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Photo: Mint

Reliance Retail's Future group deal to give it bargaining power with FMCG firms

  • With the Future Retail deal, Reliance now enjoys 27% share in India’s organized food and grocery market

NEW DELHI : Armed with funds from investors and the added scale from Future Group acquisition, Reliance Retail is expected to drive hard bargains with FMCG companies for its massive network of modern trade and kirana stores as well as the online Jio Mart platform. Analysts also expect the company to push its private labels in the market aggressively. The deal could alter the ways in which the grocery retail behemoth negotiates trade terms with fast-moving consumer goods companies as its clout over modern trade outlets, e-commerce channels and kirana stores is set to increase manifold giving it further visibility and bargaining power in India's over $545 billion grocery retail market.

With the Future Retail deal, Reliance now enjoys 27% share in India’s organized food and grocery market.

A recent report by Jefferies estimates that the combined network of Reliance Retail and Future Group’s retail business could contribute as much as 8-10% for top FMCG players—making Reliance Retail the largest retail platform based on FY20 revenues. “Reliance Retail's (RR) acquisition of Future Group (FG) while consolidates the organised grocery retail, becomes a concern for the FMCG industry," Jefferies’ analysts said in the report. The considerable scale that Reliance Retail will enjoy would also increase its bargaining power with suppliers like FMCG firms, vendors for general merchandise, logistic partner etc, it added.

Smaller companies said they are already anticipating a scenario where they could be asked to dole out offers. “I foresee some kind of a monopolistic approach and more of the industry and brands will have to really struggle to get the right targets or volumes from them, or else there will be pressure from them to give more offers, schemes or discounts," said a founder of a mid-sized FMCG company speaking on condition of anonymity.

With Future Group’s formats including Heritage, Easyday, Nilgiris, along with its own retail formats such as Reliance Fresh, Reliance Smart, the B-2-B Reliance Market—Reliance will get to operate 2,000 grocery stores. This will give Reliance Retail a combined grocery business of $5.5 billion, analysts at CLSA said in a recent report. Then there's also its newly launched e-commerce JioMart platform that works by connecting local kiranas with consumers giving it inroads into the general trade market.

While some analysts point to the change in dynamics between FMCG firms and Reliance Retail going forward, others said large multinationals will not be easy to roll over. “They (Reliance) are hard negotiators and will look to maximise this opportunity of scale. But that said I don’t think you can just roll over successful and popular consumer companies like Hindustan Unilever Ltd, Nestle, Godrej, Marico etc and leave them out of the growth strategy. What and how they build on their private label strategy as well the role and format of the Jio stores, will also play a huge part in their relationship and negotiations with their partners in the consumer goods industry," said Rajeev Krishnan, former MD and CEO Spar Hypermarket.

There’s a strong private label play as both Reliance Retail and Future Group retail have their own labels. The founder of the mid-sized FMCG companies said that the retailer will push its private labels in the market which yield better margins.

Kishore Biyani’s exit from the retail business for now, will see him building the company’s existing FMCG and fashion manufacturing capabilities. As a result, the residual business of Future Enterprises Ltd (FEL), will scale the existing manufacturing and distribution of FMCG products and supply private labels across packaged foods, beverages, personal and home care to a wider network of Reliance Retail stores and reach general trade through the JioMart’s platform.

FEL will build on “added volumes from business through the Reliance network," FEL said in an investor presentation post the announcement of the deal. While Future Group’s private labels sell mostly in modern trade outlets, some are already significant in size. Its snacking brand Tasty Treat is estimated at 200 crore, while Golden Harvest, that sells flour, pulses and cereals, is upwards 1000 crore, FEL said in its presentation.

“Reliance's obsessions will be to push private labels, that is the major purpose of this exercise," said another retail entrepreneur who spoke on the condition of anonymity. He said FEL’s manufacturing business will benefit from the additional store network and the capabilities of JioMart.

“…the tide could turn against FMCG industry if JioMart also becomes a big success and private labels gain acceptance, Jefferies’ analysts said.

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