What the Future Retail investment brings to the table for Amazon

What the Future Retail investment brings to the table for Amazon
26 Aug, 2019

Late last week, Seattle headquartered ecommerce giant Amazon acquired an indirect stake of nearly 3.6% in Future Retail, India’s second largest brick-and-mortar retailer by revenues, signalling its intent for a wider presence in the retail sector as it goes head-to-head with rival Walmart in this market.

On Thursday, Mumbai-based Future Retail, part of the Kishore Biyani owned Future Group, said in a regulatory filing that Amazon was acquiring a 49% stake in Future Coupons, a promoter entity that in turn holds 3.96 lakh warrants in Future Retail. The warrants, when exercised, would convert into a 7.3% stake in Future Retail, according to a prior filing. In another February filing, the company had said that the warrants would be converted for an aggregate sum of Rs 2,000 crore.

Amazon, according to multiple media reports, has been on a quest to own a piece of Future Retail since early last year. Future Retail will be its third bet on an offline retail player here after the Aditya Birla Group’s supermarket chain More and fashion and lifestyle retailer Shoppers Stop.


Why Amazon wants a presence in India’s brick-and-mortar retail market

After acquiring US supermarket chain Whole Foods for $13.7 billion about two years ago, Amazon wants to be prepared for potential moves by rival Walmart in India.

Apart from owning India’s largest homegrown ecommerce platform Flipkart, Walmart operates a chain of wholesale cash-and-carry stores in the country under the Best Price brand. Currently, the  Bentonville, Arkansas-headquartered retailer doesn’t sell directly to retail customers. Instead, it serves local businesses and kirana stores through the cash-and-carry outlets. A recent report in The Economic Times said that it was exploring a potential joint venture with the Tata Group for a store-based, multi-channel retail play. The Tata Group owns and operates several formats including Westside, Star Bazaar, and Croma.


With ecommerce currently accounting for just 3% of India’s overall retail market, brick-and-mortar players will continue to be the backbone of the sector for some time. Therefore, it’s no surprise that Walmart and Amazon – two of the world's largest retailers – want a piece of the country’s $700 billion retail opportunity.

Specific synergies Amazon can explore with Future Retail

With Future Retail, Amazon stands to grow its footprint manifold in the offline retail market. The More acquisition gave the Jeff Bezos-controller etailer access to 600 supermarkets and 20 hypermarkets. Its acquisition of a 5% stake in Shoppers Stop took it into 83 department stores across 40 cities across the country.


Future Retail operates retail chains under several formats such as Big Bazaar and Nilgiris, in supermarkets, Hypercity, in the hypermarkets category, and electronics chain Ezone. It manages over 2,000 stores across 400 cities, essentially controlling about a third of India’s organised food and grocery market. It also operates brands such as FBB, Central, EasyDay, Foodhall and Brand Factory.

The company has been stepping up its country-wide expansion in recent years and acquisitions have been key to this strategy. In 2017, it agreed to acquire Hypercity Retail (India) from K Raheja Corp for around $100 million in a cash-and-stock deal. It also acquired convenience store chain Big Apple in 2012 and Nilgiri’s, a southern India-based chain, in November 2014.

Early this year, it signed a master franchise agreement with US-headquartered 7-Eleven Inc to manage the India expansion of the world's largest convenience store chain.


“Online players are looking for avenues to further engage with customers and tap into India’s rising demand for household products and home-delivered fresh produce and vegetables. While online shopping has grown exponentially increased in the last couple of years, online sales are just about 3% of overall retail sales in India,” said Ankur Pahwa, partner and national leader -- ecommerce and consumer internet, at consulting firm EY India.

The move specifically enables Amazon to tap into high-frequency categories such as the hyperlocal grocery market which is growing at triple-digit rates. “We are increasingly witnessing a trend in the retail space of online marketplaces and offline big-store chains adopting omnichannel strategies. Online retailers are looking to expand their capabilities to physical stores across a wide spectrum of retail segments such as furniture, eyewear, jewellery and beauty products. Online marketplaces closely understand the preferences of customers, especially in the private label space, to enable them to successfully cross-pollinate,” Pahwa said.

By plugging into Amazon’s powerful delivery and order generation network, Future Retail may be able to  increase sales volumes, optimise inventory and leverage analytic capabilities, said Aman Kumar, chief business officer at market intelligence firm Kalagato.


Not everybody, however, sees the obvious synergies in the alliance. “I’m inclined to think that Amazon’s 5% acquisition of Shoppers Stop has not helped either of the parties. An investment of under 10% is neither here nor there. Future Retail does not necessarily have to raise money from Amazon. The real benefit comes when you are a significant partner in terms of having the ability to jointly run the operations and therefore the synergies of each other can be fully leveraged,” said Arvind Singhal, chairman of retail consulting firm Technopak Advisors.

The FDI conundrum

Can Amazon and Future Retail reap the benefits of an alliance when operating within the framework of foreign direct investment (FDI) regulations that govern the ecommerce sector?


The revised FDI norms for ecommerce that came into effect on February 1, 2019, had briefly restricted Amazon from selling products under its food retail business, Amazon Retail India (ARIPL). However, the government later clarified that FDI in sectors including food retail was exempt from the modified guidelines for online marketplaces. Amazon has since committed to invest $500 million for the food venture.

As per the revised norms, FDI is allowed only in pure marketplace models of ecommerce and not in inventory-based models. Businesses following a marketplace model cannot own or control the inventory of the marketplace. The same holds for the inventory of the vendors. Entities having any equity participation from the marketplace (or its group company) cannot sell their products on the marketplace’s platforms.

The regulations also mandate that if more than 25% of sales on a marketplace are from a single vendor, the inventory of the vendor would be deemed as controlled by the marketplace, a violation of the revailing law.

As per the revised FDI norms, Future Retail would not be able to sell products on the Amazon India marketplace. This is where Amazon’s indirect stake in Future Retail through Future Coupons becomes important.

“Press Note 2 does not explicitly mention that both direct and indirect equity participation would be considered for this purpose. In view of the above, Amazon seems to be investing in Future Coupons and in such event, Press Note 2 would restrict the entity (FCL) from selling its products on the platform having equity participation from Amazon. Therefore… the entity which will sell its product on the marketplace will be Future Retail while the entity which will have equity participation by Amazon will be Future Coupons. Thus, it appears that the extant FDI policy allows Amazon to participate in equity stake in a company such as Future Coupons,” said Diljeet Titus, managing partner, Titus & Co. Advocates.