Highlights:-
- Amazon is expected to purchase nearly 10 percent stake in Future Retail
- The deal is slated to conclude in the near future
- Valuation seems fair based on Future Retail’s existing market cap
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Indian retail, being a huge growth opportunity in itself, has seen major players gearing up for network expansion, increased adoption of omnichannels, periodic product launches and marketing initiatives. In this context, the latest newsbreak involving two industry heavyweights cannot be overlooked.
After an initial announcement nearly a year ago and months of subsequent speculation, media reports suggest that the Amazon-Future Retail deal is finally happening. While it’s obvious that both stand to gain immensely, in our view, the valuation also appears to be at par with Future Retail’s current market capitalisation.
How does Future Retail benefit?
Online sales
In India, Amazon is the undisputed leader among e-commerce marketplaces. Future Retail would be able to list its products, especially the private labels and owned brands, on amazon.in, which, in turn, will bolster its sales. Future Retail’s products will, in all probability, have dedicated web pages on the Amazon website/app to facilitate easy access and identification by users. This assumes importance since convenience shopping is picking up pace rapidly.
Data leverage
One of Amazon’s key strengths is its ability to collect and analyse data well. This can be looked at by Future Retail to plan its retailing operations better, besides collecting valuable data points of its own to link online and offline retail models.
Debt repayment
As on March 31, 2019, at a consolidated level, Future Retail’s total debt (short-term and long-term) stood at Rs 2,553.98 crore. Repayment of this may be prioritised in a bid to deleverage the balance sheet, boost profitability and improve return ratios.
Working capital benefits
Amazon is known for its short delivery time and efficient practices in handling stocks and distribution. This set-up can be also utilised by Future Retail to strengthen its own order processing and fulfillment times in connection with online sales.
Tackling competition
Reliance Retail, India’s largest retailer, is aggressively upping the ante by augmenting its network. It is also considering launching its own e-commerce website. Other retail names with national coverage -- Aditya Birla Fashion and Retail, D-Mart, Shoppers Stop and Trent -- are investing big time in strengthening their online systems. By virtue of entering into this agreement with Amazon, Future Retail should be able to stay competitive.
How does Amazon benefit?
Geographical penetration
With a store count of 1,557 stores (spanning 16.27 million square feet) and presence in 437 Indian cities, Future Retail is among India's largest retailers. The tie-up would enable Amazon to target new regions for its next leg of growth.
Market understanding
Future Retail’s stores are spread across India and cater to a diverse range of the population. Amazon, on the other hand, is comparatively underpenetrated. Insights gained from Future Retail’s operations and knowledge of local preferences in specific cities and towns can assist Amazon in formulating new strategies.
Grievance redressal
One common grouse of online shoppers is that resolution of disputes (on fronts such as exchange, refund and quality) can be time-consuming and inconvenient. The problem accentuates even more in tier 2,3 and 4 cities of the country. Future Retail’s network coverage can make it easier for Amazon to set up customer booths at outlets.
Inventory management
Without Future Retail in the picture, it would’ve been necessary for Amazon to invest heavily in setting up warehousing and logistical infrastructure. Amazon can now leverage Future Retail’s existing processes to manage these aspects at substantially lower costs.
Grocery traction
Though Amazon has succeeded in making extensive inroads in nearly all product categories, its grocery vertical (ie. through Amazon Pantry) is restricted to select big cities and covers only a few sub-segments. In contrast, Future Retail’s flagship ‘Big Bazaar’ outlets derive a big chunk of their top line from food and grocery items.
This deal could, therefore, be the starting point for Amazon to understand the sourcing, storage and supply dynamics in this segment. Post this, the possibility of a full-fledged grocery foray by Amazon cannot be ruled out.
Linkage with Future Pay
Future Pay, Future Retail’s online payment portal, has close to 13.5 million users. Amazon Pay, as a payments tool, is gaining popularity in metros and tier 1 cities for shopping and availing offers. Integration of these technological databases is likely to boost Amazon Pay’s connect with shoppers who typically use Future Pay.
An edge over Walmart
Though talks with Flipkart are under way, Walmart is yet to enter Indian markets. As and when it formally happens, it will have to scout for an offline retailer too, preferably one with pan-India coverage. Amazon, on the other hand, has been in India for a while, and thanks to this partnership with Future Retail, it would have a distinct advantage.
Promotions
A wider reach, coupled with display of Amazon -- as a brand name -- and its products in Future Retail outlets across India would help the Jeff Bezos-led giant pursue its marketing initiatives better.
Valuation analysis
The deal, prima facie, seems to be valued neither at a discount nor at a premium to Future Retail’s current market cap.
As we had indicated earlier, there were talks of this stake acquisition being done at a premium since Amazon has always been gung-ho about its brick-and-mortar plans and wouldn’t have had second thoughts about shelling out a little extra money for this purpose. Implementation of stringent e-commerce regulations earlier this year have perhaps made Amazon a lot more cautious.
However, we feel that it would’ve been difficult for Future Retail to command a higher valuation because:-
- Market sentiment is weak in the consumption space (in staples as well as discretionary), which could lead to a dip in earnings.
- In recent quarters, despite registering good top line growth on a high revenue base, its margins have been visibly lower than competition.
In conclusion, this development underscores the importance of blending offline and online retailing in an industry where competition will continue to intensify. Though the impact of this on sales growth and margins remains to be seen, one thing is certain – organised retail is likely to witness more consolidation (because funding limitations would restrict smaller retailers’ expansion plans). Perhaps, we may see more of such partnerships fructifying in times to come.
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Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd. Moneycontrol Research analysts do not hold positions in the companies discussed here.
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