After years of speculation, American e-commerce giant Amazon $AMZN Inc. has finally inched closer to holding a stake in one of India’s largest brick-and-mortar retailers.
Yesterday (Aug. 22), Future Retail informed Indian stock exchanges (pdf) that Amazon has signed a deal to buy a 49% stake in Future Coupons, which holds a minority stake in the Indian retailer that runs the popular Big Bazaar hypermarket chain. Amazon also has an option to increase or even acquire the entire stake in Future Coupons.
The companies did not disclose the size of the deal.
The agreement, which is subject to regulatory approvals, also gives Amazon the option to acquire a stake in Future Retail in the future.
“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 Future Retail, and is exercisable between the third to tenth years, in certain circumstances, subject to applicable law,” the notice to stock exchanges said.
Future Retail is part of the Future Group, promoted by the Indian retail czar Kishore Biyani.
This is Amazon’s third investment in a physical retail chain in India. Last year, the company had acquired a stake in supermarket brand More from Aditya Birla Retail, and in 2017, it picked a 5% stake in multi-brand fashion retailer Shoppers Stop.
The deal was a long time in the making as reported by a slew of source-based media reports over the last couple of years, which predicted a likely tie-up between Amazon’s billionaire founder & CEO Jeff Bezos and Biyani, the founder and CEO of Future Group.
Industry analysts say this is a win-win for both the companies.
“With the deal, Amazon gets access to one of India’s largest physical retailer’s consumer database. Meanwhile, Future Group will now have access to cutting edge technology platform and its analytics,” said Abneesh Roy, associate director for institutional equities at brokerage firm Edelweiss Securities Limited.
Amazon, which entered India in 2013, is now among the top two e-tailers in the country with over 170 million products listed on its website. However, Amazon’s reach has been limited given that a huge chunk of India’s population still does not have access to the internet. By some estimates, despite being the world’s second-largest internet userbase, more than half of its population does not use the web.
Future Group, however, operates a whopping 1,557 stores across 437 Indian cities covering 16.27 million square feet of retailing space in the country.
There’s a lot that Future Group gains from Amazon, too.
Amazon could be a lucrative online destination for the Indian retailer to showcase and sell its products to tech-savvy young shoppers. Like most brick-and-mortar retailers in India, Future Group’s e-commerce ventures have not had much success as it entered the sector late and half-heartedly, given Biyani’s dislike for e-commerce until as early as last year.
“Today, internationally many traditional modern retail as well as department store chains have closed due to customers moving towards online stores. So the brick and mortar supermarket is under threat in the future,” said Vineet Trakroo, chief executive officer at brand and marketing firm, Evolution Strategy Advisors LLP. “The partnership with Amazon will help Biyani and company stave off the threat from online business.”
Besides helping each other, the two companies together form a lethal rival for others in the retail industry.
For several years now, Indian online retailers have been investing in opening stores or experience centres where shoppers can touch and feel their products before making a purchase. These stores mainly help e-commerce websites lure first-time buyers who may be averse to the idea of online shopping due to its novelty, among other things.
This agreement could pave a way for Amazon and Future Group to build out an effective omnichannel retail play without either of the companies having to shell out huge money from their pockets. For instance, the two could in the near-term try a model where shoppers can order on Amazon.in and collect items from a Future Group store near them, a model that is popular in the US but hasn’t picked up much in India yet.
“Biyani has been focused on growing his private labels brand portfolio, which is a high margin business. The partnership with Amazon will now help him get most of his brands online and grow them,” said Renuka Kamath, a professor of marketing at Mumbai’s SP Jain Institute of Management and Research.
This deal will also help Amazon dig its heels deeper into India where it’s fighting a fierce battle with homegrown Flipkart. Last year, Amazon’s American rival had acquired Flipkart for $16 billion making life harder for the Bezos-owned company.
“With Walmart $WMT taking over Flipkart the equations have changed for Amazon,” Trakroo of Evolution Strategy Advisors said. “Future Group will help Amazon source and supply better. Things could get bigger for Future Group in case Amazon may decide to make its presence stronger in the fast-moving consumer goods segment. It could possibly look at buying more of Future Group.”
In addition, the partnership will also help both Amazon and Future Group to stave off competition from Reliance Retail, which is owned by India’s richest man, Mukesh Ambani, and has announced ambitious plans for the retail industry.
However, it may not be a cakewalk for Bezos and Biyani from here.
Experts warn that building out and sustaining an omnichannel strategy between two large businesses is not an easy business model to crack.
“Both the players are going to face several operational challenges at the back-end,” said Kamath of SP Jain Institute of Management and Research. “Integrating supply chain and logistics is not an easy task for any player in a large country like India.”
For instance, while offering an omnichannel experience to consumers, it’s important for a brand to ensure the product that a buyer has ordered online is available at the physical store. “The non-availability of a promised product can spoil consumer experience, hurting the business,” said Kamath.
There are other challenges, including pending regulatory approvals for the deal.
“Amazon currently cannot buy a stake in Future Retail directly. Foreign direct investment regulations necessitate state-level approvals,” said Roy of Edelweiss Securities. “Future Group is present across (many) states, therefore, required approvals could prove to be time-consuming.”
