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Indian Retail Market Turns into a Battleground for Billionaires – Part 3

If Reliance, the biggest offline retailer, acquires Future's assets, it would get the firepower to take on Flipkart and Amazo

Read Part 1: Battle of Business Rivalry: Amazon Vs. Reliance

Read Part 2: Future looking bleak for Amazon as CCI decides the fate of buyout

The sprawling e-commerce empire of Jeff Bezos (1) in India is again staring at its moment of truth. In 2013, Amazon first entered the nascent and almost untapped e-commerce market with underdeveloped infrastructure and only 16% population with an internet connection, while cash was the undisputed king.

The e-commerce market then had Flipkart and Snapdeal as the only and top e-commerce players. However, Amazon quickly adapted itself to the Indian way of selling products online and flushed it with its capital. It also elbowed out Snapdeal to take Walmart’s Flipkart head-on and overcome these challenges.

At that time, the differentiator was largely the capital. But now, it is more about an enabler as the planet’s richest man gets into the e-commerce slugfest with India’s richest man Mukesh Ambani (2).

The Clear Headway

According to Goldman Sachs (3), the ecommerce industry among the fastest-growing economies, India is set to reach 99 billion USD in size by 2024. There is probably no other major economy on the planet that could offer that level of scale.

What’s even more interesting is that this valuation is merely 1.6% of total retail sales, as per the 2019 World Bank Report (4). And hence, to win this market, offline or traditional retail is the slingshot that could catapult Reliance, Amazon, or Flipkart to lead the market comfortably in the next decade and further.

It is certain for Mukesh Ambani that Reliance already has a clear headway when it came to offline retail with more than 11,931 stores in September 2020. Reliance Retail has been operating in neighborhood stores, hypermarkets, supermarkets, wholesale cash, carry stores, and more.

Reliance has a multi-pronged strategy with nearly 7,000 towns observing 640 million footfalls that gave Mukesh Ambani an unprecedented acquisition base and fulfillment depth.

The shift from oil and telecom to ecommerce and technology is also quite evident at Reliance. Recently, its Retail Venture has also secured about 6.4 billion USD from Silver Lake, KKR, Mubadala, GIC, Abu Dhabi Investment Authority, TPG, Public Investment funds of Saudi Arabia, and General Atlantic increase its ecommerce bet on JioMart (5).

According to Reliance, JioMart has constantly scaled up with a steady increase in daily consumer orders. It is four times higher in quarter two compared to quarter one of the financial year 2021. In fact, in the first quarter itself, Reliance had claimed to deliver more than four lakh orders every day, which is significantly more chief than any other grocery home delivery firm.

After Facebook made a 5.7 billion USD investment in Jio Platforms, consumers can now also place orders on JioMart via WhatsApp (6). In the previous few months, JioMart had also expanded to electronics and fashion, among other sections that drive sales for existing large ecommerce marketplaces. Its intention to push these key sections first for the bigger e-commerce players is obvious.

“Reliance has a head start in omnichannel sales because of its physical presence. We see the company building on it through investments in technology and customer experience.” – Madhur Singhal, Managing Partner, Praxis Global Alliance (7).

The Setbacks

The previous ruling by the competition watchdog CCI, Competition Commission India, favored the 24,713 crore INR Reliance deal to acquire debt-ridden Future Group’s wholesale, retail, logistics, and warehousing business. There is no doubt that if the deal comes through, it would add significantly to Reliance’s retail strengths.

It might be a temporary setback for Amazon since it would lose prized access to Future’s more than 1,500 stores, including Big Bazaar, Food Bazaar, FBB, Food Hall, Easyday, and more in over 400 cities across India.

Notably, Jeff Bezos has committed to invest over 6 billion USD in India, including the 1 billion USD investment he had announced in January 2020. It has also been running several initiatives to boost India’s small businesses and ramp up its 7 lakh seller base.

As an aggressive competitor, Amazon is expected to be firing on all its cylinders to get more kiranas and small business on its marketplace if it loses Reliance in laying its hands on Future Retail’s holdings.

“Reliance is the largest offline player, and in the organized grocery, they have around 25% market share while Future has around 10% share. So that’s why Amazon was interested because if they cannot work with Reliance, which is number one, then they would want to work with number two and have fighting chance in grocery.”

– Satish Meena, Senior Forecast Analyst, Forrester (8).

It is where Walmart’s Flipkart has been lacking, unlike other categories like fashion, against JioMart and Amazon but also Grofers and BigBasket.

Amazon India has a base of 7 lakh sellers, mostly micro-businesses that recently surpassed the UK and Germany marketplaces to be the second-largest marketplaces considering the sellers’ volume. According to the Market Pulse Research, Amazon has been onboarding more sellers in the country than in other markets, except the USA.

It has been adding more than 20,000 sellers over the previous several months.

During his trip to India in early 2020, Jeff Bezos also shared his plans to get more than 10 million micro, small, and medium enterprise sellers online by 2025. These figures seem like a very long shot unless Amazon somehow makes a drastic increase in its seller base and particularly micro-enterprises that make up for most businesses in the country. However, this segment is still opposed to technology adoption.

Notably, at least 99% of Indian enterprises have come under the MSME category after the recent revision in the MSME definition by the Indian government.

The Essence

In the battle with Reliance, the differentiator for Amazon would be the experience of its competition with Flipkart as all three players are extremely capitalized.

“Amazon, by far, is the most successful e-commerce player in the world. They got strong technology strength, huge capital access, strengths of operating in various parts of the world, bringing very strong private labels of their own across multiple categories. Also, Amazon doesn’t have to go back to investors to raise money. Reliance has to do all that as far as e-commerce is concerned while their execution and capital raising skills are amazing.”

– Arvind Singhal, Chairman, Technopak Advisors (9).

While Reliance has its strength in the offline and B2B segment but on-ground, it doesn’t have enough expertise in running pure-play online companies, according to market experts. According to an ecommerce consultant (10), the ultimate winner here would be a firm that can offer consumers a large number of products and a superior customer experience. Even if they convince consumers for some time on pricing, people will look for experience, and it is something Reliance requires.

Reliance has a pervasive brand name and deep offline presence across India. It is also well-capitalized. However, the e-commerce system, user interface, protocols, supply chain, and consumer trust would take time to build. While its capital can short the course, the team requires to be pulled well together.

Reliance may also try to replicate its telecom success with Jio, particularly for pricing, a gripping component to pull extremely price-sensitive customers in India to shop online, by reducing prices and providing cheaper goods to almost stifling the competition.

There are higher chances for it to work, especially when catering to the shoppers living in tier-II or tier-III and exceeding regions who are more value-conscious than urban buyers. However, it can’t be a long term bet.

It is worth highlighting that these pricing parts may work well in telecom, but in ecommerce, one would need to give the same experience on every order. In telecom, usually, people make a connection and use it for several years. But in the case of ecommerce, if one doesn’t have a good experience on one platform, he will instantly switch to another. One would not easily do that with the telecom provider since there is a process to switch.

It means that in the ecommerce business, companies need to deliver a better experience. Reliance is not a pure-play B2C firm run by tech that is ready to head with ecommerce. There are Reliance stores, and presumably Future’s store, and then it is also working with kiranas and warehouses.

In these four different segments, Reliance would need to integrate and optimize to deliver from the nearest store to consumers. Reliance would need to complete a list of things for integration in the background, and it doesn’t seem easy.

Government’s Play

The regulatory guidelines for the ecommerce industry have, to an extent, proven to be headwinds for Flipkart and Amazon, who could play their role ahead. However, they may not be as aggressive as China. The Indian government’s 2018 Press Note 2 enabled 100% FDI in B2B ecommerce while marketplaces are needed to meet certain criteria (11).

Moreover, the marketplaces cannot exercise ownership over inventory retailed on the platform or influence their sale directly or indirectly. Any seller firm where the marketplace has an equity stake cannot sell online. For example, Amazon reportedly restructured its ownership in Cloudtail to reduce its stake to 24% from 49% following the new FDI regulations enforced in February 2019 (12).

The Indian government had also tightened its FDI policy earlier in 2020 for investments from countries sharing a border with India to reduce domestic companies’ opportunistic takeover. The market is also seeing the move to restrict investments from China and boost Make in India and Vocal for Local initiatives. With such tweaked rules, the companies based in neighboring firms can only make investments under the government’s route.

While there are regulations that give preference to Indian firms, it is not going to be as aggressive as China since India requires investments.

Even though the Indian government has managed to build a pro-business environment in the past few years, there is no reversal of any FDI while they are relaxing foreign investment at every fleeting moment.

There is an impulse to self-reliance from a manufacturing and production perspective, but it has not changed anything in retail.

The Setbacks and Jolts

Last month, the Delhi High Court had rejected Future Group’s plea that Amazon needs to be restrained from writing to regulatory bodies not to accord approval to their deal with Reliance Retail. However, the court order stated that the deal between Future and Reliance Retail follows Indian laws and dealt a blow to Amazon’s claim (13).

What is more damaging to Amazon is that the court also stated that the deal it has made with Future Coupons before the Future-Reliance deal is in the nature of control and hence needed prior government approval. In the absence of which is the violation of FEMA/FDI rules.

The basics of Amazon’s complaint regarding the deal with Reliance Retail was its previous deal with Future Coupons where it had veto powers. According to legal observers, if the court is observing it as illegal, it is a sure setback for Amazon.

Amazon owns 9.83% equity in Future Retail; while fighting the latter’s deal with Reliance Retail, it had argued that it has veto power over any sale of Future Coupons in which it owns a 49% stake (14).

In short, the court has upheld the interim award of the Singapore International Arbitration Centre in favor of Amazon as legal. It has also declared the deal between Future and Reliance to be legal and left the final decision to the regulatory bodies. The deal would go through examination before it would receive final approval.

The court stated that both Future Retail and Amazon had made their representations and counter representations to the regulators and authorities. Now, it is for the regulator’s bodies to take a decision.

Consequently, the present application is disposed of, refusing the interim injunction grant as prated for by Future Retail. However, the statuary authorities are directed to decide on the applications and objections following the law.

“On two counts, Future Retail has been able to make out a prima facie case of tortious interference by Amazon. It is clarified that it is not the making of the representation by Amazon to the statutory authorities or the regulators, which is an actionable wrong but making a representation based on incorrect assertions which do the act based on unlawful means.”

– The Court Order (15).

Future Retail had moved to the high court to restrain Amazon from approaching regulatory authorities to stall the deal between Future Group and Reliance Retail. Future had sold its retail assets to Reliance in August, but Amazon stated that the deal has breached the agreements Future had made with the firm in 2019.

After that, the US-based e-commerce firm took Future into an emergency arbitration over an alleged contract breach. It passed an interim order in favor of Amazon on October 25, barring Future from taking any step to dispose of its assets or issuing any securities to secure any funding from a restricted part (16).

Afterward, Amazon also wrote to SEBI, stock exchanges and CCI, and urged them to consider the Singapore arbitrator’s interim decision since it is a binding order.

Meanwhile, the CCI, Competition Commission of India, has approved the acquisition deal between Future Group and Reliance Retail. The SIAC has rejected Future Group’s appeal against the interim order. The final hearings were commenced in December in the matter after it would pass the final order.

Future Group has also requested SEBI to approve the deal saying that delay in approval would lead to financial loss to Future Retail shareholders.

“Any further delay on this count would cause irreparable loss not only to FRL and its stakeholders including lakhs of small investors but also to other entities and their respective stakeholders & investors, who are involved in the scheme.”

– Future Retail Letter (17).

It is worth highlighting that Future Retail may face possible bankruptcy since it has defaulted on payments earlier in 2020 and has posted a string of losses. A quick resolution for the dispute is critical for Kishore Biyani and the store chain (18).

The Case File

Amazon and Reliance are fighting out for the Indian retail market dominance. Biyani and his debt-laden Future Group are only caught in the crossfire between the two.

August 22, 2019: Amazon had bought a 49% stake in Future Coupon with a right to buy a stake in Future Retail later

August 29, 2020: Future Retail board go-ahead for a merger between Future Enterprises and sale of its wholesale and retail businesses to Reliance Retail

October 3, 2020: Amazon complaints to Sebi that Future has committed a material breach of fiduciary duties

October 5, 2020: Amazon moves to block Future and Reliance deal at the SIAC, Singapore International Arbitration Center

October 25, 2020: SIAC restrains Future from selling any asset to Reliance

October 26, 2020: Future Retail stated that the Singapore ruling is legally unenforceable in India

November 7, 2020: Future moves to Delhi High Court to bar Amazon from interfering with the deal

November 8, 2020: Amazon charges Future Group with perpetrating fraud and breaching SEBI norms

November 20, 2020: Antitrust regulator gives the green flag to the Future and Reliance deal

High-intensity Battle

Both companies fighting for dominance over India’s burgeoning online retail market continue to mirror each other in the ground-up strategies to build the most preferred retail ecosystem for consumers. They match each other at every step, which can only intensify in the upcoming future, considering the high stakes.

Over the last few years, the US-based e-commerce giant has also been making investments (19) like Reliance in many companies. It is targeted sectors like fintech, sellers, financial services marketplace, book publishers and retailers, home services, bus aggregators, and all-in-one aggregators. Over the past several years, Amazon has also expanded its services to food delivery, e-pharmacy, online flight ticketings, and education.

Reliance has made investments in online pharmacy Netmeds to take on Amazon Pharmacy. It has also bought logistics startup Grab against Amazon Food. It has rolled out Jio TV and Cinema and has also acquired music stream app Saavn to take on Amazon in the OTT, over-the-top space.

“E-commerce players such as Amazon and Flipkart are working on their offline retail strategies in India. Globally, Amazon and Alibaba are following similar strategies to fine-tune their online-to-offline strategy.”

– Garima Mishra, Analyst, Kotak Securities (20).

Amazon also wishes to utilize the offline footprints of these stores to push its private labels. It includes AmazonBasics, which offers HDMI cables, Acs, cables and batteries, household necessities, general merchandise, and apparel. There are speculations that amazon could also make use of these stores to retail its grocery brands.

According to BofA Global Research (21), Reliance has a lot of catching up to do considering its nascent stage compared to Amazon and Flipkart in tech investment, user interface, and supply chain. It also does not see Reliance as a formidable challenger to Flipkart and Amazon in the overall online market. They have the first-mover advantage and better end-to-end experience.

Nevertheless, for Reliance, the first battle would be to acquire market share by establishing itself as an alternative to Flipkart and Amazon in the customer’s minds instead of nudging for the bragging rights for being on the tabletop. Even with a second or third rank, Ambani led Reliance would be a significant player in the Indian ecommerce market.