Amazon is getting aggressive about building offline partnerships in India. After buying stakes in Aditya Birla Retail’s more supermarkets and fashion retailer Shoppers Stop, the Jeff Bezos-led company is reportedly eyeing 9.5 percent equity in Kishore Biyani-led Future Retail.
The reasons why Amazon is picking up stakes in supermarket chains, or companies that operate physical retail stores, are multiple.
First, globally Amazon – which has got phenomenal success in online retailing has been slowly establishing its presence across offline retail as it believes that the next phase of growth will come from offline retail, and not just online.
As Indian government does not allow foreign entities to operate in retail sector with 100 percent ownership, Amazon can only do that by partnering local players, with stakes up to 49 percent, to replicate its global strategy in India. According to regulations, an Indian entity can dilute only up to 49 percent to multiple foreign portfolio investors.
On the other hand, online retail in India is still negligible at around 2 percent of India’s total retail sales while the global average is around 15-20 percent. While online retailing is estimated to grow faster than physical retail in India. Over the next few years, it will still be a small portion of the total retail pie. So, physical retail stores will always dominate and Amazon wants to grab a slice of it.
Now, why Future Retail? Future Retail currently operates 1123 stores under different brand names, including Big Bazaar and Nilgiris, across 339 cities. Besides, Biyani has an ambitious plan to have 10,000 mall-format stores over a period, most of which will be in smaller cities. Once the deal is done, Amazon will have the strength of India’s largest physical retailer, with strong presence in smaller cities where e-commerce has very limited penetration.
Amazon will be able to utilize Future Retail’s stores as its pick-up points, experience zones where consumers can have a look-and-feel of products on Amazon’s e-commerce marketplace and order if they want. This will help Amazon increase its penetration in smaller cities, which will eventually result in increased sales, with negligible investment.
On the other hand, Future Group has a very well spread warehousing at different parts of the country, which Amazon can tap. Currently, the US firm is at a disadvantage since foreign companies aren’t allowed to hold e-commerce inventory in India. Utilizing Future’s vast warehousing network will help Amazon deliver products much faster in smaller cities, and across rural India (over a period) where e-commerce is yet to reach. A seamless integration of offline and online is the model all global retail giants are trying to develop across the world.
Besides, Amazon has been trying to crack grocery and daily household stuff segment which is primarily dominated by kirana stores and modern retail. Globally, it has been testing the sector with Amazon Go stores, and Prime Now (online). But, yet to see the kind of success it has witnessed with its core e-commerce model.
That is probably the reason why Amazon bought grocery chain Whole Foods for about USD 14 billion in June 2017. While Whole Foods was a full acquisition, Amazon’s partnerships and or stake-holdings in Indian retailers will mostly be strategic so that it can integrate online with offline, utilize infrastructure of its partners to reduce delivery time and eventually increase Amazon’s penetration in smaller cities and rural areas.
Together, these steps will also help Amazon reduce losses simply because its investments will not be very high and the offline model is not discount driven unlike online retailing. During the past few years, Amazon has incurred huge losses though revenue jumped each year because of heavy discounting to keep pace with competition.
Amazon is not the only one to look at an integrated model. Walmart has acquired a majority stake in rival online platform Flipkart for USD 16 billion in May. Walmart had also acquired Chinese e-commerce business Yihaodian in two phases. It has also bought Jet.com and got into a strategic alliance with JD.com, besides adding Moosejaw, ModCloth, Bonobos and Parcel to consolidate online and offline globally.
Unlike Amazon, Walmart initially entered India through cash-and-carry wholesale retail, and so far stayed restricted to that. This is the first time; the two US retailers will have a direct fight in India. With a stake in Future Retail, along with a strategic partnership, Amazon will have the advantage of being well-spread across India which Walmart does not have right now. The success, however, will depend on how much access Kishore Biyani is ready to give Jeff Bezos into his turf. — Moneycontrol