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Why Reliance Retail isn’t quite the sure bet it’s seen to be

Economic and market realities suggest that the group’s retail prospects are largely being overestimated

Even as it fitfully embraces modernity, India remains a country of perpetual myth-making. For the past few years, the world of e-commerce and internet start-ups—a story-telling business worldwide where projections of endless exponential growth take precedence over revenues and operating profits that boring old-world companies must live by—has been grafted onto India’s gift for tall stories. The breathless coverage of unicorns becoming decacorns captures headlines, while the cash-burn or value destruction of $2.5 billion by Indian e-commerce last year and the fact that Facebook derived a single-digit share of its revenues from India remain footnotes. As a Goldman Sachs July report observes, “Low income levels result in customers being very price sensitive. The biggest question remains how, if ever, will India’s internet become increasingly monetized."

Months of deal-making and rumours of deal-making of Reliance Retail was thus bound to compete with Paatal Lok as the most emblematic Indian serial of 2020.

Fresh from the acquisition of Future, Reliance Retail received a $1 billion investment from Silver Lake in early September for a 1.75% stake. Carlyle is now reportedly poised to make a $2 billion investment. Unconfirmed reports last week that Amazon might pay $20 billion for a 40% share in the company led me to ask Arvind Singhal, who heads Technopak, India’s leading retail management consulting and research firm, why the world’s largest e-commerce company would seek a passive stake in a competitor. “It makes no sense to me at all," said Singhal. Given the repeated policy interventions of the Narendra Modi government in the e-commerce sector to prevent, say, deep discounting by foreign companies, Wal-Mart, which has an erratic international record, is a more likely candidate to hedge its bets on Flipkart, he said. The Economic Times reported that in the second quarter, Amazon passed Wal-Mart’s Flipkart in mobile phone sales, a critical segment for e-commerce in India, for the first time.

Mukesh Ambani’s Reliance group is certainly hard to bet against, given its track record of agile deal-making this year alone with Facebook, Google and a host of foreign private equity investors. Telepathy for the concerns of New Delhi helps as well. Just last year, Ambani said at a business summit in Gujarat that India’s data must be owned and controlled “by Indian people and not by corporates, especially foreign corporations". In April, after securing $5.7 billion from Facebook for a 10% stake in Reliance Jio, “Mr Ambani struck a warmer tone as he welcomed one such global corporation, a ‘friend’ of the Indian people: Facebook," the Financial Times wryly reported. Remarkably, Reliance Jio is both profitable and has 400 million subscribers paying an average of $2 a month and signed up for the least expensive data in the world.

Whether this record of ambition and execution in telecom is a solid foundation for the e-commerce success of Jio Mart and broadly of Reliance Retail remains to be seen. Reliance Retail both dwarfs its nearest brick-and-mortar competitor, Dmart, and is growing much faster. But, its huge share of the country’s organized retail market means that Reliance Retail’s growth is partly dependent on the Indian middle class and India’s economy growing as fast as in previous decades. As I had argued in this paper in October before the pandemic tipped India’s economy into something akin to a depression, with income shocks for just about everyone except the very rich, the Indian middle class is not growing (https://bit.ly/3knuTfu).

Reports late last month that JioMart’s corner-shop kirana partners increased order flows to four times of their pre-lockdown numbers, on a base that is tiny in the context of India’s unorganized retail trade, is part of a global trend. Amazon in the second quarter of 2020 saw its net income rise 100%, but still remains heavily dependent on web services for its profits. Significantly, Silver Lake’s investment in JioMart coincided with the Centre for Monitoring Indian Economy reporting that 21 million salaried jobs have been lost after India’s late-March lockdown.

Reliance’s success hitherto has also largely been in businesses that serve other large entities, rather than consumers—or in telecom, where service expectations are low. As K Vaitheeswaran, author of Failing to Succeed, his account of co-founding India’s first e-commerce business in 1999, points out, “The service levels in telecom are modest. E-commerce is different." Vaitheeswaran, who is now a co-founder of a firm marketing a health drink, Again, tried JioMart some weeks ago. A couple of items were old or had expired, he reports: “It’s almost a month. It remains unresolved. I have moved on."

Grocery remains highly fragmented in India, is much more complex online than selling books or clothes, and is “hyper-local" says K. Ganesh, a promoter of Big Basket. Even formats like supermarkets have just a fraction of India’s total grocery spend. Once the pandemic is behind us, conversion to online grocery sales may stall because Indian consumers prefer looking at vegetables and fruit closely before they buy.

In far more tech-savvy China, traditional markets account for above two-thirds of all grocery sales. With 75% of Indian consumers having an annual income of less than $2,500, according to Goldman Sachs, and the prospects of raising incomes looking bleak, the projected online bonanza for Reliance may prove a tall order.

Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.

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