<div>The brick and mortar industry in India is finally sailing with the wind at its back. Extreme competition put up by online retailers in raising funds has led to the consolidatation of the industry. Thanks largely due to foreign investment regulations which fundamentally do not allow access to foreign funds, except in a few states, brick and mortar companies need to merge to compete. The online retail industry has raised over $4 billion, in under two years, which is a large investment and it is more than what retailers like Future Group or Aditya Birla had raised in such a short span of time.</div><div> </div><div>Today Future Retail, owned by the Future Group, has merged with Bharti Retail, owned by Bharti Enterprises, to create one of the largest food and grocery businesses worth Rs 14,000 crore. This clever move from Kishore Biyani adds value to the whole deal because Future Group has also partnered with Amazon, the global online retailer which works on a market place model in India, to sell products on their platform. Amazon harbours hopes of penetrating the food and grocery business in India. This merger, between Future Retail and Bharti Retail, will allow Amazon to reach consumers in over 243 cities. Earlier this week, the $28-billion Aditya Birla Group merged its retail businesses, Aditya Birla Nuovo and Pantaloon Retail, to create the largest apparel retailer in the country with Rs 12,000 crore in revenues.</div><div> </div><div><strong>Why Is A Merger Necessary?</strong></div><div>Consolidation will create synergies across tier 1 and 2 cities and other smaller towns. It will result in easy access to foreign funds and will reduce the logistics costs involved in serving stores across the country. According to Ernst & Young, the retail industry in India is $550 billion of which only seven per cent is organised. Compare that with the e-commerce industry and it is only $4 billion today or Rs 24,000 crore. PWC expects this business to grow to a Rs 100,000 crore business by 2017. Brick and mortar companies have merged to also engage consumers on this platform.</div><div> </div><div>This merger of Bharti Retail and Future Retail will create a company that has an omni channel strategy and will compete with the likes of Reliance Retail, Shoppers Stop and the Landmark Group. Reliance Retail, owned by Mukesh Ambani's Reliance Industries, is the dark horse here and has hit the Rs 10,000 crore in sales mark. Sources say that Reliance too is experimenting with an e-commerce platform, of its own, to create an omni channel sales and consumer engagement platform. This move opens up a few questions whether we will see megers between established players like Shoppers Stop, Trent and the Landmark Group or whether we will see all these companies strengthen their omni channel retailing strategy by integrating ecommerce platforms with their offline stores. A classic example is what the $72 billion global retailer, Target, is doing to integrate brick and mortar stores with their ecommerce channel (<strong><a href="http://www.businessworld.in/news/business/corporate/right-on-target/1791810/page-1.html">Right On Target</a></strong>) in the USA. Analysts told BW-Businessworld that working on an omni channel strategy is the only way forward for brick and mortar retailers. Younger people or the millenials are shopping on all platforms and will eventually create an equilibrium out of the current chaos in five years. Therefore making it important for companies to focus on online stores, new logistics and delivery modes along with smaller stores with focused inventory. In the current regulatory set up, this kind of structure will not happen because accessing capital from Indian banks alone cannot sustain the brick and mortar industry.<br><br> The top three e-commerce marketplace companies have been able to raise big money consistently and have been backed by global funds because 100 percent FDI investment is allowed in wholesale and logistics businesses. The final question, that one must ask, is whether global funds would invest in brick and mortar retailing if the regulatory environment changes. Foreign direct investment (FDI) is allowed in multi brand retailing only in a few Indian States. Only Trent's Star Bazaar, which has partnered with UK's Tesco PLC has managed to retail, across India by registering different corporate entities, in each State, where FDI is not allowed.</div><div> </div><div>Regulation is finally driving consolidation.</div><div> </div><div>Competition from online companies will get tougher. While brick and mortar retailers grapple, over the restrictions of the FDI policy to raise money, they will also have to compete with the expanding ecommerce market place businesses in acquiring consumers. Snapdeal, Amazon and Flipkart have been able to raise money and have also managed to connect over 300,000 sellers on their platform. One must treat this number with caution because only 20 per cent maybe active sellers on market places. Still, they have spent over Rs 1400 crore in TV advertising to get more customers on board. Also the valuations driven by their asset light business models have eclipsed every other business out there. That said, they do manage inventory for returns and for products with exclusive tie ups. Flipkart gets 40 per cent of its business, in shipments and not value, from WS Retail, which is it's organically grown logistics firm.</div><div> </div><div><strong>Consolidation: The Name of the Game</strong></div><div>The merger with Bharti Retail will create two companies: Future Retail and Future Enterprises. The former will operate the retail business and the latter will manage investments and company assets. This will split Future Retail's debt burden, of Rs 3500 crore, in to two companies. Future Retail will handle Rs 1200 crore and the rest will be borne by Future Enterprises.</div><div> </div><div>This deal is also synonymous with Kishore Biyani's business acumen. He had earlier, in 2012, had pared debt of Rs 8,000 crore to Rs 4,020 crore by demerging Pantaloon Retail into two entities called Future Retail and Future Lifestyle Fashion. He also managed to sell several group companies along with the flagship company Pantaloon, which was sold to the Aditya Birla Group for an undisclosed sum. Aditya Birla took over a debt of Rs 800 crore and infused Rs 800 crore through debentures.</div><div> </div><div><div>Kishore<span class="Apple-tab-span" style="white-space:pre"> </span>Biyani, Founder and Group CEO,<span class="Apple-tab-span" style="white-space:pre"> </span>Future<span class="Apple-tab-span" style="white-space:pre"> </span>Group said, "Bharti Retail’s strengths and network compliment Future Retail's business. It will bring us closer to<span class="Apple-tab-span" style="white-space:pre"> </span>millions of consumers."</div><div> </div><div>The combined entity will have over 570<span class="Apple-tab-span" style="white-space:pre"> </span>retail stores in 243<span class="Apple-tab-span" style="white-space:pre"> </span>cities with operational retail space of over 18.5 million square feet.<span class="Apple-tab-span" style="white-space:pre"> </span> It will operate 203 Big<span class="Apple-tab-span" style="white-space:pre"> </span>Bazaar<span class="Apple-tab-span" style="white-space:pre"> </span>and ‘Easyday’ hypermarkets, 197 Food Bazaar and ‘Easyday’ supermarkets, and 171 other stores<span class="Apple-tab-span" style="white-space:pre"> </span>comprising Home Town, eZone, FBB and Foodhall.</div></div><div> </div><div>“We are<span class="Apple-tab-span" style="white-space:pre"> </span>delighted to announce this partnership,<span class="Apple-tab-span" style="white-space:pre"> </span>which<span class="Apple-tab-span" style="white-space:pre"> </span>brings<span class="Apple-tab-span" style="white-space:pre"> </span>together the strengths<span class="Apple-tab-span" style="white-space:pre"> </span>of the<span class="Apple-tab-span" style="white-space:pre"> </span>two companies and provides a strong platform for future<span class="Apple-tab-span" style="white-space:pre"> </span>growth," says Rajan Bharti Mittal, Vice Chairman, Bharti Enterprises.</div><div> </div><div>The shares of Future Retail rose by 12.50 points, a 10.80 percent growth over the previous days close, to Rs 128.20 on announcement of the merger.</div><div> </div><div>India is going to see so many hybrid business models that will increase shareholders. But the value is going to be cashed in by a few companies, be it in online or offline retailing, and many such companies are needed to distribute wealth evenly. Sadly only the technology businesses have managed to create value evenly in terms of shareholder wealth.</div>
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