The Reliance-Future deal poses challenges for Radhakishan Damani’s Avenue Supermarts or DMart which was so far rapidly increasing its share of India's consumption pie in the absence of a strong competitor.
With Reliance Retail acquiring Future Group’s retail, wholesale, logistics and warehousing business, the Mukesh Ambani-led company has increased its share in India’s retail space. However, the move poses challenges for Radhakishan Damani’s Avenue Supermarts or DMart which was so far rapidly increasing its share of India’s consumption pie in the absence of a strong competitor. With the large footprint that Reliance Retail now has, DMart becomes distant a second in a largely duopoly retail market. Shares of Avenue Supermarts tanked 4.6% on Monday while Future Retail jumped over 19% and Reliance Industries traded flat.
“Obviously, in the medium term the deal increases competition for someone like Avenue Supermats because they were easily gaining market share prior to this,” Himanshu Nayyar, Lead Analysts at Yes Securities told Financial Express Online. Post the transaction, the total grocery and fashion revenue for the Reliance will be double that of Avenue Supermarts. Although the deal may take a while to be completed, Nayyar adds that with the reins now in the hands of a strong player in Reliance Industries, competition will heat up in the online and offline arena. In terms of retail space, Reliance will have over 40 million square feet while Avenue Supermarts will be far behind with less than 10 million square feet of retail space.
The acquisition witnessed a stronger firm in Reliance Industries with a healthy balance sheet take over a weaker competitor in Kishore Biyani’s Future Retail. “Among the three main players in the grocery market, Avenue and Reliance had strong balance sheets, while Future Retail was highly leveraged,” said Credit Suisse in a note. Post the Reliance Industries and Future Group deal, Avenue Supermarts now becomes a distant number two in a largely two player market, the note said. According to Credit Suisse, it is likely that Reliance Retail will get more favourable terms of trade and greater share of brand funded promotions post the deal. Additionally the improved presence of Reliance Retail in Mumbai is also likely to play spoil-sport for Avenue Supermarts.
Reliance has increased its retail market share to 38% with the acquisition, up from 22% earlier. With the online retail space already heating up as Amazon and Flipkart shift their focus, DMart has another competitor to fight with for market dominance. On the other hand, Jiomart will only benefit from the deal. In terms of stores, Reliance Retail after the acquisition has over 13,000 stores while Avenue Supermarts has around 200 stores, said Abhimanyu Sofat, Head of Research, IIFL Securities. “In my view, the deal will create competition for DMart which was cruising as a growing company in the retail space,” he said. Abhimanyu Sofat, however, is more interested in seeing how the banks fare post the Future-Reliance deal.