With Amazon picking up 49% stake in Future Coupons — a promoter entity of Future Retail – the battle for India’s grocery retail is now likely to be between Mukesh Ambani’s Reliance Retail, Jeff Bezos controlled-Amazon and Walmart.
“From what was termed as a tug of war among Biyani, Ambani and Damani, it is now becoming a war largely amongst Walmart, Amazon and Reliance (advantage, consumers),” said Abneesh Roy of Edelweiss Securities, in a note on the deal.
Now that Amazon has decided to partner with FRL, it puts to rest earlier speculation of the global behemoth courting Reliance Retail. The deal will now give Future Group much-needed ammunition to compete with the other global behemoth Walmart and Reliance Retail.
In a late evening filing to the stock exchanges on Thursday, Future Retail said that Amazon.Com NV Investment Holdings has agreed to make an equity investment in Future Coupons for acquiring a 49% stake comprising both, voting and non-voting shares. Future Coupons is a promoter entity controlled by Kishore Biyani.
As part of the agreement, Amazon has been granted a call option. This call option allows Amazon to acquire all or part of the promoters’ shareholding in FRL, and is exercisable between the 3rd to 10th years, in certain circumstances, subject to applicable law. Analysts at Edelweiss Securities explain that the key difference in this deal versus Amazon holding 5% stake in Shoppers Stop (SSL) in FY18, is that if exercised, Amazon can potentially end up owning 47% directly in FRL and 3.6% through Future Coupons.
With this deal, it is clear that a hybrid model is the way forward for grocery retail, which will lead to more investments into the Indian retail sector, forcing other retailers to also invest heavily. To put this in perspective, Future Retail spans across 138 cities of India, while other large physical retailers with comparable formats have a markedly lower store footprint with coverage that spans only about 50% of Future Retail’s locations, observe analysts at Morgan Stanley.
Under a successful hybrid model, India’s online grocery penetration may move to about 6% as is the case in China and South Korea, which is a $30-billion opportunity, analysts said. “To put it in context, this is 1.7x the current cumulative eCommerce revenue pool in India. Net, we believe that grocery in India may bypass the E-highway and enter straight into the Omni-runway,” according to MS analysts.
So, while Amazon brings in its technology might, FRL’s strong presence in brick-and-mortar formats will give Amazon access to a large physical presence of its Indian partner. With this transaction, Amazon gets access to FRL’s 1,557 outlets which will shorten delivery time. Future Group’s strong supply chain will ensure quick delivery and this can be leveraged across India. FRL has 293 Big Bazaar stores and 1,150 Easy Day stores.
“The promoters have also agreed to certain share transfer restrictions on their shares in the company for same tenure, including restrictions to not transfer shares to specified persons, a right of first offer in favour of Amazon, all of which are subject to mutually agreed exceptions (such as liquidity allowances and affiliate transfers),” the BSE filing stated.
“This is in line with what they (Amazon) and all online players are doing to establish a foothold in the offline retail space as it is important to have an omni-retail presence to engage with consumers and shoppers,” said Rajat Wahi, partner at Deloitte. This allows online players to bring in their expertise in areas like large sourcing base, logistics, delivery and technology to the table, while offline retailers are able to imbibe the whole end-to-end e-commerce play, Wahi added.
Arvind Singhal, chairman, Technopak Advisors, said that Seattle-based online retail giant has been making tactical investments for sometime now with Shoppers Stop and acquisition along with Samara Capital in Aditya Birla’s More. “Amazon basically is saying India will probably be a multi-channel market where physical retail is going to do very well for a long time to come. And, therefore, why not have some presence on the ground strategically in physical retail. As of now, Amazon cannot do much than what they have already done because of government’s policy in multi-brand retail. It is a convoluted policy, in practice, it is not feasible to implement that.”
However, Singhal feels that Mukesh Ambani’s plans are far more ambitious than Amazon’s or Walmart’s. “Reliance is creating a complete ecosystem of activity in which retail ecosystem – it is not only physical retail – it is about entertainment, financial services,” he said.