Reliance's move into e-commerce set to shake up huge Indian market

Oil-focused conglomerate looking to take on giants such as Amazon and Flipkart with its own online retail platform

FILE PHOTO: Mukesh Ambani, Chairman and Managing Director of Reliance Industries, arrives to address the company's annual general meeting in Mumbai, India July 5, 2018. REUTERS/Francis Mascarenhas/File Photo
Powered by automated translation

Reliance Industries, controlled by India's richest man Mukesh Ambani, is progressing on its plans to launch an e-commerce venture that would compete with online giants Amazon and Walmart-owned Flipkart.

The oil-focused conglomerate - which reported annual revenue for the financial year until the end of March 2019 of $87 billion - has diversified interests ranging from telecoms to real estate. Its planned entry into the e-commerce space is being closely watched, given the huge impact it would have on the industry, analysts and business leaders say.

“It's going to be a game-changer in India's online retail industry,” says Anthony Dsouza, the managing director of  Mespack, a manufacturing company based in Mumbai. “Reliance already has a huge footprint across India in other sectors and e-commerce development is highly important as it tries to compete.”

Mr Ambani, the chairman of Reliance Industries, in November said that his firm was working on “creating the world's largest online-to-offline new commerce platform”.

At this stage, there is still little in the way of exact details known on the new e-commerce platform and when it will open for business. But in January, Mr Ambani said its companies Reliance Retail and Reliance Jio Infocomm would jointly launch an e-commerce platform, starting in the western Indian state of Gujarat, benefiting some 1.2 million small retailers and shopkeepers by enabling them to sell their products online. The business model is similar to that of Alibaba in which local offline merchants team up with an online marketplace.

Reliance Industries declined to comment on its planned e-commerce venture. A source at Reliance said that the company was still working “on formulating plans” for the venture and that it did “not have a timeline for its launch”.

The move would be part of Reliance's broader strategy as it tries to diversify away from oil and gas, which accounts for 80 per cent of its business. Mr Ambani in the next decade has said he wants to generate half of the group's revenues from its consumer businesses.

As a homegrown firm with a wide presence in both retail and telecoms, Reliance would be a force to be reckoned with in the online shopping sector. Reliance Retail has close to 10,000 stores across in India, while its telecoms firm, Jio, which only launched in 2016, has close to 300 million subscribers. Reliance's Jio took the market by storm with promises of free calls for life and cut-price data deals, forcing some companies out of business and prompting others to merge, as it caused huge disruption to the landscape of the telecoms industry in India. It even played a role in forcing rival telco Reliance Communications – controlled by Mr Ambani's brother, Anil Ambani – to shut up shop. It emerged on Tuesday that Reliance Communications is entering into bankruptcy again and will try to sell off its assets.

That's why many experts say that rival companies will have to sit up and take notice as Reliance prepares to enter the e-commerce industry.

UBS in a report says that Reliance can gain “significant share” in e-commerce, adding that it has “a home-court advantage, similar to Alibaba's success in China”.

Reliance has the potential to emerge as the Amazon or Alibaba of India, according to UBS.

The stakes are high for companies in the e-commerce space in India, which is the world's fastest growing major economy.

For now, the online shopping sector is still in a nascent stage, with online sales accounting for just 2 per cent of retail sales in India in the financial year to the end of last March, according to Morgan Stanley. But India's e-commerce market is growing by 30 per cent a year in terms of gross merchandise value and is expected to be worth $200bn by 2027, helped by an expanding middle class and a rapid rise in the number of internet users, according to Morgan Stanley's projections.
To tap this potentially huge market in a country of more than 1.3 billion, Amazon has earmarked $5.5bn of investment for India, while Walmart last year forked out $16bn for a majority stake in the Bangalore-based market leader Flipkart.

Some analysts say there is only room for a limited number of companies in the sector in India.  “Typically, e-commerce and other such internet platforms are a winner-take-all model,” says Ravi Menon, the lead IT analyst at Elara Capital, a financial services firm based in Mumbai. “There is likely to be only one or at max two successful firms in the space.”

He adds that Reliance setting up its telecom company, Jio, is part of a broader strategy.

“India e-commerce has huge potential and they probably started Jio at least in part to create this market opportunity,” Mr Menon says.

Jio has helped to drive data costs down and bring more Indians online, which along with cheaper and cheaper smartphones becoming available, creates an opportunity for more people to shop online. The majority of internet users in India access the web via the smartphones.

There are other factors working in Reliance's favour when it comes to its e-commerce plans, Mr Menon says.

The government in February introduced a new foreign direct investment (FDI) policy that placed restrictions on discounting, exclusive tie-ups with brands and ownership of retailers selling on their websites. This forced Amazon and Flipkart to scramble to make changes to adjust to the requirements. The policy is something that could give Reliance an advantage over its foreign competitors.

“The recent e-commerce regulation has stacked the deck in favour of firms which are backed purely by domestic capital,” says Mr Menon. “FDI in this important sector is now at a disadvantage.”

Indian business newspaper Mint reports that Reliance Retail has already started testing a food and grocery app among its employees, which suggests it is rapidly moving closer towards a launch.

Reliance does already have some presence in the online sector through its grocery website and fashion website, but nothing close to the scale of what it is working on currently.

Analysts point out that there may be potentially large profits to be be gained in the long-term in the sector. But in the near-term, it is tough, with the e-commerce industry being extremely cash intensive and the sector currently bleeding money. Reliance will not have an easy time battling Amazon and Flipkart, which are well-established and control the lion's share of the market.

“The existing players are still reporting losses on their books,” says Vineeta Sharma, the head of research at Narnolia Financial Services in Mumbai. "With Reliance foraying into e-commerce, it will mean stress on its cash flow for a good number of years.”

There are a number of areas that Reliance has to invest in, she adds, including technology, warehousing and logistics, to facilitate and grow its proposed e-commerce business.

But with consumer spending on the rise in India and the country's e-commerce sector still being at a nascent stage, with enormous scope for growth, Ms Sharma thinks there is space for Reliance alongside the other two giants in the market.

“There's enough room to capitalise on the consumption story in India through e-commerce,” she says. “Reliance entering into this segment will only increase the market for e-commerce. Unlike Jio, where there was a fight for market share, Reliance's business will be expanding the market itself.”

But that may bring little comfort to Amazon and Flipkart, and they are likely to be keeping a very close eye on the rapid progress Reliance seems to be making towards its e-commerce launch.