New Delhi, Aug 31 (IANS) Reliance takeover of Future Group's retail business marks a major consolidation in the Indian organised retail sector, with two of the top three players merging.
A research report by foreign brokerage, Credit Suisee said the Reliance takeover of Future Group's retail business is a major consolidation of organised grocery retail.
Reliance announced that it is acquiring the retail, wholesale, logistics and warehousing business from the Future Group, subject to approvals.
“This marks a major consolidation in the Indian organised retail sector, with two of the top three players merging,” it said.
In terms of grocery retail, the revenue of Reliance Retail in FY20 was Rs 346 billion and that of Future Retail annualised revenue of FY20 (based on 9M FY20 results) was Rs 100 billion. In terms of retail space, Future Retail had 16 million sq ft, while Reliance had 28 million sq ft. Reliance's revenue and retail space gets a step jump from this transaction.
Among the three main players in the grocery market, Avenue (DMart) and Reliance had strong balance sheets, while Future Retail was highly leveraged.
“The weak competitor being acquired by a stronger one is negative for Avenue which now becomes a distant No. 2 in a largely two player market,” Credit Suisse said.
Grocery revenue of Reliance becomes 2.5 times larger than Dmart post the transaction. This could impact relative terms of trade and promotional support (greater share of brand funded promotions) from FMCG companies in favour of Reliance, thus improving its competitive position. In key cities for Avenue like Mumbai, Reliance strengthens its presence as it consolidates Future's deeper reach, the report said.
“The transaction increases the bargaining power of Reliance and can force a change in terms of trade in favour of Reliance, which is a negative for large FMCG companies,” the report said.
However, the overall organised retail share of business for most FMCG companies is still small at 10-15 per cent of revenues. “Thus, even if there are changes to terms of trade like higher margins for retailers and increase in working capital cycle, it is unlikely to materially move the overall financial metrics of the FMCG companies,” the report said.