Amazon is in early talks with Spencer’s Retail to pick up a minority stake in the food and grocery retail chain, according to two people with knowledge of the matter, as the US online giant scours the country for alliances to penetrate deeper into the market.
The US company is also in talks with the Aditya Birla Group on buying stakes in its More chain of stores and is likely to partner with Samara Capital and other investors to fully acquire the business. It is also aiming for a minority stake in Kishore Biyani’s Future Group. If all three deals go through, Amazon will have a stake in over 1,700 stores and a mine of data to further its business in India as it seeks to compete effectively with Walmart-Flipkart and Reliance Retail.
“Talks with Spencer’s on valuation and structure are currently ongoing,” said one of the two executives cited above. “They are preliminary in nature, so we can’t be sure that the deal will go through.” Spencer’s Retail didn’t respond to queries. Amazon India declined to comment. Amazon needs to have an omnichannel presence in order to make a mark in India’s food and grocery, said a retail industry veteran. This strategy will likely unfold through Amazon’s Prime Now hyperlocal platform that promises two-hour to same-day delivery of food and grocery.
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This is currently available in some areas of Mumbai, Delhi-National Capital Region, Hyderabad and Bengaluru. Sellers can use Amazon’s logistics network or their own. “Without the support of brick-and-mortar chains that already have stores in all cities including the tier II and III markets, it will be difficult for Amazon to expand its play in food and grocery retail across the country,” an executive said.
Having a stake in brick-and-mortar retailers will help Amazon save on margins, said the expert cited above. Spencer’s is a subsidiary of RP Sanjiv Goenka group’s flagship power unit, CESC Ltd. CESC recently received National Company Law Tribunal (NCLT) approval for demerger of the business into four entities, including Spencer’s Retail, which will become a separate listed company. Spencer’s has plans to raise funds after it gets demerged, said people with knowledge of the matter, with Goenka looking to dilute a minority stake.
If the foreign direct investment (FDI) rules on multi-brand retail get liberalised, Amazon will look at full ownership in some of the chains, an executive said. “It has made a similar offer to Spencer’s Retail and others,” he said. The deals are structured by Amazon Inc’s mergers and acquisitions team in Mumbai along with Amazon India’s business heads in Bengaluru. India allows 51% FDI in multibrand retail, while 100% is allowed in cash-and-carry ventures for wholesale-to-business entities such as neighbourhood stores and those with a business licence.
Amazon will continue the marketplace model for the food and grocery format since India does not allow overseas investment in inventory-based ecommerce. Spencer’s Retail runs 128 stores in over 30 cities. These include 58 large-format, hypermarkets and supermarkets. Its revenue was Rs 2,091crore in FY18 on a loss of Rs 30 crore loss before tax compared with a loss of Rs 129 crore in the year before. Spencer’s has plans to roll out 40 hypermarket stores in the next four years.
An executive said Amazon has realised that despite government approval for a fully owned food retailing venture, it will take time to develop since it’s a difficult business to sustain and make profitable without a presence in other categories. Under this, Amazon can only sell food products produced or manufactured in India. “Herein these strategic investments in top brick-and-mortar chains will come in handy,” said the person. “The stickiness in food and grocery categories is huge and consumers tend to make more frequent purchases, which is the reason behind Amazon’s interest.”
