Entrepreneurial Capital Vs Shareholder Capital: Case Of Indian Ecommerce And Retail Industry
Can companies with shareholder capital ever compete with entrepreneurial capital in economies such as India?
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Over the past few months, the Indian ecommerce industry has witnessed a lot of M&A activity. Recently, Amazon acquired Aditya Birla Group Retail arm MORE for a value of Rs 4300 crores. Walmart paid $16.7 billion (Rs 1,16,900 crores) to acquire a stake in Flipkart. However, there are significant differences in these two moves by global giants. The move by Amazon is far sighted.
It is known that the Indian retail industry especially super markets and hypermarkets are expected to grow at 20 percent per annum. Currently, Aditya Birla Retail has a total of 658 MORE branded retail outlets and 20 hypermarkets covering more than 2 Million square feet whereas the largest retailers in the segment is Reliance Retail which has 3837 stores with an area of 17.7 million square feet. The Reliance Retail profit has increased to Rs 2529 crores in comparison to Rs 1179 crores and the revenues of Reliance Retail stores is Rs 69198 crores in FY 2018. However, the revenues of Aditya Birla Retail was at Rs 4194 crores and making a loss of RS 644 crores in FY 2017. How would the acquisition of a loss making entity help Amazon? Currently, the online multi-brand retailers (ecommerce players) are not allowed to hold inventory as per government policy. This provides immense benefit to brick and mortar players such as Reliance Retail. Moreover, the online market place model cannot sell in the 2nd and 3rd tier cities and categories such as grocery. This move by Amazon would help enhance and combine the inventory based model with the online ecommerce model by making MORE an online seller in the Amazon market place. Assuming, the competition commission of India (CCI) does not give a clearance, how does this help Amazon?
Recently, Mukesh Ambani in the 41st AGM of Reliance Industries expressed his ambitions to counter Amazon and Flipkart. The introduction of JIO helped Reliance industries to establish a connect with customers and households directly. Since its entry, Reliance JIO acquired 215 million customers in telecom. This lead to Reliance JIO establishing its position as the second leading player (in terms of revenue) in the telecom market during the last quarter. This means that the growth of JIO helped Reliance establish connect with customers directly. Consequently, these handsets can hold applications such as amazon and Reliance JIO’s own applications. In his address to shareholders, Mr Mukesh Ambani explained “This (JIO) platform has the potential to redefine retailing in India and become one of the biggest new growth engines for Reliance in the years to come... I am confident that our growth in these consumer businesses, based on asset-light platforms of the future, will be nonlinear and exponential,". What does this mean? This would help Reliance Retail to establish and compete with providers such as Amazon and Flipkart. Hence, the move by Jeff Bezos is to counter the threat by the India’s biggest industrialist, Mukesh Ambani. In another interesting move, Mr Jack Ma’s Alibaba group has raised its stake in Paytm mall to 60 per cent. Besides, there has been speculation on future’s group’s alliance with Jack Ma’s Alibaba.
Consequently, is this a battle of only entrepreneurial capital across the globe? The answer is No. If one checks the ownership structure of Walmart and Amazon, the individual shareholders own 51.9per cent in Walmart, whereas they only own 16.92per cent in Amazon. The institutional shareholding is quite high at Amazon (at 58per cent) whereas it is only 30per cent in Walmart. Among the individual shareholders, Walton family holds around 50per cent whereas Mr Jeff Bezos holds only 16.4per cent. This means the success in institutionally rich environments is probably because of the dispersed shareholding. Does the same hold true for the emerging economy contexts? The evidence is ambivalent. Jack Ma (along with other employees) own only 10 per cent of Alibaba whereas the significant shareholding rests with Softbank (30per cent) and Yahoo (15per cent). However Reliance Retail and Reliance JIO are subsidiaries of Reliance Industries. Mukesh Ambani has nearly 44per cent ownership stake in Reliance Industries. Could there be other reasons for success of these three firms? All three are led by dynamic and bold entrepreneurs whereas Walmart is led by a Manager CEO.
Can companies with shareholder capital ever compete with entrepreneurial capital in economies such as India? Given the risk propensities of these owners viz., large individual shareholders, institutional shareholders owing to the (uncertain) nature of risks as well as different horizon of their risks, it is quite unlikely that shareholder capital can even have an appetite to counter moves by firms led by entrepreneurial capital. However, one of the ways that shareholder capital can compete is partnering with entrepreneurs who understands the nature of risk and excel in emerging economies.
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