Krishna Karwa Moneycontrol Research
The festive cheer came to Shoppers Stop early as its board of directors approved a proposal to sell nearly 5 percent equity in the company in the form of a fresh issue for approximately Rs 179 crore to Amazon NV Holdings LLC, the investment arm of Amazon. Initial inferences from the valuation of the transaction suggest that Shoppers Stop has been valued close to its prevailing price and the deal looks like a win-win proposition for both the entities. Here’s why:-
How does Shoppers Stop gain?
Deeper market penetration A glance at Shoppers Stop’s store outlet count at the consolidated level indicates that the company’s presence is robust primarily in metros and other commercially big cities across India. However, its supply network in the tier 2/3 regions of the country is relatively small.
The deal, therefore, will enable the company to capitalise on the logistical capabilities of Amazon and help tap customers from underserved/unserved areas. Consequently, the company can take a leaf out of Amazon’s book by learning to manage its inventory procurement and disbursement processes far more effectively.
In addition, Amazon will offer an exclusive space on its webpage for Shoppers Stop’s products, thus enhancing the visibility of the latter’s products and aiding top-line growth.
Paring debt Proceeds of stake sale may be utilised for paring debt, a measure that ought to be undertaken by the company for better earnings visibility. Alternatively, the funds may be deployed to meet additional capex requirements.
Focus on key strengths The move could also result in Shoppers Stop shifting its emphasis from developing its own omnichannels (which haven’t yielded any significant or noticeable results until now) to core retailing of its product offerings (garments and apparel, home accessories and furniture, leather goods, jewellery, watches, electronics, personal care) by leveraging Amazon’s popularity and digital reach.
Brand recall Shoppers Stop’s in-house brands are likely to garner better consumer interest as well. A margin-accretive profile, increased customer loyalty, clear product differentiation, and higher bargaining power with suppliers are some of the major factors that give the private-label brands of a company a big edge compared to brands of other manufacturers sold under the same roof.
What could have attracted Amazon?
Amazon’s attempts to acquire online grocery retailer Big Basket fell through reportedly on account of valuation differences. Though the global brand has made significant inroads in India’s digital retailing space in a fairly short period of time for a diverse range of products, it has not tasted success in the grocery space.
For Shoppers Stop, Hypercity, one of India’s biggest hypermarket chains, has been a drag. Amazon could use this platform to expand its reach in the grocery segment, particularly in the leading cities of the country to start with.
Secondly, the strategy is in line with Amazon’s plans to set up experience centres/brick-and-mortar outlets in 80 Shoppers Stop stores (20 more to be added to the list in due course) in order to be better connected to its current/prospective customers, wherein buyers can touch and feel the products at specific locations before buying the same online.
The cost of setting up such a large network of stores without a corresponding matching revenue contribution would have been significant for Amazon.
A mutually beneficial partnership
In accordance with the reasons stated in our earlier article, Shoppers Stop and Amazon appear to have taken the correct step by integrating the advantages of physical and digital platforms, with neither dictating the way the other operates.
The contours of the agreement prohibit each party from entering into similar agreements with its partner’s competitors. For example, Shoppers Stop cannot engage with Flipkart/Shopclues. On similar lines, Amazon cannot consider the prospects of tying up with Pantaloons/Reliance Retail/Westside/ Central. As a result, financial interests of both would be protected.
Overall, strong macro tailwinds such as favourable demographics, rising affluence, and increasing aspiration to purchase branded products should augur well for Indian retailers in the long-term. Amazon cannot afford to ignore the immense potential of the Indian market either. With consumer demand expected to gain momentum once GST-induced disruptions begin to fade gradually, the alliance couldn't have been better timed.
A significant takeaway from the deal is the interdependence of e-retailing and physical retailing even when the world is digitizing at a fast pace.
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