India Inc’s growing appetite for dotcoms 

Be it for online pharmacy, e-grocery, or online furniture store, India’s biggest corporate houses are increasingly developing an appetite for young local e-commerce ventures. Being a witness to the rapid spike in online shopping that the pandemic has wrought, large enterprises such as Reliance Industries Limited (RIL) and Tata group are now much more interested in adding new e-commerce offerings to their existing brick-and-mortar retail formats.

Ankur Bisen, senior vice president, retail and consumer products, Technopak points out that big Indian corporations with retail operations have started to appreciate far more the virtues of e-commerce businesses and its potential in a large market like India. “That’s why you are seeing the Tata group and Reliance Industries upping their game,” he says.

In August, billionaire Mukesh Ambani-led RIL, the oil-to-telecom conglomerate, said that its subsidiary Reliance Retail Ventures Ltd (RRVL) acquired a majority stake in online pharmacy store Netmeds for ₹620 crore. Then, within three months, RRVL announced another acquisition, this time of Bengaluru-based Urban Ladder for ₹182.12 crore. The eight-year-old furniture retailer started off as a pure-play online business but later pivoted to an omni-channel model. For RIL, these deals became crucial to strengthen its digital retail offerings in order to compete with multinational behemoths like Amazon and Walmart-owned Flipkart in the online space.

While Mukesh Ambani, Asia’s richest man, has firmly set his eyes on the endgame, Tata group, one of India’s oldest and largest business houses, is also working to up its game plan.

According to a Bloomberg report dated December 2, Tata group is in advanced talks to buy about 80% of BigBasket in a deal that is likely to value the Alibaba-backed online grocery store at an approximate $1.6 billion. Other reports suggest that in the likelihood of the deal going through, Tata group could likely pay about $1.3 billion to buy around 80% in BigBasket.

“BigBasket has emerged as a successful model with very high customer stickiness and it is no more a startup. It is the vertical leader [in online grocery] and that is reflected in the way Tatas are looking at the deal at that valuation,” says Bisen.

Tata Cliq—the group’s e-commerce arm that operates in categories such as electronics, fashion, footwear, and accessories—isn’t a formidable player in the Indian e-commerce space. “BigBasket puts them in the forefront of online grocery. This gives Tatas an opportunity to scale up their private labels and do pivot for other Tata brands,” adds Bisen.

The Tata Group’s retail portfolio includes the jewellery store Tanishq, Trent, which operates retail chain Westside and supermarket Star Bazaar, and Croma, which is a retail chain for consumer electronics and durables.

Besides BigBasket, Tata group is reportedly in talks to acquire a majority stake in Gurugram-based 1mg, an online pharmacy store.

Vikram Chachra, founding partner, 8i Ventures, an early-stage venture capital firm, explains: “The market leader in a tech sector is usually worth more than all the rest of the peers put together. This is largely due to the winner-take-all economics of the digital economy. When this happens, there is usually no room for a number 3 or 4 player and those are the types of companies that Indian conglomerates have been snapping up at distressed valuations.”

Chachra further adds, “that strategy almost never works if the intention was to enter a digital market and dominate it. Tech M&A is a capital allocation exercise by the board on the future optionality of what appears to be an expensive acquisition today.”

However, most tech M&As are still driven by build-vs-buy decisions by the chief information officer (CIO) of a traditional conglomerate. This is why a strategic M&A with domestic buyer remains a low priority for Indian startups, Chachra argues.

The Covid-19 pandemic has accelerated the pace of e-commerce adoption and growth in the country. To tap into this potential, RIL has built its own e-commerce platform JioMart, a joint venture between its retail and digital services arm Jio Platforms. JioMart delivers grocery and daily essentials from nearby stores. Tata, with its vast retail footprint, would not like to miss this opportunity as well. That is a reason why the BigBasket deal and other online acquisitions is crucial to the group, besides plans for building its own super app that would encompass groceries, healthcare, insurance, bill payments, consumer durables, and fashion, among other services.

Analysts point out that e-commerce now is a play for mature players who can deploy capital and scale the business. Therefore large companies are scouting for assets that are good businesses with potential to scale.

But then what is it about the pandemic that is fuelling this appreciation for e-commerce businesses now?

Bisen feels it is not just about getting a good price in this pandemic-hit market. And it is also not completely true that funding has dried up for startups and smaller companies and they are desperate for buyers. Large enterprises are looking for online businesses that will give them some edge and capabilities. There is a genuine need for good online assets, adds experts.

Kumar Rajagopalan, chief executive officer, Retailers Association of India points out that typically India Inc. witnesses about 10 to 15 consolidations/takeovers in the retail space. However, this year has been different. “Few deals have happened in the country, as is the case across the globe. There have been some very high value deals this year, which are yet to be concluded, but which re-emphasise the importance of modern retail in the country,” says Rajagopalan, adding that retail businesses are redefining themselves by becoming more omni-channel in their approach.