In a discount war, Mukesh Ambani’s JioMart is now poised to beat Jeff Bezos’ Amazon and establish itself as the market leader.
Kishore Biyani’s Future Retail’s Rs 24,713 crore deal with Reliance Retail entered troubled waters when he was sent a legal notice by Amazon.com Inc. Blaming Future Retail, Amazon said that the deal violates its clause of ‘contractual rights’, which is forcing the company to move to the Singapore International Arbitration Centre.
Blaming Future Retail, Amazon said that the deal violates its clause of ‘contractual rights’.
Watch: Legal Battle between Reliance and Amazon
What is the Future-Reliance deal?
After months of negotiations, the RIL announced in late August that its subsidiary, Reliance Retail, was working on multi-billion dollar deal with Future Retail. As per the deal, Future Retail will sell its logistics, warehousing, retail and wholesale business to Reliance Retail. Future Group will sell its 1800 stores of premium foods unit Foodhall, supermarket chain Big Bazaar, fashion and clothes chain Brand Factory’s retail and wholesale businesses, Nilgiris and Central to Reliance Retail. With the multi-billion deal with Future Retail, Reliance has challenged Amazon’s dominance in e-retail sector.
Why is Amazon objecting to the deal?
In August 2019, Amazon inked a deal worth Rs 2,000 crore with Future Coupons Ltd., the promoter of Future Retail. Amazon purchased a 49% stake in Future Coupons, which owns 7.3% in Future Retails. As per the agreement, Amazon held the first right to acquire all or part of the promoters’ shareholding in Future Retail, between 3 and 10 years after the transaction.
The deal also had a clause which restricted Future Retail from selling the shares to any third party or competitor (like Reliance) without their consent. Jeff Bezos‘ Amazon now claims that with a deal with Reliance, Future Retail has violated that clause.
What Future Retail is saying in its defence
Future Retail said that it had not sold any stake in the company. All it had sold was its asset which didn’t violate any clause of agreement with Amazon. However, feeling the heat of the legal notice, Future Retail appears to be on the defensive. According to a report, the group is considering an out-of-court settlement for the case.
Feeling the heat of the legal notice, Future Retail appears to be on the defensive and is considering an out-of-court settlement.
Why Kishore Biyani sold his business?
Biyani was once known as India’s Sam Walton (the founder of Walmart), for his skill in establishing a sprawling retail business. But his over-ambitiousness, trying to sell everything at his stores, and mindless expansion led to heavy losses for the company. In just a span of six months, from March 31 to September 30, debts swelled from Rs 10,951 crore to Rs 12,778 crore.
Watch: Why Kishore Biyani had to sell the Future Group
Future Retail’s biggest lender, State Bank of India, objected to unpaid debts, adding insult to injury. In March, when the lockdown hit stores and unessential businesses, Future hit a new low. The writing was on the wall as Biyani started wooing buyers before signing a deal with Reliance.
How the deal can benefit Reliance Retail
Reliance Retail has its presence in 7,000 towns with a footfall of 6.40 crore. Plus, the company started its e-retail service JioMart in April. Merging with a group as big as Future Retail, Reliance will literally control the entire value chain. With Reliance’s dominance in the retail market, promoter Mukesh Ambani will be able to more effectively implement the company’s discount policy, and through better bargaining power, it can outperform its nearest rivals – Amazon and Flipkart, which is now owned by Walmart.
Merger with a company worth Rs 24,713 will make Reliance Retail’s company value much higher. Its dominant position can easily help Reliance Retail to raise huge money from the market in a year or two. The deal has been signed at an opportune time, as India’s festive season is about to start. If all things go well, and the deal addresses all legal formalities, it will surely give Reliance Retail a huge boost.
With dominance in the retail market and thus better bargaining power, Reliance is poised to outperform its rivals – Amazon and Flipkart.
Why Bezos is so invested in preventing the deal from happening?
Amazon entered the Indian market as late as 2013, and despite the presence of Indian unicorn Flipkart, it soon emerged the market leader. The American company has so far invested over $5 billion in its business in India in the last two years, it has purchased stakes in companies like Future Coupon, Shoppers Stop and More. Despite Amazon’s firm position as the market leader, online sales in 2019 in India was just 1.6% of the country’s retail sector.
Watch: New Twist in Future Group – Amazon Battle
However, unlike Mukesh Ambani’s Reliance, Amazon is a foreign company and faces limitations in expanding its business in India. It will take years for Amazon to establish retail stores like Reliance Retail which was miles ahead in that sector even before purchasing Future Retail. The only option it leaves Amazon with is to hold on to its business of e-retail. But Reliance has challenged the American company with the launch of JioMart. Reliance’s latest deal with Future will help JioMart to sell goods at cheaper rates and thus win the e-retail war. If JioMart’s business increases, Amazon will be the biggest loser. It’s the most likely reason Bezos wants to stop a Reliance-Future deal.
It will take years for Amazon to establish retail stores like Reliance Retail which was miles ahead in that sector even before purchasing Future Retail.