies will also get access to a physical store, while the Indian retailer gets the much needed capital. Amazon, for instance, has picked up 5 per cent stake in Shoppers Stop, which according to Shrikhande is beneficial for both sides. The investment has helped the company reduce a significant amount of its debt. "We started the year with Rs850 crore consolidated debt, today the total debt is just Rs87 crore." From a commercial standpoint, Shoppers Stop catalog will be listed on Amazon, and its private brands will get priority. "The traction of Amazon is 10x of It will help us in reaching towns where we are currently not present. We are currently at 83 stores in 37 cities. India has 200 plus cities and that will increase our reach," he explains. From an Amazon point of view, Amazon experience centres are soon going to come up at Shoppers Stop stores. "What it means is that there are lot of products available on Amazon exclusively, but not available to customers in physical stores to touch and feel. The customers will now be able to touch and feel the products too," says Shrikhande.

Harsh Shah, Co-Founder, Fynd, an offline to online marketplace that recently got funded by Google, says that the next few months will witness quite a few right sizing of stores. "A fashion brand may not need 10 stores in Mumbai as a lot of fashion shopping has moved online. So, the brand may close down a few stores and move the capital to Tier II-III towns and open stores there. The winner will be an offline to online business model and not this versus that."

Grocery Retail

Online retail, so far, has been all about electronics and fashion retail - it covers almost 80 per cent of e-commerce retail. However, food and grocery, a $550 billion market in India, is an area that most e-commerce companies have shied away from. A few start-ups, such as Local Banya, did try their hand but badly burnt their fingers. Grocery is an extremely low margin business and companies have found it extremely difficult to deep discount. However, the likes of BigBasket and Grofers have stayed on after learning from their mistakes and reinventing themselves.

Grocery retail is all about efficient buying and sourcing, and e-commerce companies now don't want to miss out on the opportunity as it will help them get volumes. After all, a consumer shops for a mobile phone probably once a year or buys an outfit once in two months but grocery shopping happens literally every week. E-commerce companies have started investing heavily in getting their grocery business model right. In fact, the Walmart spokesperson says that their focus would largely be grocery retailing in India as it is their core competency. "Grocery will be the next holy grail of e-commerce retailing," says Vidhya Shankar Sathyamurthi, Executive Director, Grant Thornton India LLP.

Amazon has recently pumped in close to Rs2,000 crore in its grocery business - 15 of its 67 fulfilment centres are dedicated to fruits and vegetable retailing, claims the Amazon India spokesperson. It also has Amazon Now, currently in five cities, where it has partnered with a whole bunch of local retailers and the likes of Big Bazaar to deliver fresh vegetable and fruits in just two hours. It also has Amazon Pantry service in 30 cities where it delivers grocery in a box.

Walmart on the other hand plans to make use of its cash and carry retail experience in India to take its online grocery retail business forward. The retailer has 21 Best Price stores along with fulfilment centres in each of the nine states it is present in. "We have been serving more than one million members, especially kiranas and other small businesses, since we opened our first store in the country in 2009. Our goal in the next few years is to increase the total number of Best Price stores in India to 70," says the Walmart India spokesperson.

While Walmart already sources fresh vegetables and fruits from farmers, Amazon too is testing a similar model in Pune. With the Government allowing FDI in food retail, Amazon India, says the companys spokesperson, is also looking at creating an inventory model where it would sell its own food brands. Walmart already has an array of private brands at its cash and carry stores under the brand names Right Buy and Member's Mark. "The private labels evolved following an in-depth and meticulous research on the demographic structure of the country and unique aspirations, needs and demands of various business segments," claims the Walmart spokesperson.

A private label strategy seems the best way out for e-commerce retailers as the margins in FMCG are in low single digits and deep discounting may not be a great idea. The FMCG companies themselves may not allow the online retailers to deep discount, points out the former CEO of a leading cash and carry retail chain. "I think deep discounting is utilised when there is no strategy behind the thought process. In grocery, it will be harder as the margins are limited. Private Labels will be the long term strategy for all the companies," says Albinder Dhindsa, Co-founder of online grocery retail company Grofers that offers a basket of private brands. The margins for a retailer can be anywhere between 10-12 per cent compared with single digit margins that regular brands offer. This explains the rationale behind Kishore Biyanis bet on his consumer business. The Indian retail king has over 27 brands that he sells out of his 1,000 odd stores. He plans to have over 10,000 neighbourhood stores by 2022, where he would sell primarily his own brands and the consumer would have the luxury of buying them online too. Biyani's food brands also cater to regional tastes. His atta brand, Desi Atta, has 59 varieties. "Atta is where diversity of India shows up. In some places ragi atta does well, elsewhere jowar atta does well. We are launching SKUs (stock keeping units) like crazy," says Biyani.

So, does Walmart, Amazon or even Paytm Mall have the wherewithal to create a hyper local grocery retail model? Dhindsa of Grofers says: "Grocery is a business with a unique supply chain which in our case runs on proprietary technology which ensures fill rates of over 99 per cent. Anything that Amazon or Walmart currently do in India does not translate into any advantage when they get into the grocery business. This is why Amazon has struggled with grocery for three years and counting." Dhindsa says none of the online marketplaces have succeeded in grocery retail. Grofers itself moved from a marketplace model to an inventory model.

Albinder Dhindsa Co-founder, Grofers (Photo: Nilotpal Baruah)

In fact, Arvind Mendiratta, MD and CEO of Metro Cash & Carry Retail, says e-commerce will get good results in electronics and fashion. "As far as food and grocery is concerned, the kiranas will continue their dominance. We have a complex and diverse country where tastes and food preferences change every 100 km and only the local kirana store can adapt to these changes." But both Amazon and Walmart are determined to conquer online grocery retail in India, and to do so they are talking about partnering with kirana stores. Amazon, for instance, has a programme called I Have Space (IHS) where it partners with local store owners across different cities to deliver products to customers within a two - four kilometre radius of their store. "On an average, Amazon India's store partners deliver between 20 to 30 packages a day, earning a fixed amount per delivery. Amazon has 17,500 IHS stores in 225 cities across India," points out the Amazon India spokesperson.

Singhal of Technopak does not buy the two American retailers claims of partnering with local unorganised retailers. "I can't see a business model where one can integrate such a disintegrated kirana network." Concurs Dhindsa of Grofers. "I don't think even the kiranas buy that talk. Until we actually see how they intend to help the kiranas or partner with them, we will chalk it up to empty promises," adds Dhindsa of Grofers.

The biggest challenge for the global retailers would be to develop a model specific to India. While investing in the supply chain, cold chain and distribution network is a given, retailers need to lure consumers with innovative products. "Once the consumer is lured with good quality products by these global brands then I am sure they will buy. Ready-to-eat meals is an area where the foreign retailers can create disruption. They have to look beyond the top 50 items of consumption in order to make a dent," says Ashok Maheshwari, CEO at Avenue Infrastructure, who was part of the founding team of D-Mart.

The consumers may surely have a joy ride in the short run with the global biggies trying to lure them with attractive discounts, but in the long run it is the Indian companies will have an edge, as they understand the complexities of the market. "Walmart never understood India in the 10 years they have been here, I am not sure what they will do in future," says an analyst. Indian retailers, on the other hand, will have to start thinking more hybrid, points out Maheshwari. "They will have to evolve with new strategy and experiments, keep looking at consumer behaviour and trends. Indian online retailers currently enjoy very high valuation which is based on bottom line. A high valuation for a publicly listed e-commerce company with reduced bottom line is yet to be seen in India."

In the short run it may be advantage Amazon and Walmart because they have capital, but it could be short-lived. Yes, FDI in multi-brand retail becomes imperative in order to create a level playing ground.

With inputs from Nevin John


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