A necessary purchase. A repeat purchase. An essential purchase. Combine these three and it’s not hard to see why retail businesses make a bold promise. Get a critical mass of consumers (and their data), persuade them to buy regularly and a 25-to-50-percent-a-year growth for the next decade is there for the taking. Few businesses hold such potential.
The latest to be snared into retail’s charms is the 153-year-old Tata Group which plans to make retail businesses and the consumer a key ingredient of its growth strategy over the next decade. It promises steady growth with stable cash flows and, if executed well, a high price-to earnings multiple. Within Bombay House, work on an app to link all of Tata’s consumer brands is underway. Also on the cards, according to media reports, are plans to buy out online grocer BigBasket and pharmacy e-retailer 1mg. If the deals don’t go through, an entry into grocery retail is still on the cards, but an organic roll-out would take longer to execute.
A large part of Tata Sons’ earnings come from businesses that are cyclical. While Tata Steel and Tata Motors gorge out disproportionate amounts of cash in an upcycle, a downcycle is equally brutal. Both require long investment cycles. In contrast, once consumers are hooked, retail has the potential to generate high returns with low incremental capital. Given this it’s hardly surprising that N Chandrasekaran, who took over as chairman of Tata Sons in February 2017, has chosen to keep the consumer at the core of his new businesses.
India’s retail market is valued at $700 billion, according to the Boston Consulting Group, with organised retail—of which online retail is a subset—accounting for 10 percent and growing at 10 to 12 percent a year. Package-carrying delivery boys have become part of the urban landscape. “What excites the market now is the heavy overlay of tech in these businesses,” says Krishnan Thyagarajan, president and COO of DataWeave, a company that works on data analytics with retailers. According to him, given the spread of ‘Tata’ branded products, it will be extremely beneficial for them to take a meaningful seat at the table.
Also, in the last year, Reliance Industries [owner of Network 18, the publisher of Forbes India] had seen its valuation surge as it leveraged the strength of its telecom and retail consumers. The two businesses saw investments of ₹152,056 crore and ₹47,265 crore respectively, taking Reliance’s valuation to ₹12 lakh crore. This, say industry watchers, prompted the Tatas to consider taking a seat at the table. If all works according to plan, the Indian online retail industry could coalesce around Reliance, Amazon, Walmart and the Tatas.
While the heavy overlay of tech makes it quicker to scale retail offerings (there is no need to scout for properties, negotiate with landlords and spend a decade building a national network of stores), it also dramatically increases the complexity and intensity of the competition.
All competition is now national and against competitors who are willing to burn vast sums of money to acquire customers. They can match pricing online on an hourby-hour basis. However, while competition has increased, there still remains no profitable way of delivering low margin items across urban agglomerations. (New delivery models are being tried in the West and should in time make their way to India.) This is on account of low bill amounts and bulky order sizes. The Indian consumer has proved resistant to being weaned off free delivery.
These are some of the challenges that Chandrasekaran, who—via a spokesperson—declined to be interviewed for this story, will face. In the past, there has been resistance from Tata companies towards groupwide projects. Tata insiders say since Chandrasekaran has put his weight behind this project, they’ll have no option but to fall in line. Add to that the spotty record that the Tatas have in executing new business and they’ll need all the help they can get.
The last time Bombay House made a bold bet with new businesses was in the late 1990s. Tetley’s acquisition had brought Ratan Tata his first flush of success. They were now a household name at our erstwhile colonial masters.
To an impartial observer, there was little that could go wrong. With cash to spare, the Tatas laid claim to two exciting new ventures that would define the group’s aspirations in the businesses of tomorrow—retail and telecom.
Trent, started by Noel Tata, was an entry point into retail. At a time when organised retail was restricted to Shoppers Stop and the soon-to-bedefunct Future Group, Trent—which chose to eschew the discounting route—has seen its private label strategy pay off. Tata Teleservices had set up fixed line services and although the group had been caught napping in the mobile telephony space, its entry into telecom with its vast potential wasn’t seen as late.
Fast forward to 2020 and little seems to have gone according to plan. In the industry, Trent, with a ₹24,000 crore market cap, is seen mostly as an also-ran. Faster, nimbler rivals—Avenue Supermarts, Reliance Retail, Amazon and Flipkart—have raced ahead and captured a larger share of the consumer wallet.
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