A deal with Future Retail will give Amazon a head start in offline presence as against Flipkart, which doesn’t have any stores but its parent Walmart has a growing wholesale business in India
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A stake in Future Retail will be a far bigger step in
marrying Amazon’s online presence in India with offline stores. Photo: Reuters
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Future Group founder Kishore Biyani is negotiating an agreement with Amazon that will give the US-based online retailer the option to acquire Biyani in the future, The Economic Times reported last week. The report said the e-commerce giant is in an advanced stage of talks to buy a 9.5% stake in Future Retail Ltd. Amazon has been testing the waters with stakes in smaller offline companies, including Shoppers Stop Ltd and Aditya Birla Group’s food and grocery retail chain, More. A stake in Future Retail will be a far bigger step in marrying its online presence with offline stores.
Analysts at Morgan Stanley said in a note to clients that Future Retail has a strong store distribution compared to that of its peers. “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,” they said in a 21 November report.
As on 30 September, Future Retail had 1,336 stores, including 284 Big Bazaar stores, covering 15.4 million sq.ft, across 373 cities.
Now, the moot question for Amazon is whether the Future Retail deal will be a game changer. How much will it help Amazon in dealing with stiff competition from Flipkart (now owned by Walmart)?
Well, Amazon may get an edge if it decides to acquire Future Retail. As Michelle Grant, head of retailing at market research firm Euromonitor International says: “It gives Amazon a head start in physical outlets compared to Flipkart. While Flipkart doesn’t have any stores right now, Walmart has a store-based wholesale business that is growing.”
“It’s only a matter of time before Walmart uses its local and global expertise in store-based retailing to open stores in India. Amazon is getting ahead of that, while Walmart deals with the transition of owning Flipkart,” adds Grant.
It’s not the only one in this space. At the 41st annual general meeting in July, Reliance Industries Ltd’s chairman, Mukesh Ambani, had said: “As Reliance transitions to become a technology platform company, we see our biggest growth opportunity in creating a hybrid, online-to-offline new commerce platform.”
Amazon’s interest in offline retail is not new. Last year, Amazon bought Whole Foods Market for $13.7 billion. In India, Future Retail will be its third investment in an offline retail firm. The 9.5% stake in Future Retail will be worth about ₹2,500 crore at Friday’s prices. In September 2017, Amazon’s investment arm had bought a 5% stake in Shoppers Stop for ₹179 crore. Reports pegged the More deal value at ₹4,200 crore, in which Amazon bought a 49% stake, while private equity firm Samara Capital holds the remaining 51%.
A hybrid retail model is becoming important, given that pure online retailers have not generated profits. On the other hand, intense competition from e-tailers has weighed heavily on offline retailers. Combining both may lead to a sustainable route to making profits.
As for Amazon, analysts agree that the clause to increase its stake in Future Retail in the long run will prove helpful for the e-commerce major. As of September-end, the promoter and promoter group held a 46.5% stake in the retail arm.
As the Indian retail sector evolves, with offline and online channels vying for a share of the booming market, investors can expect more consolidation. This growing interest in offline retailers gives investors an opportunity to benefit from any improvement in valuations, either due to the presence of a strategic investor or an interest in raising their equity stake. News flows on this front may continue to grab investor attention in the years ahead.
Source:https://www.livemint.com/Money/IYJM1avKf2MkZA03iZQdmN/Amazons-Future-Retail-deal-goes-beyond-tackling-Flipkart.html
Source:https://www.livemint.com/Money/IYJM1avKf2MkZA03iZQdmN/Amazons-Future-Retail-deal-goes-beyond-tackling-Flipkart.html
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