9 min read.Updated: 28 Sep 2020, 05:23 AM ISTMihir Dalal
Flush with funds, Reliance Retail has trained its sights on the Flipkart-Amazon duopoly. How will it fare?
Reliance will find it tough to break the dominance of Amazon and Flipkart, similar to how Walmart is struggling to challenge Amazon in digital sales in the US even as its stores continue to prosper
Last month, Nimit Jain, an entrepreneur, ordered biscuits, shampoo, toothpaste and other items for his family in Kota. He used JioMart—the new online shopping app by Mukesh Ambani’s Reliance Industries Limited—lured by its low prices and freebies.
JioMart was to deliver the order within two days, but Jain’s family didn’t receive the items on time and JioMart didn’t inform Jain about the delay. The delivery was done four days after he had placed the order, a few hours after Jain had complained to the firm via email and Twitter.
A few products were missing, Jain’s parents informed him. It took time to figure out the missing items because the details of the order weren’t available on the app. Jain had paid online and asked JioMart for a partial refund. Instead of receiving an acknowledgement for his refund request, he received a response for his previous email about the delay in delivery. Five days later, Jain got a refund.
Mumbai-based Jain, a computer science graduate from the Indian Institute of Technology, Madras, usually orders groceries from BigBasket and sometimes from Dunzo. He said that he doesn’t plan to use JioMart again.
“A couple of my friends and relatives (in Mumbai and Kota) have also had similarly bad experiences. It doesn’t look like JioMart is ready for online groceries. Their operations and customer care teams weren’t in sync," Jain said.
Since JioMart expanded to more than 200 cities this summer, scores of customers like Jain have complained about missing products, delayed deliveries and generally poor service. Still, industry executives say that while its service levels have been inconsistent, JioMart is registering similar order volumes to BigBasket, the largest e-grocer, on the back of aggressive marketing and discounts.
These volumes still comprise a small fraction of the overall business of Amazon India and Walmart-owned Flipkart, the two dominant online retailers. But that’s because JioMart is only selling groceries now; it plans to sell other products like fashion and electronics soon. It’s clear that after many years of talk and hype, Reliance, which owns India’s largest offline retail chain, is finally becoming a serious challenger to Amazon and Flipkart, as well as BigBasket and Grofers.
Still, industry executives, logistics firms, consultants and analysts that Mint spoke with said that Reliance will find it tough to break the dominance of Amazon-Flipkart in e-commerce, similar to how Walmart is struggling to challenge Amazon in digital sales in the US even as its stores continue to prosper. Amazon and Flipkart both have deep pockets, proven expertise in e-commerce, popular brands and good knowledge of the Indian market.
“Reliance has the financial muscle, but Walmart (Flipkart) and Amazon are no pushovers," said Harminder Sahni, managing director, Wazir Advisors, a consultancy. “Today, most people who want to shop online are happy with Flipkart and Amazon. These companies have achieved significant scale and have very few weaknesses. As a latecomer, it will be very difficult for Reliance to make a big dent in the market."
Reliance did not respond to an emailed questionnaire seeking comment.
Local internet powerhouse
During the pandemic, Reliance has not only moved fast to make inroads into the e-commerce market, it has also consolidated its leadership in organized offline retail. Last month, Reliance bought most of the businesses of Future Group for about $3.4 billion in a deal that will take its retail footprint to nearly 14,000 stores—by far, the largest in India.
In the past six months, Reliance has raised more than $21 billion for its digital unit Jio Platforms. This month, Reliance kickstarted a separate fund-raising spree for its retail unit, Reliance Retail, bagging about $1.8 billion from private equity firms Silver Lake and KKR, two of the investors in Jio. Several more investment firms, including other shareholders in Jio, are expected to join them.
These moves are part of Reliance’s efforts to transform itself into a 21stcentury digital behemoth. It is positioning itself as India’s answer to Amazon, Facebook, Google, Alibaba and other world-class digital giants, and unlike local startups like Flipkart, Ola and Paytm that have or had similar ambitions, Reliance enjoys some unparalleled advantages.
It is now accepted wisdom among politicians and regulators that India needs a ‘local’ internet powerhouse to counter the dominance of America’s Big Tech and the growing influence of Chinese firms, partly because of sovereignty concerns. Reliance’s mastery in lobbying and its political clout makes the firm best-placed to exploit this urgent establishment need to find a domestic internet powerhouse.
Amazon, Flipkart, Facebook and others face many policy-related restrictions that not only serve as obstacles to them but pave the way for domestic firms led by Reliance to enter the fray. For instance, foreign investment rules prevent Amazon and Flipkart from owning inventory or selling private labels (though critics say that these firms do it anyway using clever legal workarounds), while Reliance has no such constraints. Apart from a supportive policy environment and huge capital resources, on the business front, too, Reliance has an enviable digital distribution network and reservoir of customer data on account of Jio.
But despite these formidable advantages, Reliance has yet to prove that it has the chops to realise its ambitious vision.
The war among Reliance and Flipkart and Amazon and other internet firms is also not restricted to retail, but will extend to other sectors like financial services, content and business-to-business commerce. The technology-centric nature of the battle is more suited to the internet companies than to Reliance. There’s little doubt that Reliance will be a major player in the digital business, but the jury’s out on how much value the firm can corner. Its foray in e-commerce and B2B will provide early answers to this question.
After JioMart began testing its service late last year, media reports said that the company would deliver products to customers from local kirana stores. After Facebook invested in Jio in April in a deal that included a business partnership between JioMart and WhatsApp, Ambani said that JioMart would soon connect some 3 crore kirana stores with their neighbourhood customers.
Many analysts, too, expect the partnership with WhatsApp, the most popular app in India, to be a game-changer. In July, Goldman Sachs estimated that Reliance’s entry will help expand the online grocery market by 20 times to about $29 billion by 2024. Reliance’s partnership with Facebook could help the firm become the leader in e-grocery and garner a market share of more than 50% by 2024, Goldman said.
But Mint learns that Reliance is sourcing a majority of orders on JioMart in many cities through Reliance Retail’s supply chain; only a small number of orders are served through kirana stores. JioMart is signing up a few thousand kirana stores every month, but its expansion is happening at a slower rate than many analysts expect. Two industry executives said that JioMart’s average order value is lower than that of other e-grocers, which means that Reliance is losing larger amounts of money on every order.
According to one e-commerce executive, for BigBasket and Grofers, the delivery cost is about 3-4% of the average order value, which exceeds ₹1000. For Reliance, the delivery cost is presently much higher because its order value is below ₹800. The lower order value is partly because most of JioMart’s 200 city-markets are non-metros. BigBasket and others generate an overwhelming majority of their business from the metros. Reliance is betting on expanding the e-grocery market rather, than taking market share from incumbents, which generate an overwhelming majority of their sales from 10-15 cities. But while Reliance may be able to attract customers in smaller cities initially with discounts, profitability will be tough.
“The economics of serving metros are very different from the rest of India. In the mass market, bill values are much, much lower. Right now, Reliance’s main focus is to scale JioMart, so they aren’t worried about the delivery cost," the executive cited above said. “But eventually, reality will catch up, and they will have to increase basket sizes because this model isn’t sustainable. Grocery has very thin margins to start with. "
Private label push
One obvious way for Reliance to boost margins is by selling more private label products. In the grocery category, Reliance Retail already generates 14% of its revenues from private labels. People familiar with Reliance’s plans said that the company wants to push its private label products to kirana stores. While there are hundreds of well-known brands in FMCG, the grocery category (products like rice, pulses and flour) is largely unstructured. Reliance plans to sell its private label products both in grocery and FMCG.
Apart from retail, Reliance is also rapidly expanding its B2B business. Its private label products form a key component of its retail and wholesale business plans, the people cited above said.
The private label push, however, is making large FMCG companies like Hindustan Unilever, Marico and Dabur, which sell competing products, wary of working with Reliance’s B2B arm.
Like Flipkart and Amazon, which are also expanding their B2B businesses, Reliance’s grand vision over time is to have an integrated ecosystem of wholesale and retail in which it connects consumer goods makers with kirana stores and retailers, supplies a large number of private label products across many categories to retailers and end-customers, and becomes the biggest omnichannel retail firm in the country. But realising this vision will require Reliance to work seamlessly with millions of kirana stores, thousands of brands, modern retailers (all of which will see the firm as a rival to an extent)—and provide exceptional service in a profitable manner to retail customers.
Analysts and industry executives said that Reliance has a higher probability of finding success in categories like fashion (in which it already runs a portal called Ajio) and grocery that are mostly unorganised and have a shortage of established brands. In these categories, Reliance faces fewer barriers from existing players and has a better chance of pushing its private labels in both the wholesale and retail markets. But in categories like electronics and FMCG, which are dominated by entrenched brands, kirana stores and e-commerce firms, Reliance may struggle to scale as fast.
For instance, Flipkart and Amazon dominate online sales of electronics and fashion, which together comprise more than 75% of all e-commerce. To win significant share in electronics, Reliance will have to spend enormous amounts on discounts, marketing and offering favourable terms to brands . But, in fashion, Reliance can tap its low-priced private labels to lure customers without resorting to value destruction.
“The market is too varied for one player to be big in all categories," an investment banker said. “Reliance will have to carefully choose its battles. There’s a risk that it may spread itself too thin, so it’s wise for them to have started with grocery."
Meanwhile, while Google and Facebook have together invested more than $10 billion in Reliance, both companies are continuing to expand their own businesses in India. Google and Facebook have ambitions to enter e-commerce and expand in other sectors like payments and content. What this means is that while Google and Facebook will end up collaborating with Reliance in some areas, they will also compete with the firm in others, joining Flipkart and Amazon in the war of the digital conglomerates.
Flipkart and Amazon have already stepped up their lobbying efforts with the emergence of Reliance as a threat. Because of the pandemic that has made e-commerce indispensable, there has been a thaw in the government’s attitude towards the US e-commerce firms. A more antagonistic attitude may return when the pandemic passes.
Eventually, though, the war will be decided by customers. Here, experts are divided on whether Reliance will emerge as the winner. “Reliance still has to do a lot more on getting the customer experience in place, but given the strides they’ve made, it is well-placed to compete in the digital space," said Devangshu Dutta, head of retail consultancy firm Third Eyesight.