Amazon, Walmart’s India Battle Driven By Food And Hope
Amazon.com Inc. and Walmart Inc., the world’s two largest retailers, are invading each other’s turf in India to build a formidable base for their next faceoff: grocery.
Amazon bought a 49 percent stake in the parent of a services company that acquired More—a chain of supermarket stores—at an enterprise value of around $580 million, the largest investment in India’s brick-and-mortar retail in four years. Walmart picked 77 percent stake for $16-billion in Flipkart, India’s largest e-commerce company, in its biggest-ever acquisition.
Their target is the $672-billion retail market that, according to a report by Assocham and MRRSIndia.com, is expected to be worth $1.1 trillion by 2020.
And to win the e-commerce battle, it’s important to win grocery, said Satish Meena, senior analyst at Forrester research, adding that India’s food and grocery market accounts for 60 percent of the overall retail revenue. “The opportunity is huge.”
Amazon is trying hard to conquer that in India, having allocated $500 million last year to food and grocery. Over two years, it juggled models to establish a foothold with Amazon Kirana, later rebranded to Amazon Now and now as Prime Now. It offers delivery within two hours.
Still, the online grocery market is tiny. Forrester estimates it accounts for less than 1 percent of overall food retail. The biggest challenge is that it’s not uniform in India, with tastes and ingredients varying with each state.
“The type of groceries people in Madurai shop for is going to be different from that in Pune,” said K Vaitheeswaran, founder of India’s first online retail company Fabmart, which was later acquired by the Aditya Birla Group and rebranded as More. “You need local merchandise and for that you need a local partner chain.”
Neither Amazon nor Walmart can control directly owned brick-and-mortar stores in India as foreign direct investment in multi-brand retail is capped at 49 percent.
Perhaps why Amazon bought a stake in Witzig Advisory Services—51 percent owned by private equity firm Samara Capital—that now controls More. That gives Amazon nearly half the ownership of India’s fourth-largest retail chain with nearly 500 supermarkets and 20 hypermarkets in 150 cities and towns.
The bet on More will allow Amazon better visibility over the stock, said Meena. This is something which it lacked as it had to depend on its partner stores like Big Bazaar and HyperCity for its Amazon Prime Now service. “In grocery, if you can’t deliver what customer wants and on time, that customer is gone.”
For Flipkart, Walmart brings its sourcing and grocery expertise to food retailing. Just days after its majority acquisition by the U.S. retailer was approved, the Indian e-commerce company said it would double down on grocery.
Grocery is a low-margin business and to sell food at volume is something Flipkart can’t do without Walmart, said Meena. “They (Walmart) can build the grocery play for Flipkart like how to source, procure, maintain the warehouses, and maintain margins; everything will be taken care of by Walmart. Flipkart is only going to be the front end.”
Moreover, since Walmart can’t sell its food and general merchandise to consumers directly, Meena expects a lot of cross-selling of its private brands on Flipkart. “Walmart can figure out a way to supply its private labels, which usually have higher margins than third-party products, to Flipkart.”
A Marriage That Hasn’t Worked So Far
What the two retail behemoths are doing in India is an encore of a global battle. In the U.S., Amazon’s shifting focus to physical stores after last year it spent $13.7 billion to buy Whole Foods. It’s now expected to set up 3,000 cashless stores, Bloomberg reported.
Walmart, on its part, is building an alliance of technology firms to build its online business. Besides, acquiring Flipkart and strategic tie-ups with Instacart, Japan’s Rakuten and others, Walmart bought online retailer Jet.com Inc. and an online clothing startup Bonobos Inc.
At the core is the marriage of online commerce with offline retail. The idea is to offer customers a seamless experience. A buyer can touch and feel a product at a store and then order it online; or can order online and take delivery at a store. Something that even India’s richest man Mukesh Ambani agrees is the next big opportunity.
“E-commerce needs offline integration for best results,” Vaitheeswaran said over the phone. Amazon spent 10 years scaring brick-and-mortar retailers saying that online retail was the future, according to him. “Now, Walmart and others are beginning to understand the nuances of digital and are integrating offline-online far more efficiently than earlier.”
Amazon last year also acquired a tiny stake in Shoppers Stop Ltd., a lifestyle retailer. “Customers love to touch and feel, and with omni route you marry both the worlds,” said Govind Shrikhande, former managing director of Shoppers Stop. “If you don’t evolve your format you are bound to lose out.”
For a More or a Shoppers Stop, whose online journey has just started, partnering with a global retailer can give them confidence and cash to scale up and multiply omni-channel presence, he said, adding that brick-and-mortar stores look at profitability while e-commerce companies aren’t afraid of burning cash to win customers. “It’s a win-win for both the parties.”
The Tata Group is trying that with Tata Cliq, its fashion and lifestyle portal, and StarQuik, the online grocery platform of its Trent Hypermarket. Even Shoppers Stop is trying to sell online via shopperstop.com.
Yet, the strategy to marry online and offline retail has so far not worked in India. Aditya Birla Group tried that but shut down its venture called Abof.com last year.
Since both Walmart and Amazon can’t open brick-and-mortar stores in India, offering a combination of online and offline shopping experience directly is out of the question for now. But they have an extensive network. Amazon has more than 50 warehouses across the country, while Walmart runs 22 Best Price-branded cash-and-carry stores in nine states and two fulfillment centers. And their bets stem from optimism.
A Walmart spokesperson, in an emailed response, said overtime, the synergies from this partnership – a combination of Walmart’s global expertise and Flipkart’s customer focus— will position the company for the long-term success.
Arvind Singhal, chairman of retail consultancy Technopak Advisors, said the aim is to have a multi-channel presence in the country for the time being. “The hope here is if and when the FDI opens up, maybe in four to five years, they’ll have a substantial network to complement and expand.”
Emailed queries to Amazon remained unanswered.
Domestic rivals have been pressing the government for a national e-commerce policy with stricter norms on data storage and inventory that could put foreign players at a disadvantage. The draft policy is under review, though.
And local retailers—Kishore Biyani-led Future Group’s Big Bazaar and Easyday stores and billionaire Radhakishan Damani’s Avenue Supermarts Ltd. that owns the D-Mart chain—have been experimenting with their own versions of an omni-channel retail. Then there is Alibaba Group-backed Paytm. But the biggest threat is from Ambani’s Reliance Retail Ltd.
Vaitheeswaran doesn’t think that will be a problem for Walmart or Amazon. Reliance’s ability to scale business in India is unparalleled but it hasn’t competed with a serious threat yet. “It only competed with Indian companies and outmanoeuvred them. Doing that to an Amazon is tough.” An unfavourable policy or a delay in easing FDI norms will only be a short-term setback for the global retailers, he said. “Amazon is already hedging its bet, and both would have planned for a worst-case scenario.”