The great retail gold rush

With a consumer base of over 1.3 billion and an estimated value of a shade below $1 trillion, India is a gargantuan market for retailers—both offline and online. The only other comparable market of such scale is China, where entry is heavily restricted. U.S. retail giants such as Amazon and Walmart have literally been kept out from the consumption growth of the East Asian country, allowing them, instead, to pour billions of dollars into India’s retail consumption story. To date, Amazon has invested over $6 billion in India, while Walmart acquired Flipkart for a hefty $16 billion in 2018.

“There is a large pie to be taken and this [billion-dollar spend] is the price for getting a seat at the table and being in the reckoning,” says Sanjeev Mohanty, managing director, South Asia, Middle East & North Africa of Levi Strauss & Co. “It’s a free market and that’s what is most attractive.” The retail sector, according to the Retailers Association of India (RAI), contributes 10% to the country’s GDP and employs about 46 million people.

So, to be in the reckoning, even during the Covid-19 pandemic—which brought the retail sector in the country to a virtual halt—top-dollar investments and big-ticket deals continued unabated. For starters, Mukesh Ambani’s Reliance Retail Ventures Limited (RRVL) raised a staggering $6 billion in growth capital and is in the process of buying out the retail operations and other assets of Kishore Biyani’s Future Group for about $3.4 billion.

Similarly, Walmart-backed Flipkart has been on an investment spree, picking up strategic stakes in top fashion retailers such as Aditya Birla Fashion and Retail (with brands such as Louis Philippe, Van Heusen, and Peter England), Arvind Youth Brands (Flying Machine), and USPL (Wrogn). Word on the street is that the Tata group is also in talks to acquire a majority stake in online grocery store BigBasket for about a billion dollars.

Did 2020 witness a gold rush in retail? “A gold rush is a very smart way of putting things in perspective,” Mohanty says with a chuckle. But many will argue that the first true marker of that gold rush was Walmart’s acquisition of Flipkart.

Walmart’s investment in India’s largest e-commerce company, says Arvind K. Singhal, chairman and MD, Technopak Advisors, a retail consultancy firm, was “a massive strategic investment” as compared to the financial investments that poured into RRVL this year. “Reliance [Reliance Industries or RIL] is in a different class altogether. Besides them I don’t see any [billion-dollar] investments coming to the retail sector,” he adds. In the case of RIL, besides its retail business, the oil-to-telecom conglomerate raised an eye-popping $20 billion for its digital services arm, Jio Platforms, in the months during the nationwide lockdown. And there are as many as seven common investors between the retail and digital services businesses, a clear indication that the RIL ecosystem is well and truly ready for a retail juggernaut—both online and offline. “The investors who have put money into Reliance see it as a multi-category and multi-product play,” says Singhal.

RRVL operates around 12,000 stores across the country and reported a profit of ₹973 crore on revenue of ₹41,000 crore in the July to September quarter of FY21. RRVL, on its own, is a “phenomenal asset”, says Hemchandra Javeri, co-founder and managing director of Forum Synergies, a private equity firm. “And when you sync it with Jio [Platforms] the whole Reliance ecosystem becomes massive.” In some ways, Reliance’s fundraising spree and acquisition of Future Group’s retail assets have been hastened because of the Covid-19 pandemic. Had Covid-19 not happened, the Future Group, says a retail industry veteran, would have dragged its feet and gone on for another five years and received slow drip funding from Amazon. Incidentally, Amazon, which had invested in a holding entity of Biyani’s Future Group, contested the RRVL-Future deal in an arbitration court in Singapore, and got a stay on the transaction. Biyani’s Future Retail has approached the Delhi High Court against the order. RRVL, though, has said it intends to complete the transaction without any delay, under Indian law.

For RIL, the digital-retail sync will give it enough and more firepower to compete with Amazon and Flipkart in the online space, which became more accentuated and an integral part of everybody’s lives during the pandemic.

That’s a reason why the Tata group is also in the market scouting for online acquisitions, besides building its own super app that would encompass groceries, healthcare, insurance, bill payments, consumer durables, and fashion, among other services. The potential addressable market for the online pharmacy business, too, proved to be just that tempting for Reliance—it acquired Netmeds for ₹620 crore. It also acquired 96% stake in furniture retailer Urban Ladder, in what many have termed as a fire sale, for ₹182 crore. (Urban Ladder had seen its valuation soar to about ₹1,200 crore a few years ago.)

“Retail businesses are definitely redefining themselves by becoming more omni-channel in their approach,” says Kumar Rajagopalan, chief executive officer of retail industry body, RAI. Currently, online retailers are sailing on the rising tide. But, when it comes to the fashion category, in particular, the tide isn’t that high. “If they need to take a bigger share of the pie, how are they going to do it? They need brands,” says Javeri.

Online fashion retail is one of the largest categories in e-commerce in India. According to a report by RedSeer Consulting, the fashion market in India is growing at a CAGR of 11% with online fashion growing the fastest, at a CAGR of approximately 32%. “There is only so much online retailers can do with private labels. For the brand-conscious consumer, private labels don’t work,” adds Javeri.

There could, however, be pitfalls looming once a brand becomes dominant online—an online price discovery of the product could very well eat into the sales of the brand’s offline stores. For, the discounting model by e-commerce players isn’t going away anytime soon. “Hence, the ability and capability of a brand to harmonise its retail channels will be critical,” says Javeri.

Another stream of thought is that in order for both online and offline players to expand their product portfolio, international acquisitions could be a way forward. For example, last year, Reliance bought British toymaker Hamleys for about $89 million. According to Mohanty, there could be “soft targets” in the range of $20 million and $40 million.

Accounting for an estimated 87% of the total business, the so-called unorganised sector still claims a significant part of India’s retail landscape. What it signifies is that the market is complex. And in this backdrop, many retail industry watchers believe that the idea of a ‘winner takes all’ is far-fetched. But the good news is that the unorganised market is quickly getting organised. “The introduction of GST is helping and the focus on digitisation is another factor driving modernisation of retail businesses,” says Rajagopalan of RAI.

A picture, though, that is clearly emerging is that Reliance, Walmart-owned Flipkart, Amazon, and the Tata group’s retail arm are likely to be the four main pillars of the organised retail sector. “If you don’t get a seat at the table to ride the big wave of growth now, the cost of entry [later] will be phenomenally prohibitive,” says Mohanty.

So spending a billion dollars now is, perhaps, well worth the money spent. After all, that’s the price to pay for having a seat at India’s retail table.

(This story originally appeared in the December 2020 issue of the magazine)