With Aditya Birla's More in its cart, Amazon looks to take Indian grocery retail by storm

The 49 percent stake in Aditya Birla Retail would be attributable to Amazon since Indian FDI (foreign direct investment) regulations don’t permit foreign retailers to purchase controlling stake in multi-brand Indian retail firms. The rest 51 percent shall be owned by Witzig.

Completion of the deal will be subject to clearance from the Competition Commission of India.

How does Amazon benefit?

Food and grocery (F&G) foray

As of now, the reach and product portfolio of ‘Amazon Pantry’, the e-commerce major’s grocery retailing arm, is limited to major cities and certain categories only. By virtue of the deal, Amazon’s long-unfulfilled goal of tapping the Indian F&G market (among the largest globally) at a big scale will see the light of the day.

Reach and brands

Nearly 20 million members fall under the purview of the ‘Clubmore’ plan, More’s loyalty programme. Besides having a wide range of multi-purpose products on the shelves of its 543 outlets, More has some private label brands in its kitty as well.

Integration

Except for F&G items (includes personal care, home care, footwear, apparel, consumer durables, technology goods), the product range of Amazon and More is closely related. Therefore, going forward, Amazon is well-positioned in terms of revenue traction and can derive economies of scale too.

Brick-and-mortar expansion

In mid-FY18, Amazon acquired 5 percent stake in Shoppers Stop through Amazon.com NV Investment Holding LLC, its subsidiary, for Rs 179.26 crore. Post this, Amazon would be able to set up experience centres and display its products at Shoppers Stop stores pan-India.

The strategic investment in More has been done on similar lines. It will enable Amazon to not only sell consumables online (through home delivery options) and offline (in the store itself), but also explore cross-selling opportunities (in connection with non-food products) at the More outlets.

Competitive advantage

The transaction should enable Amazon to compete with ‘Grofers’ (backed by Softbank) and ‘BigBasket’ (funded by Alibaba) in the online F&G space. Amazon, being a much larger and well-known name in India vis-à-vis the other two, can leverage its brand appeal to gain a higher market share.

In the offline F&G retail environment, Amazon will be better placed to take on industry-leading players such as Reliance Retail, D-Mart and Big Bazaar, who enjoy a dominant presence in the smaller cities/towns of India (a region where most of the More outlets are situated).

Logistics

In the context of F&G delivery, a strong distribution network becomes extremely critical given the perishable and sensitive nature of some goods. Last mile connectivity, which happens to be one of Amazon’s biggest strengths and a prime reason behind its success in India, can be leveraged optimally.

How does the Aditya Birla Group benefit?

Proceeds received from the deal will be used to pare Aditya Birla Retail’s debt that currently stands at approximately Rs 4,000 crore. Though the performance of More outlets indicated some signs of improvement lately on the back of a slew of measures (loss-making store closures, rental expense trimming, store resizing, overhead cost controls), historically, it has been a challenging task to achieve break-even.

By hiving off its F&G retail arm, the Kumar Mangalam Birla-led conglomerate would now be able to consolidate its organisational structure and lay more emphasis on businesses where it believes comparatively better growth prospects exist. These areas include cement (Grasim Industries, Ultratech Cement), telecom (Idea Cellular), finance (Aditya Birla Capital), metals (Hindalco Industries) and fashion (Aditya Birla Fashion and Retail).

Challenges for Amazon 

Though Amazon stands to gain immensely from the stake purchase, it’ll have to contend with some roadblocks that lie along the way. F&G businesses are inherently characterised by normal losses on account of wastage and quality deterioration.

The staples and consumables segment, despite attracting a large number of footfalls at stores, is a low-margin one. This is because periodic product discounting becomes necessary to clear inventories off the shelves and tackle high competitive intensity (particularly from kirana shops in local geographies). This, in turn, necessitates high marketing spends.

Infrastructural challenges on fronts such as warehousing and cold storage would involve high capex in the initial stages.

To facilitate the proposed expansion plan of 100-150 store additions (mostly neighbourhood supermarkets) each year, allocation towards rental costs, that have been on a rising trend in recent times, will be fairly high.

Path ahead

Samara Capital’s investment rationale, prima facie, hints at the optimism in connection with consumer-facing sectors growing consistently in the long-run.

In conclusion, the underlying theme of this inorganic growth route chosen by Amazon-Samara is that offline and online retail mechanisms will continue to co-exist, notwithstanding the pace at which the latter has gained momentum. Since both formats enjoy their own set of advantages, a blend of both ideally augurs well for any retailer in the long-term.

However, only time will tell if the resource-heavy Amazon has what it takes to battle it out against its large brick-and-mortar counterparts in a segment (F&G) where working capital optimisation, store cost rationalisation and high conversion-to-footfall ratios can make all the difference.

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