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Reliance & e-retail: Volatile entry expected?

  Amidst the battle heating up between Amazon and Walmart-Flipkart in the Indian e-commerce space, Reliance is looking to enter e-retail. RIL's entry is typically insanely aggressive, visible from the way the new entrant Jio captured a large share of the telecom market. Will we see the same in Indian e-commerce?  

Dr Suresh Srinivasan

It is an incredible fact that in India today,there are more than 50 crore online users. That number will increase to close to 75 crore over the next three years, even with a conservative compounded growth rate of 10 to 12% per annum. The size of the ecommerce industry per se is more than `3.5 lakh crore; this again is estimated to double by 2021.
Groceries and hyperlocal deliveries as well as fashion are showing huge promise, but still remain substantially underpenetrated, while online ticketing and travel aggregators are reaching scale economies. Online retail, including electronics, food delivery aggregators and cab hailing services, are sharpening their business and revenue models.An exponential growth is expected in the coming years for these segments.
Amazon is likely to finish 2018 with a Gross Merchandise Value (GMV) of around `65,000 crore, and Flipkart at close to `60,000 crore. Other players are significantly smaller in size, as compared to the top two players. Today, these two players together control less than 40% of the overall market, leaving sufficient room for other smaller players to grow, but more importantly, for a couple of more new entrants to make an entry.

Likely entrants
With high penetration and growth rate expected in the coming years, consolidation among existing players is bound to happen. More interestingly, the potential business on the table over the next three years is quite large, and this makes a business and economic case conducive for new large players to enter the market;this is most likely to happen.

Chinahas an eye open
Alibaba is certainly not one to let go of the lucrative Indian e-commerce market. The low profile Jingdong Group (JD) of China, which is believed to be larger than even Alibaba’s e-commerce operations in China, could also eventually find its way into the Indian market.All of this — if it comes to pass over the next three years — will not be unexpected, especiallyon the back of the huge potential growth and the doubling of the e-commerce market size.

Reliance riding on Jio
Reliance Industries Limited (RIL) is also actively pursuing an e-commerce entry. Mukesh Ambani has recently stated that his telecom outfit Jio will be the foundation on which the company’s commerce platform will be built. Primarily, RIL will leverage its Jio assets along with its retail business to develop the e-commerce platform.With the existing retail stores well positioned as pickup points and warehouses, the model should enjoy substantial traction and speed up the scaling, especially when in competition with the two large players, Flipkart and Amazon.
In this context, the markets are well aware that RIL has taken huge bets on what it calls its consumer business, which comprises retail and telecom, and expects this business to contribute around half of its total topline by the next decade. As of now, RIL is primarily an oil and gas company, with miniscule revenue being driven by consumer business. Such a leap into the complex ‘service’ businesses with such aggressive targets — that too to be achieved within a decade — is the height of risk taking. Of course, the company is well backed with rich cash-flow from its core businesses. However, this high risk appetiteis a definite sign of the company’s “entrepreneurial DNA”.

Master plan?
For example, Mukesh Ambani mentions as a part of his talk in the recent annual general meeting of RIL that the company is achieving its target of 99% population coverage with 4G-LTE; its geographic coverage is wider than any other network in the country. Having realised that more than 80% of data consumption is happening indoors through fixed line data connectivity though broadband connections, Jio has poured investments in fibre optic cables laid out to far reaching geographies within the country.
It recently rolled out the Giga-fibre plan,its 4G broadband service, across the country, offering 100GB data free for three months, with a refundable deposit to cover the optical line terminal.The target? Five crore homes in more than a thousand cities.
RIL believes that to boost its data consumption, such investments in high speed fixed line broadband is inevitable, especially in the areas of healthcare, education and entertainment, as and when large scale data consumption starts to become reality! Jio has reportedly spent an additional `60,000 crore during the current financial year to execute the broadband plan.

The Reliance approach to market entry
To put across the opposite perspective: Is there any reason for RIL — or Jio — not to enter the e-commerce space? Not really. Jio’s approach to entering the telecom industry was very different from the other incumbent players like Vodafone and Airtel —aggressive, counterintuitive, controversial and financially risky.
With upfront investments close to `2.5 lakh crore made in its digital business, and having aggressively discountedprices to capture market share, Jio’s market entry strategy was highly perilous. To a certain extent, it can however be said Jio ultimately did a commendable feat in managing to achieve its planned objectives quite well by gaining a subscriber base close to 215 million, setting global records in the process.

Challenges from within
However, to further gain market share especially when it has to move away from its ‘discounting’ model to offering a seamless user experience which would be superior to the competition, the true challengesarenow likely to show themselves. More importantly, incumbents like Airtel and Vodafone are also catching up and perfecting their offerings, and are providing stiff resistance to customer swaps.
This pushes Jio into a ‘do or die’ mode, wherein it has to drive data consumption into the market by making the customer consume data, provide seamless delivery of data at acceptable speeds, and at the same time, ensure that the customer is eventually paying for the services. Reliance has already extensively invested in content creation and media, along with its discounting game, to support higher data consumption. As the pressure grows to secure a return on investment, challenges are emerging fromtechnology obsolescence perspective, especially since the investments have been primarily made in technology and infrastructure.

Challenges from without
Facebook’s Aquila project, which uses unmanned solar powered drones that can stay in the skies for months at an altitude of 65,000 feet, are now commercially used to beam internet to large geographical areas. Google’s Loon project too is looking at similar capabilities. Although Facebook has withdrawn from the project, and will use third party drones, the model is still viable, and will soon see many players using such technologies to beam remote connectivity.
These technologies could provide aerial wireless network for specific geographic areas at 4G-LTE speeds. Such disruptions have the potential to make look Jio’s huge investments futile, within the near to medium term future.

Handshake with Alibaba?
RIL is reportedly setting up a joint venture with Alibaba, which again is known to be desperately seeking an avenue to enter the Indian market. Alibaba, a specialist in the online-to-offline (O2O) model, is reported to be seriously considering a partnership with Reliance Retail. Under this model, customers search for the product online but eventually buy it through an offline channel.
With Reliance Retail being the largest retail player in the country, the brick and mortar support clubbed with Jio’s technology and customers can provide a viable model for O2O with Alibaba. These require substantially more funding in the next few months.For example, Amazon spent close to around $7 to $8 billion to establish itself into the Indian e-commerce space; this translates to around `60,000 crore.
So, to summarise, RIL’s aspirations are very high, expectations are optimistic, actions are extremely aggressive, and all of these are in the context of highly growing market conditions. The question to be asked is whether this position can push the company to its financial edge, or if RIL will ultimately pull through. If you ask me, a financial investor in RIL will certainly be excited, but there will also that niggling worry!