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Reliance Industries: India’s Answer To Amazon, Alibaba?

Amazon, Alibaba and Reliance Industries have wide business ecosystems - LD Investments

Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA) are two of the world’s biggest e-commerce companies, each boasting a market value of about half a trillion dollars (specifically speaking, Amazon is slightly more than half a trillion dollars while Alibaba is slightly less).

Both companies boast top-line figures that surpass the Gross Domestic Product of entire countries – Amazon raked in US$ 136 billion in revenues in 2016 while Alibaba earned CNY 158.3 billion or about US$ 24 billion for the year ended March 2017, higher than the 2016 GDP figures of countries such as Estonia (US$ 21.3 billion), Iceland (US$ 20 billion), Cyprus (US$ 19.8 billion), Afghanistan (US$ 19.5 billion), Jamaica (US$ 14 billion), Brunei (US$ 11.4 billion), Fiji (US$ 4.6 billion), and Maldives (US$ 3.6 billion) according to data from the World Bank.

Both companies also serve sizeable user bases the number of which is larger than the population of entire countries; Alibaba’s over 500 million monthly active users would make it the third most populous country in the world after China and India, while Amazon’s over 300 million monthly active users would make it the fourth most populous country in the world after China, India and the United States.

Both companies owe much of their success to the rapid growth of e-commerce in their respective home countries which make up the world’s two biggest e-commerce markets; Alibaba in China (the world’s biggest e-commerce market) and Amazon in the United States (the world’s second biggest e-commerce market).

Both companies continue to dominate their respective home markets, with a market share of about 50%.

With India emerging as e-commerce’s next major opportunity (Morgan Stanley estimates India’s e-commerce market will grow from US$ 15 billion in 2016 to US$ 200 billion in 2026, representing at a CAGR of nearly 30% between 2017 and 2026), could the South Asian nation join China and the United States in producing its own e-commerce juggernaut?

India’s crowded e-commerce landscape boasts its own share of homegrown online retailers notable examples include Flipkart (the current market leader), Snapdeal, Alibaba-backed Paytm Mall (the e-commerce arm of India’s top digital payment firm Paytm) and ShopClues. With Reliance Industries (RIL) (NSE:RELIANCE) (BOM:500325) and Future Group planning on entering India’s e-commerce sector, competition is set to intensify in an already hyper-competitive market where the majority of players are yet to show profits. For instance, India’s second-biggest online retailer and e-commerce veteran Amazon’s loss from its international business jumped five-fold in the June quarter last year and then nearly doubled in the September quarter last year mainly due to massive investments in India.

With e-commerce making up just 3%-4% of India’s US$ 650 billion retail sector, it is still early days for India’s e-commerce market which is undergoing rapid change. Founded in 2010, local competitor Snapdeal, at one time was India’s number two e-commerce platform after Flipkart, while Amazon India stood at number three. By mid-2016, Snapdeal found itself dislodged from its second-placed position by deep pocketed Amazon India, which began life a couple of years after Snapdeal. With current market leader Flipkart managing to retain its number one position, the market has so far evolved to be a two-horse race with Flipkart and Amazon fighting tooth and nail for gold while Paytm Mall and Snapdeal battle for bronze.

Although late to the party, oil-to-telecom conglomerate Reliance Industries possesses several competitive advantages from an extensive brick-and-mortar network to a wide eco-system of businesses which could help it emerge as a formidable player in India’s e-commerce war.

 

Deep Pockets

Amid stiffening competition, e-commerce platforms are investing substantial sums and burning money heavily as they vie for a slice of India’s promising e-commerce market. Aiming for dominance, Amazon, the world’s largest e-taiiler, has a massive US$ 5 billion war chest while local rival and current market leader Flipkart managed to add nearly US$ 4 billion to its kitty thanks to a funding round from investors such as Softbank, Tencent, Microsoft and eBay last year. The company reduced its burn to just US$ 17-18 million a month while arch rival Amazon continues to burn twice that amount estimated at over US$ 40 million

Against this backdrop, it is likely that smaller, cash-strapped rivals will gradually find themselves edged out by deep-pocketed players. Reliance Industries Ltd being a Fortune 500 company and India’s biggest private sector corporation could have the financial wherewithal to compete against the incumbents similar to the manner in which its telecom arm, Reliance Jio disrupted India’s telecom sector in less than two years of operation to emerge as India’s fourth largest telco after Bharti Airtel, Vodafone and Idea Cellular.

 

Extensive brick-and-mortar store network

Omnichannel retail experiences (offering customers a seamless online and offline shopping experience) are increasingly becoming commonplace in mature retail markets such as China and the United States. India is expected to follow suit and retailers such as Pepperfry, Adidas, Urban Ladder, FirstCry and Nykaa are among the few in India to have already incorporated click-and-mortar shopping experiences. Unsurprisingly, Amazon and Flipkart have also been busy plotting their own omnichannel retail strategies; last year, Amazon made its first investment in an offline retailer in India when it picked up a 5% stake in Shoppers Stop, a Mumbai-based department store chain for INR 179.24 crore (about US$ 28 million). Under the partnership, the duo will conduct “joint marketing” initiatives which will see Amazon open Amazon Experience Centres showcasing Amazon’s products across all 80 Shoppers Stop outlets located in 38 cities in India. Not wanting to be outdone, Flipkart is reportedly in talks to acquire a 8%-10& stake in Future Lifestyle Fashions Ltd (NSE:FLFL), the listed fashion company owned by Future Group, one of India’s largest retail companies with a presence in grocery, electronics, home furnishings and furniture with over 17 million square feet of retail space in more than 240 cities. Future Lifestyle is one of India’s largest branded apparel retailers in India with a total retail space of over 5 million sq ft across 400 stores in 90 cities. Flipkart claims to have a 70% market share in India’s online fashion retail space. A deal with Future Lifestyle Fashions could open an avenue for Flipkart to establish an offline presence in India’s fashion retail sector thereby helping it solidify its market leading position as India’s leading online fashion retailer.

While the e-commerce giants have bolstering their offline presence, Reliance Retail already has an extensive brick and mortar store network throughout India which the company can leverage as part of an omnichannel retail strategy. Similar to Future Group which was founded in 1997, Reliance Retail which was founded nearly a decade later in 2006 is one of India’s largest retail enterprises with a presence in grocery, electronics, furniture and fashion. The company boasts a store network of over 3,700 stores across 750 cities with an area of over 14.5 million square feet of retail space according to the company’s December 2017 quarterly report.

 

Reliance Jio

There has been a noticeable trend in developed markets where media companies such as Google, Amazon and Alibaba which deliver copious amounts of video and other content are increasingly morphing into telecom companies and telecom companies such as AT&T and Verizon are morphing into media companies. In other words, the “pipe” owners i.e., the telecom companies are increasingly taking control of the content that flows through their “pipes” while the content owners i.e., the media companies, are increasingly evolving into pipe owners. Google offers high-speed internet service through its subsidiary Google Fiber, Amazon has reportedly been considering the prospect of becoming an ISP in Europe, and Alibaba is reportedly looking at expanding into the telecom sector.

AT&T, America’s second-largest wireless carrier is looking to merge with Time Warner while Verizon, America’s largest wireless carrier, scooped up AOL in 2015 and Yahoo last year, and then clubbed the two companies together to launch its digital content subsidiary Oath Inc with the goal building a media business that could compete with the likes Google and Facebook.

Over in India, a similar trend has been unfolding and Reliance Industries has made its moves. Reliance Industries owns the “pipes” via its telecom arm Reliance Jio and the company also offers its own unique content via its plethora of content apps such as JioCinema, JioMusic etc.

In response to rising net neutrality concerns, the Telecom Regulatory Authority of India (TRAI) last year proposed guidelines in favor of net neutrality; however, Content Delivery Networks (CDNs) or “content “edge” providers (a network of computer servers set up inside an ISP which can deliver digital content faster to end users) do not fall under the proposed regulations and thus integrated operators such as Reliance Jio and Bharti Airtel are poised to benefit as they could leverage this CDN exemption and offer their content at lower prices to their subscribers. Content Delivery Networks are often built and owned by third-party companies such as Akamai Technologies Inc and Cloudflare, however, some deep-pocketed content providers such as Google, Facebook, Netflix, Amazon, Microsoft and Alibaba have built their own private CDNs. The net neutrality debate focuses on ISPs (Internet Service Providers) and not CDNs.

 

Wide ecosystem of businesses

Amazon, Alibaba and Reliance Industries have wide business ecosystems - LD Investments

With businesses spanning cloud computing to video streaming Amazon and Alibaba are much more than just e-commerce companies. Interestingly, Indian stalwart Reliance Industries also boasts a highly diversified ecosystem of businesses which combined could prove to be a powerful force.

In brick-and-mortar retailing, Amazon owns the Whole Foods grocery chain, Alibaba owns Hema Supermarkets (盒马) while Reliance has Reliance Retail.

All three companies have logistics arms – Amazon with Amazon Logistics, Alibaba with its Cainiao and Reliance Industries with Reliance Logistics.

In video streaming, Amazon has Amazon Video while Alibaba has video hosting platform Youku Tudou. Relince has JioCinema.

In music streaming, Aamzon has Amazon Music, Alibaba has Ali Music and Reliance Industries has JioMusic.

All three companies have ventured into production of digital video content; Amazon through Amazon Studios, Alibaba through Alibaba Pictures and Reliance Industries via its partnership with Roy Kapur Films (RKF) which will produce original digital video content as “Jio Originals”.

In the mobile wallet space, Amazon has Amazon Pay, Alibaba has Alipay and Reliance has Jio Money.

In messaging apps, Amazon has Amazon Chime, Alibaba has DingTalk and Reliance Industries has JioChat,

All three companies have their feet in the cloud business as well with Amazon offering cloud services through AWS, Alibaba through Alibaba Cloud and Reliance through JioCloud.

All three companies have a direct or indirect involvement in media as well, with Amazon founder Jeff Bezos owning the Washington Post, Alibaba founder Jack Ma owning the South China Morning Post and Reliance Industries holding Network 18.

Such a wide eco-system has several advantages; the businesses will reinforce each other as existing consumers and companies become more likely to use their platforms which not only generate diverse sources of revenue but vast quantities of consumer and business data as well, which ultimately could be used towards further business expansion.

RIL Chairman Mukesh Ambani famously said, “Data is the new oil and India does not need to import it”.

While Reliance Industries is a latecomer to India’s e-commerce arena and the company’s success depends on several factors such as execution, Reliance’s entry into e-commerce cannot be taken lightly; the Indian giant could be a formidable competitor, disrupting the current status quo similar to the manner in which it reshaped the Indian telecom sector within a few years of operation.