Reliance-Future Deal: More than a White Knight Aiming for the Retail Crown

The RSS affiliate Swadeshi Jagran Manch revealed that it is studying the deal to see how it could impact small retailers.

In October 2006, when Reliance opened its first retail outlet in Banjara Hills of Hyderabad, Raghu Pillai, the then president and chief executive (operations and strategy) at Reliance Retail told this writer: “The end goal is clear: To have a presence across all formats and a topline of Rs 1 lakh crore by 2010-11.”

New at Reliance but already a veteran in the retail industry, Pillai knew what Reliance was reading when others could only see a new entrant opening the shutters of its first retail store.

Last year, Reliance hit these numbers. While it was much later than originally anticipated, the recently announced move to buy out the Future Group’s retail business has added a furious gallop and girth to its growth story, making the combined entity manifold bigger than its nearest rival in the organised retail sector.

At one level, Kishore Biyani, the widely acknowledged ‘Rajah’ of Indian retail had no option but to cash out rather than crash land and had a Hobson’s choice in terms of suitors. But then there is more to it. Retail experts read a story deeper than a white knight rescuing a damsel in distress. It has all the ingredients of what family-led businesses need to watch out for, lessons in financial prudence, growth aspirations, business opportunities and redefined management mantras and the most immediate concern: is this the best for the consumer?

The deal is also a pointer to the policy challenges that confront this sector on opening up to greater competition.

It also raises questions on the view that regulators might take in a case such as this, in times such as these and in conditions where a distress sale ends up making the bigger the biggest.

Representative image of Future Group’s Big Bazaar. Photo: Reuters

Time for FDI without restrictions

In terms of whether this is good for the consumer, Arvind Singhal, retail sector expert and the chairman and managing director of Technopak, a leading management consulting firm, feels, “An ideal situation for the consumer would be one where there are multiple players of the size of Reliance and Future combined.” He thinks this will be possible if foreign direct investments (FDIs) are allowed into retail without any restrictions.

Currently, in terms of size, Reliance’s core retail business is about Rs 95,000 crore and that of Future estimated by the industry at around Rs 35,000 crore, taking the total to Rs 1,30,000
crore and about five times bigger than the next biggest player Avenue Supermarts, which runs DMart stores with revenues to the tune of Rs 25,000 crore as of March 31, 2020.

The proponents of FDI into the Indian retail sector without restrictions see it as a solution to create a greater level playing field and thereby reduce the scope for dominance by any single player within the organised retail sector. However, there are also those who see this very move as detrimental to the interests of smaller retail players.

For instance, the stand taken by the Swadeshi Jagran Manch. Those within the Indian retail industry, however, point to a contradiction in the stance of the Manch when it is opposed to large foreign retail players entering India but finds nothing wrong if Indian players get to dominate a market. Ashwani Mahajan, national co-convenor of the Swadeshi Jagran Manch, however, reiterates that this is not true.

“There is no contradiction in our stand, if we are opposed to Walmart or any other foreign retail giant entering India. We are also opposed to any attempts at monopolisation of the market by Indian corporates.”

He adds, “If I am against Walmart, it is not because it is a US company. We are opposed to it because we feel big players such as these will impact the jobs of our people and hurt the small traders because large corporates have the capacity to offer predatory pricing.”

He says, “For us, this holds true both for Walmart or any other foreign giant as also for any Indian player be it Reliance or the Future group.”

In fact, he also adds: “Developments are happening at a fast pace and we now have a research team that is working on how the Reliance and Future deal could impact small retailers.”

Ashwani Mahajan, chief of the Swadeshi Jagran Manch. Photo: REUTERS/Altaf Hussain/Files

Retail space planning and regulatory challenges

While the extent to which the FDI policy needs tinkering to facilitate more competition from similar size players, there are other policy challenges which also need attention.

For instance, one argument has for long been on the lack of town planning for retail spaces.

Today, growth of both modern and traditional retail needs designated retail spaces in town planning, which has not yet got its due share as is done in the case of parks, schools and hospitals. Retail space planning for small stores and not just malls is also integral and that, retail experts feel, the town planners have yet not adequately considered.

But without many such large players, how is the regulator likely to view this?

Geeta Gowri, former member of the Competition Commission of India, says the commission would typically look at thresholds with assets of Rs 2,000 crore and turnover of Rs 6,000 crore. Since there is also an e-commerce component, they may look at the turnover and since the combined turnover is higher, it will come under its notice but then as of now, the CCI has not taken up cases on “failing firms” and whether the Future group business falls in this category and will be viewed as a distress sale, is a call the regulator will have to take.

Also, since this is a difficult time, there is now the added component of a green channel clearance option so consumers do not suffer. But then, how much of this will need to be considered in this case is a view which the CCI will have to take.’’ Gowri, who is editor (South Asia) of Competition Policy International, explains that the scope for acquisitions of ‘failing firms’ or mergers of weak and strong firms during the lockdown touches on a sensitive area relating to ‘failing firms’.

The recently enacted Insolvency and Bankruptcy Code has seen several acquisitions and mergers cleared by the CCI. No attempt has however been made to define a ‘failing firm’. But then, there are built-in checks. “All mergers are ex-ante and the commission is therefore prescient in its approach. A merger can be re-evaluated after a year by the CCI again. Also, later than a year, it can be taken up under ‘abuse of dominance’ which is an ex-post assessment of the market power,” she says.

File image of Kishore Biyani. Photo: PTI

Fragmented structure rules

There is also the dimension of the nature of the Indian retail market and its fragmented structure. The overall retail in India (including the organised and unorganised sectors) is estimated at $825 billion. Of this, organised retail accounts for only $100 billion, or just about 12% of the total Indian retail market.

Within this $100 billion, about $30 billion is the estimated size of the e-commerce segment, leaving just about $70 billion for organised physical retail. It is the share in this that the combined entity of Reliance and Future is looking at, unconfirmed estimates done on the back of large-size envelopes suggest, it could be in the region of around 25% of the organised physical retail market.

Evolving space

Arvind Sahay, professor of marketing at the Indian Institute of Management, Ahmedabad, sees a long way ahead still and reminds, “We are only seeing the beginning of the process of how retail will evolve here in India. How the various retail outlets will evolve to add online channels to their physical presence needs to be seen.”

Also, apart from the retail outlets the market also has various local aggregators and the extent to which the likes of JioMart, Amazon and Flipkart take them on board and how they will evolve will determine how the Reliance-Future deal will play out, he says.

To Sahay, what needs to be kept in mind is the basic fact about the market which is that a large percentage of consumers in India still do not buy from large organised retail and that is unlikely to change in a hurry. Also, many could well take to buying online and exploring the various choices available with players like Amazon, Flipkart and JioMart.

Amazon and Flipkart logos. Photo: Reuters

Creating legacy

There is something in this deal also for the family-led businesses. It is a pointer to promoters on what not to lose sight of when nurturing their business ambitions and attempting to create legacies.

Nupur Pavan Bang, associate director, Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business, says, “Kishore Biyani has moved on and averted a crisis for the retail business of the Future Group. An enterprise of which he was the king. While he will remain the man who pioneered organised retail in India, he has lost the opportunity to leave a legacy for his future generations. It is, therefore, a reminder to promoters on the need to keep an eye on the capital structure and not fuel growth and ambition through disproportionate debt.”

From a management perspective, there is an added dimension of what some in the industry have started calling “the last mover advantage” and it is not necessary that pioneers are good at leveraging this.

There are enough and more cases on what last mover advantage can be, such as that of Indigo in the airline industry. With astute moves and smart strategies that are aligned to business opportunities, late entrants could well end up as the last ones standing.

E. Kumar Sharma is a senior business journalist.