M & A CritiqueReliance Industries Limited (RIL) is a Fortune 500 company and the largest private sector corporation in India. Reliance’s products and services portfolio touches almost all Indians on a daily basis, across economic and social spectrums. The company has evolved from being a textiles and polyester company to an integrated player across energy, materials, retail, entertainment and digital services.
The home-grown crude-to-yarn-to-telecom-to-e-commerce conglomerate, RIL, has purchased the 259-year-old British toy store chain Hamleys from C.Banner International Holdings for Rs 620 crore. This buyout, including a host of other stake purchases or outright acquisitions in the past six months, is the strategy of Mukesh Ambani to push for consumer business, which he feels will contribute nearly as much as to the conglomerate’s total earnings as its core energy business by the end of 2028. Globally, too RIL aspires to be among the top 20 companies and along with refining and petrochemicals and new age businesses – Reliance Jio and Reliance Retail.
After establishing Reliance Jio as one of India’s leading telecom players, it turned profitable less than a year and a half since its launch, RIL has been chalking out plans for a retail expansion to combine its traditional outlets with an online foray to take on global giants like Amazon and Walmart in India. In fact, Mr. Ambani had outlined his plan to shareholders in July last year that he wants to scale up the online retail business by getting onboard the millions of mom-and-pop stores that dominate the Indian retail market. He has also figured out that Indian consumer is all about technology, social media and entertainment and that these will help in scaling up the retail space.
Retail in India
India’s retail sector offers an immense opportunity with just 10% share in organised retail. A study by McKinsey Global Institute says that digital applications could proliferate across most sectors of India’s economy. It estimates that e-commerce sales in India would grow faster than sales at brick-and-mortar outlets, allowing digital retail to increase its share of trade from 5% currently to about 15% by 2025.
In fact, total e-commerce sales in India are likely to grow at 32% CAGR from 2017 to 2021, according to EY. The tax consultancy firm says the rural market for e-commerce in India is likely to be a $10-12 billion opportunity in the next four years on the back of rising household income leading to an increase in consumption expenditure, diversified income sources from non-agricultural activities, positive agricultural outlook, increase in internet penetration, high propensity to spend and rising number of nuclear families in rural India, the report said. In the e-commerce in the country, the key players are Amazon India and Walmart-owned Flipkart, with ShopClues and Snapdeal on the sidelines. Even Chinese-giant Alibaba is gradually making its presence felt through Paytm.
India is one of the largest and fastest-growing markets for digital consumers, with 560 million internet subscribers in 2018, second only to China. India will have around 850 million smartphone users by 2022 from 500 million now and that will push online services faster such as food, entertainment, gadgets, apparels, lifestyle products, etc.
Another report by Deloitte India and Retailers Association of India has projected that e-commerce market is likely to grow to $1.2 trillion by 2021, And that is what the Asia’s second richest businessman is aiming at. While most retailers are trying to bank on an omnichannel strategy, Reliance Retail is working on a unique Offline-to-Online model, that would be integrated with Jio’s ecosystems.
Large companies always prefer to acquire startups because it is where innovation happens, value creation is done and the cost of acquisition is also cheaper. The engagements with startups and the acquisitions also fits into RIL’s future roadmap of creating new opportunities through new and emerging technologies like artificial intelligence and robotics. Globally, too many tech giants are integrating network technologies into their product portfolio. While some are doing through in-house R&D, others are simply acquiring startups, to build scale faster.
Reliance strategy to become global relevant retailer both online and offline
Mukesh Ambani has an ambitious plan to utilise it’s over 6,000-plus smaller Jio Point stores in more than 5,000 cities and towns as the last mile connection point for its e-commerce venture to reach consumers without internet access or who have never shopped online. The company plans to set up e-commerce kiosks in Jio Point stores from where store executives will help consumers place orders. Reliance Retail is the biggest bricks-and-mortar retailers in terms of revenue and number of stores.
So, the real game starts now as Mukesh Ambani gives a final push to his e-commerce venture through a series of acquisitions of startups. So, when Ambani saw it may be a tad lagging in building its new-age businesses, inorganic growth was the only route plausible. Moreover, to start from a scratch will need a good understanding and gestation period and acquisition will give the RIL a jump start. Most of these acquisitions and tie-ups are in the telecom and retail space where RIL wants to strengthen its position.
The acquisition of Hamleys from Hong Long-listed C Banner International Holdings Ltd will actually give RIL around 167 stores across 18 countries, a global footprint which the 62-year-old businessman was aspiring for his retail business. The global acquisition of the iconic Hamleys brand and business places RIL into the frontline of global retail and marks the conglomerate’s first foray in an overseas retail brand. Hamleys was set up in 1760 with its flagship Regent Street store in central London, a great landmark in the capital of Great Britain. The toy shop in London spread across seven floors, has been the finest toy shop in the world bringing magical experiences and joy to children of all ages.
Globally, the acquisition of Hamley will now give wings to RIL to compete with Amazon and Walmart. In fact, Walmart has a strong presence in India after it acquired Flipkart two years ago. In 2018, Reliance Retail announced its entry into the e-commerce space with an online-offline hybrid model and started with series of acquisitions. In the last one year, RIL has acquired a logistics startup Grab, software firm C-Square, a vernacular language-as-a-service platform, Reverie Language Technologies; Indian government schemes/services aggregator, EasyGov; and a multi-physics simulation service, SankhyaSutra Labs. All these are to scale up his retail and e-commerce business.
According to exchange filings, the conglomerate has acquired 76% equity stake in Easy Gov and more than 80% stake in SankhyaSutra and Reverie. While Bangalore-based Reverie enables real-time delivery of online content in many vernacular languages, EasyGov is a software-as-a-service (SaaS) startup which enables people to apply for various government schemes. SankhyaSutra, another acquisition by RIL, helps to find solutions to industrial problems. These acquisitions are indeed important for RIL for strengthening its e-commerce business, especially in the rural areas and Tier 2 and Tier 3 towns. Even in retail space, in the last one year RIL acquired Rhea Retail, picked up stakes in Genesis Luxury Fashion, GLF Lifestyle Brands and GLB Body Care, among others.
In order to strengthen its artificial intelligence, Reliance Jio brought 87% stake in artificial intelligence startup Haptik for Rs 700 crore. Founded in 2013, the company builds chatbot applications for consumers and entrepreneurs and has marque clients such as HDFC Life, Samsung, Amazon Pay, etc. Last year, RIL acquired a majority stake for $180 million in Bengaluru-based online education platform, Embibe, which uses artificial intelligence technology and leverages data analytics to give personalised learning tools to students. This acquisition suits the company’s long-term vision of creating the digital highway first through Jio and them building its own digital ecosystem of apps. Another similar example was the buyout of Saavn, a music streaming app for $1 billion. The music app has been merged with JioMusic, which at present has over 100 million users.
In fact, Mukesh Ambani had said that the company will combine the strengths of its Reliance Jio and Reliance Retail arms to create a new commerce platform that will amalgamate the data and online reach of Jio and offline reach of the company’s retail arm. So, the acquisitions of startups that provide technology-driven solutions is a clear indication of RIL’s mission to lead the digital path. The startups, too gain in terms of reach and funding which a large and well-established player like RIL can provide.
The conglomerate’s revenue mix is changing as more than 25% of RIL’s revenue in FY19 came from businesses other than core oil and gas. The shift in revenue pie is an outcome of the company’s strategic focus, scale up opportunity considering industry size, deployment of technological vectors and increase in capital employed. The shift in revenue mix towards retail is a result of meticulous planning and diligent execution of different ventures. In FY19, Reliance Retail’s revenue grew 89% to Rs 1,30,566 crore as against Rs 69,198 crore in the previous financial year. During FY19, retail area under operations grew by 24.2% amounting to approx. 22 million square feet.
Conclusion
While the results of the acquisitions are yet to be seen, in the near-term, RIL is likely to continue its acquisition spree to scale up its e-commerce business. In both online and offline retail business, the company will have to create synergy between technology and the acquisition brands and then leverages its mobile customers for retail sales and gives services including education etc.
For a conglomerate well known with proven track record of building large-scale greenfield projects, the series of acquisitions of startups to scale up the telecom-cum-e-retail business is a clear indication that data will be the new gold in the coming years that will power e-commerce, a points which Mukesh Ambani and so much emphasized and leveraging its mobile customers for retail sales and also give services including education etc.
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