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The Battle for Indian Retail

How Mukesh Ambani, Amazon's Jeff Bezos and Walmart's Doug McMillon are fighting to get a bigger slice of India's $850 billion retail market
twitter-logoAjita Shashidhar | Print Edition: December 27, 2020
The Battle for Indian Retail
Illustration by Raj Verma

Ostensibly, Mukesh Ambani, Chairman, Reliance Industries, and the world's richest man, Jeff Bezos, CEO of Amazon, are engaged in a court battle over ownership of the Rs 26,000 crore debt-laden Future Group. But at the core of the fight is the struggle for supremacy in the $850 billion (Rs 62.8 lakh crore) Indian retail industry. Having been pushed into a corner by Alibaba, not only in China but also in South East Asia, Amazon sees India as its only hope of achieving scale outside the US. Bezos is doing all he can to ensure that the opportunity to buy India's second-largest retailer does not go out of his hand easily.

But this isn't a two-way fight. There's a third, perhaps, even a fourth, player vying for leadership of what is projected to be a $1.3 trillion (Rs 96 lakh crore) industry by as early as 2025. The Walmart-Flipkart combination, led by global CEO Doug McMillon, acquired minority stakes in Arvind Brands and Aditya Birla Fashion Retail in quick succession. And one of India's oldest and largest business houses, the Tata Group, is prepping to up its retail ante by bidding for Indias biggest online grocery retailer Big Basket.

Big money is being committed for leadership of that lip-smacking trillion dollar pie. The top three have cumulatively invested $33.3 billion (Rs 2.46 lakh crore). The world's largest retailer Walmart invested $16 billion to buy e-commerce giant Flipkart and recently announced an additional $2 billion (Rs 14,478 crore) investment. Reliance has invested Rs 30,000 crore and is spending another Rs 24,713 crore to buy Future Group's retail assets. Amazon has pumped in $6.5 billion and is neck-and-neck with Flipkart in India's e-tail landscape.

In January, Bezos announced an additional $1 billion investment to bring 10 million traders and micro, small, and medium enterprises (MSMEs) online and promised to create one million jobs. "We are investing to create a million new jobs here in India over the next five years," he said.

Readying More Firepower

That's just the beginning. Each of the contenders is aware that this corpus is not going to be enough in the tough battle that lies ahead. They are readying fresh arsenal. The Walmart-Flipkart combo is believed to be looking at an overseas IPO with projected valuation of $40-50 billion (the homegrown e-commerce giant is currently valued at $24.9 billion).

Ambani's Rs 1.63 lakh crore Reliance Retail is already valued at Rs 4.2 lakh crore ($56.8 billion). He's unlocking value to raise more funds for growth. During the lockdown, Reliance Retail raised Rs 47,265 crore by selling 10.09 per cent stake to top private equity investors such as Abu Dhabi Investment Authority, Silver Lake, General Atlantic, Mubadala, GIC and TPG. Reliance Retail is now among the world's most valued retail firms. At this rate, it can offload another 15 per cent stake to raise Rs 75,000 crore, taking the war chest to nearly Rs 1.25 lakh crore. Reliance Retail did not respond to BT queries.

Amazon Inc. invested Rs 2,500 crore in Amazon Seller Services and Amazon Data in January 2020, followed by a second round of investment of Rs 2,310 crore in Amazon Seller Services (Amazon's marketplace arm) in June.

"India is at a unique inflection point. The country's vision is to be a $5 trillion economy fueling consumption and a $1 trillion digital economy powered by the world's largest and youngest mobile internet base. Additionally, millions of small and medium businesses will embrace technology and become digital. With online retail penetration at barely low single-digit levels, the long-term online opportunity is massive," says Amit Agarwal, SVP and Country Head, Amazon India.

Sweeping Brands For Heft

With such large war chests, it's hardly surprising that the majors are vying with each other to pick up anything and everything that is on sale to gain heft. This year, so far, Reliance has acquired five companies and brands worth Rs 2,917 crore; Walmart bought Flipkart in 2018 and is now consolidating its 28-store strong cash and carry business under Flipkart Wholesale to create a formidable omni-channel wholesale play. Flipkart has also invested in fresh produce supply start-up Ninjacart.

Indian FDI rules don't allow foreign retailers to own physical stores. However, Amazon has found a way to invest in physical stores through its investment arm. Its latest attempt is the contested Rs 1,500 crore investment in Future Retail through Future Coupons. In 2018, in partnership with Samara Capital, Amazon bought the Aditya Birla group's grocery retail arm, More, for Rs 4,200 crore. It also bought a 5 per cent stake in Shoppers Stop in 2017. "In the long term, there will be space for at least three large players and one small player. Whether it will be the Tatas, D'Mart or even Swiggy, you never know," says Manpreet Ratia, Partner, Jungle Ventures, a venture capital firm.

Reliance is the mightiest due to its sprawling physical presence of 12,000 stores. It has also accelerated acquisitions of late. In May, it rolled out its e-commerce venture, JioMart, and bought online furniture retail company Urban Ladder and lingerie platform Zivame. It also acquired online pharmacy retailer Netmeds. In July last year, it bought global toy retail company Hamleys for Rs 620 crore. It also announced a joint venture with American luxury jewellery retailer Tiffany & Co. RIL already has exclusive rights to retail UK-based Marks and Spencers' products in India, along with 45 global luxury brands such as Armani Exchange, Bally, Canali and Emporio Armani. Reliance has also invested in technology solutions in artificial intelligence, haptics, voice recognition and virtual reality.

The Tata Group is also upping the ante. Despite being first movers in organised retail, the Tatas have been conservative about expansion. The revenue is all of Rs 8,771 crore between two retail entities Trent (which houses Westside and Star Bazaar) and Infiniti Retail (Croma) compared to late entrant Reliance Retail (which entered retail in 2007, a decade after the Tatas), which has set up a formidable Rs 1,62,936 crore empire. Tatas' e-commerce arm, Tata Cliq, is still to make an impact in the e-tail space. However, Chairman N. Chandrasekaran recently announced that the company would soon have a super app that would help consumers shop across its consumer-facing businesses. Tata Group is also in advanced talks to buy the Rs 6,000-crore online grocery platform BigBasket.

Battle Zone Retail

Interestingly, modern retail is just 10 per cent of India's $850 billion retail industry. If the Future Group judgement goes in favour of Reliance, it would gain an additional revenue of Rs 26,000-odd crore. However, if Amazon wins, it will be a distant number two player with 1,700 stores over 12 million sq.ft. It has another 500-odd 'More' stores which it acquired from Aditya Birla Retail. Walmart owns 28 cash and carry stores, while the Tata Group has 344 stores across Westside, Landmark, Zudio, Star and Croma brands.

But they will have to cope with the formidable Reliance Retail. With 27 million sq.ft. space across 6,700 towns and cities, Reliance Retail is by far the biggest retailer. Online platform JioMart gives it a distinct advantage of robust multi-channel presence. "If modern retail is just 10 per cent and Reliance has 30 per cent of that, its share of the total retail market will be quite small, and hence there is no dominance," says Arvind Singhal, Chairman of retail consultancy Technopak. This gives Amazon and Walmart-Flipkart enough room to battle it out in India.

"This year has accelerated online adoption, be it in education, communication or shopping, as people prioritise health and safety. As we make investments that focus on developing and nurturing the retail ecosystem, we are also committed to making our platform easier to navigate and richer for consumers in terms of content and experience," says Kalyan Krishnamurty, CEO, Flipkart.

Grocery, The Holy Grail

The big dilemma most retail majors are grappling with is scale versus profitability. While Flipkart or Amazon is where a consumer will invariably buy a mobile phone or a washing machine, such purchases are one-off. It is fashion and grocery that enable marketplaces to build a long-term relationship with consumers. Apparel generates more volumes and margins. But grocery gives most volumes and stickiness. A consumer is likely to visit a marketplace at least twice, if not more, for day-to-day grocery. If a marketplace like Amazon can win her over with wide range of products at great prices, it will get her loyalty too.

This has pushed the likes of Amazon to burn crores on getting the grocery business right. While the US and the UK have a largely homogeneous population, Indians have diverse habits. This makes the grocery business complicated. The market has to grow city by city to cater to diverse needs, which makes it a slow process.

"Grocery's asset-heavy model (dominant model currently) is trending towards a hyperlocal business and one would possibly create depth city by city in terms of fulfilment. Every per cent of ecommerce penetration in grocery gives a significant jump to online grocery market size, as the base is so huge (upwards of $600 billion). Hence, the online grocery market will grow in the coming years, but will take more than 10-12 years to reach more than 10 per cent of penetration. The penetration uptick would be gradual," says Rishav Jain, Senior Director and Consumer, Consumer Tech & Retail Lead, Alvarez & Marsal.

Jain expects some of the online grocers, both vertical and horizontal leaders, to play a meaningful role in the medium to long term in the top 20-30 cities, which are likely to contribute to more than 80 per cent to the online grocery sale "Online grocery penetration will grow incrementally, but given the big base, the incremental growth will also be very big for some of these online players. Every 100 basis points increase in penetration results in $6 billion of revenue."

But tapping this opportunity will require huge investments and smart strategy. So, acquisition of BigBasket will help the Tatas reach a wider consumer base, but to really grow the segment, they will have to invest big money. Amazon tried to find a sweet spot in the low margin grocery business by promoting its private brands. Through the Covid-19 lockdown, when supply was a challenge for national brands, Amazon pushed its private brands. If the consumer clicked on detergents or dish cleaners, the search threw up names of Amazon's own brands such as Skrubble and Scyclone. In staples, one found brands such as Solimo and Vedaka. These brands are priced more competitively and offer higher margins. Reliance and BigBasket are also aggressive in pushing private brands.

Amazon wants the largest wallet share for grocery purchases. That was the idea behind investing in Future Retail. The plan was to use Future Group grocery stores as fulfilment centres and last-mile delivery points. Apart from regular grocery service, Amazon Pantry, it expanded Amazon Fresh (earlier available in NCR, Bengaluru and Mumbai) service to Kolkata, Ahmedabad, Pune and Chennai. Amazon Fresh, with 5,000-odd SKUs that include fresh food products such as vegetables, dairy products, meat and staples, promises same-day delivery.

Flipkart is slightly conservative about its grocery strategy. The Flipkart spokesperson says they are in the process of identifying what the consumer needs in each city. Reliance, on the other hand, is bullish on its online grocery retail business. However, experts believe that over 60 per cent of Reliance's grocery growth will continue to come from offline stores. "The fight is getting into all three levels. Earlier, it was about getting into pure online or pure brick and mortar, now the fight is online, offline as well as B2B," says Govind Shrikhande, Former MD, Shoppers Stop.

Unravelling Game Plan

Reliance Retail seems to have an advantage for now. Apart from scale, it is also profitable (Rs 5,448 crore in FY20), unlike Walmart and Amazon, which are burning cash to establish supremacy. They are losing 30-40 per cent of annual sales. Reliance Retail has opened up another front through JioMart, targeting onboarding of 15 million strong kirana stores. It intends to integrate them with JioMart through its point of sales devices and have control over their inventory. That's something Walmart and Amazon have been planning too.

Soon after the announcement of RIL's association with Facebook, the retail major rolled out a pilot in parts of Mumbai where kirana partners could take orders on WhatsApp and fulfil demand in their vicinity. "We successfully piloted the JioMart grocery customer online platform in 200 cities. Within a few weeks of the launch, we have hit 250,000 orders a day, and the numbers are growing each day," Ambani said at the Reliance AGM.

Amazon and Walmart intend to reach consumers through their strong online presence. Amazon has a 200 million product portfolio. Since it is yet to have a robust physical presence, it intends to bridge the gap through partnerships with 1,00,000-odd local stores. Ratia of Jungle Ventures agrees that omni-channel doesn't necessarily mean having own physical presence. "I may not be able to set up a physical store, but nothing prevents me from partnering with local stores and bringing them in. The kirana pie is out there, FDI rules do not prevent anyone from having a partnership with the kirana store or even from having a wholesale presence. There are alternative channels which can be tapped into."

"We recognise customers will use multiple ways to fulfil needs. We work closely with local SMBs for unique 'offline' outreach with thousands of Amazon Easy stores," explains the Amazon spokesperson. A local consumer durables store can get listed on Amazon, and if a consumer from his locality purchases a refrigerator or a washing machine on Amazon, the local dealer delivers the product.

Though Flipkart also has a horizontal approach, the e-commerce major is betting more on its apparel vertical. Flipkart and Myntra together is the largest online fashion retailer. Fashion also generates much higher margins than grocery or any other business, and could lead the retailer towards profitability faster.

The idea behind investing in apparel companies is to have control over brands. "Between the horizontals, some are focusing on specific categories (such as fashion) with a focus on profitability and the others are focusing on categories which provide a scale play (such as grocery). The scale-based grocery play is farther from positive unit economics due to lower gross margins, but has greater market depth. Both are different strategies - one is more conscious of profitability, the other is conscious of market depth," explains Rishav Jain of Alvarez & Marsal.

In FY20, Flipkart reduced losses to Rs 3,150 crore, from Rs 3,836 crore in FY19. Walmart had faced shareholder criticism for the acquisition and the losses it generated. It has since been trying to reduce losses. It has also merged its cash and carry business under Flipkart Wholesale to get economies of scale and reduce cash burn. "It made no sense to have separate entities as costs are too high. Flipkart has the added advantage of a strong logistics network and a higher brand recall in India than Walmart," says Singhal of Technopak.

Focus On Online Play

Online retailing is just 3 per cent of modern retail, though Covid-19 led to an 80 per cent surge in online shopping during the first six months of 2020. With social distancing restricting mobility, more Indians went online to shop. This has pushed retailers to have their own digital presence. That is why the Tatas, apart from buying BigBasket, are looking to create a super app.

Independent brands such as Raymond are also feeling the need for a robust online presence. This has led to collaborations. While Arvind and Aditya Birla Fashion Retail have collaborated with Flipkart, Ganesh Kumar, COO, Raymond Lifestyle, says collaborative growth will be the way forward for Raymond too. "Our tie-up with Flipkart brings in data analytics and consumer trends. It will improve our ability to launch new categories based on consumer data," says J. Suresh, MD, Arvind Brands. "If you have grown up as a brick and mortar player, hiring a bunch of people saying I will go through digital transformation is difficult. Most organisations which have tried this have failed. So, why not partner with an online platform and make it a win-win situation? I get a platform for my online sales and I don't need to keep experimenting on my own platform," explains Ratia of Jungle Ventures. He says that starting one's own online platform isn't enough. "You need to drive traffic, conversion and manage the supply chain. It needs engineering resources, which companies from traditional backgrounds may not have," says Ratia.

"The share of online will increase. If it is 3 per cent today, it might become 7-8 per cent in three-four years. In absolute terms, it will be a large market. Having 8-9 per cent in a $1.2 trillion market makes it a $100 billion business. If Flipkart and Amazon get $30 billion each, it is not a small business for them," says Singhal of Technopak.

New Rules In Technology

Technology is beginning to play a huge role in the battle. Google's investment in Reliance will give the latter high quality data while the Facebook deal will give it access to over 300 million Indian users. The Facebook users and Jio's 40 million telecom consumers will have access to Reliance's retail offerings, which make Reliance a compelling platform. This strategy is on the lines of what Alibaba has done in China, where it offers a host of other services apart from e-commerce and physical retail.

A bouquet of retail offerings on the telecom platform will lead to stickiness as the consumer will not just interact with Jio for telecom needs but also find it convenient to shop for grocery, fashion (Reliance has Ajio and Reliance Digital) and other things. The consumer can also use Reliance Pay for payments. The partnership with Facebook will also give Reliance access to the former's large consumer base in India as well as its 348 million WhatsApp consumers. "WhatsApp is also ready with its payments service, which will give Reliance an upper hand, as WhatsApp user base in India is very strong. It will give them a large base of customers who are interacting with them every day," explains Govind Shrikhande.

Sanjesh Thakur, Partner, Risk Advisory, Deloitte India, says the kind of information and data advantage that Reliance will have through Facebook and Google is invaluable. "Suppose kirana stores plan to go on a strike tomorrow and Reliance gets to know about it in advance from Google or Facebook, the changes it can make to its supply chain will give it a huge advantage over other retailers," says Thakur. "The amount of intellectual monopoly these partnerships will create will be a game changer," he adds.

Amazon and Flipkart are heavily investing in creating vernacular interfaces. They have introduced interfaces in South Indian languages also apart from Hindi. "We have enabled a voice-powered search experience which eases the customer shopping journey on the platform," explains the Flipkart spokesperson.

It remains to be seen who will win or lose. As Reliance, Amazon and Walmart are surging ahead, one wonders what the Tata Group's game-plan would be. The Tatas are already late to the party. Then there is the extremely profitable D'Mart, a drop in the ocean compared to Reliance, Amazon or Walmart. It's anybody's guess if the low-profile founder of D'Mart, Radhakrishna Damani, will want to burn cash and spread wings across India or partner with one of the platforms. The industry is anxiously awaiting the outcome of the Reliance-Amazon court battle. Indian retail is getting increasingly complex.

@ajitashashidhar

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