Ambani-Biyani deal: RIL spreads wings to become a dominant player in retail

Gets scale, massive presence, higher valuation of its retail business, and inherits the entire logistics and distribution chain

Reliance’s acquisition of Future group’s retail and wholesale business dovetails perfectly with its strategy to become a dominant player in retail — offline and online.

The company’s strategy comprises three elements. Reliance wants to build scale and consolidate its position in modern retail. It also wants to push up the valuation of its retail business — Mukesh Ambani has already announced it is looking for strategic investors. It also wants to bring the 30 million small retail shops (which includes about six million kiranas) into the organised sector by bringing them on to the JioMart platform and transforming them into partners.

The Future acquisition will give it scale. At a macro level, with a 12 per cent revenue share of the country’s modern retail market of over $102 billion in 2019, Kishore Biyani’s Future group’s business will help Reliance increase its share to 16 per cent, according to data from Technopak.

The acquisition will also widen the gap in revenues with its competitors. 

The next three big retail chains —DMart, Tata’s retail business, and Kalyan Jewellers (which has a retail chain) — have a combined revenue that will be nearly half that of the retail king (revenues of over Rs 120,000 crore). 

With the acquisition, Reliance is expected to be able to double its revenues from Rs 57,000 crore in FY17.

Looking deeper, with the Future group in its shopping bag, Reliance will have a substantial presence in the over $26-billion modern retail food and grocery business with its revenue share going up from 20 per cent to 27 per cent.

Interestingly, it is a space where e- commerce has not taken off, with a current gross merchandise value of $2 billion annually. Even Amazon and Flipkart are small players. The market is dominated by Grofers and BigBasket.

But this is about to change now that Reliance is ready for an onslaught in this space through its app JioMart, which has also seen the two global players push the peddle. And, there is speculation that both Grofers and BigBasket could be up for grabs.

In the more fragmented $20-billion modern trade apparel business, Ambani faces more competition from e-commerce players. The acquisition will help to increase its revenue share from 18 per cent to around 26 per cent.

But currently about half the sales come from e-commerce platforms and Reliance also is a player in the game. But according to Technopak, Flipkart and its various other platforms such as Myntra would still be  larger than Reliance given its business of over $6 billion annually.

Yet, opinion is divided on whether the acquisition will lead to industry consolidation. Some analysts say many retail chains will collapse as they have neither the scale nor the financial muscle to take on the likes of Amazon, Flipkart, the Tatas, or maybe DMart.

“Organised retail is only 12 per cent of the $850-billion retail market in India. (The Reliance-Future revenue share is less than two per cent of that business). Only the surface has been touched. I don’t believe niche players will die and other bigger chains will collapse. Unlike telecom, there is a huge unorganised market and growth to tap. What happens when a big player comes is that there is no distress in the sector like the Future group was facing,” said Ankur Bisen, senior vice-president in Technopak.

The other question is on valuation. The acquisition has not only given Reliance scale, more crucially it also helped it gain a strong logistics, distribution, sourcing and vendor relationship system from the Future group. This is key to scaling up quickly if it is looking for a better valuation.

“What would have taken them two to three years to build has been done in one go. Investors would have been chary about paying a hefty premium otherwise, as Amazon and Flipkart have upped the ante now. And JioMart has taken too much time because of backend issues, so this deal will help,” said a senior executive of a rival retail firm.

While analysts have valued the retail business at Rs 3.6-4 trillion without Future, it was valued at $83 billion in the over-the-counter market in August amidst talk of a stake sale.

The third part of the retail story which Reliance is working on is bringing the 20 million retail shops that sell groceries, food, medicines, electronics repair shops, etc, into the formal sector by putting them on the JioMart platform.

For one, these shops are a cost-effective way to execute the last-mile delivery of goods to consumers rather than building one’s own. 

For another, Reliance can now leverage the larger logistics, wholesale and distribution system available from Future to offer products to these small retailers supported by credit lines. This might help in its epic battle with Amazon which is also wooing last mile small retailers.