Lack of FDI, threat of e-commerce lead to consolidation in retail space

With FDI in retail stuck in regulatory hurdles and e-commerce players snapping at their heels, brick and mortar retailers are looking for consolidation to get better margins and profits.

At a time when consumer demand has not exactly been upbeat, the two back-to-back deals among the biggest offline retailers over the last two days signals that more mergers and acquisitions could be in the offing.

While the merger of Pantaloon and Madura Garments was about restructuring the retail business of Aditya Birla Group to help Pantaloon reduce debt and get profitable, in the case of Future Retail and Bharti Retail, the merger signifies the latter’s decision to offload the retail business to drive scale and synergies with a bigger retailer.

In October 2013, Bharti Retail had called off its retail joint venture with US giant Walmart.

Govind Shrikhande, Managing Director, Shoppers Stop, said: “It has been a great move on the part of Aditya Birla Group as Pantaloon had always been challenged to make money. But in the case of Bharti Retail, it was possibly looking for a way to exit the retail business with its decision to merge with Future Retail.”

In fact, unlike the Future Group, retail had never been a core business for the Bharti Group since it had to spend heavily behind its telecom business. “The high management of Bharti would have realised that it needs to focus on its core telecom business where it had been spending heavily on spectrum auctions. Besides, consolidation has been on the cards for brick and mortar retailers in areas like fashion where discounts in e-commerce had been affecting their profitability,” says Devangshu Dutta, CEO, Third Eyesight, a retail consultancy.

Besides, with FDI getting almost ruled out and foreign investors not exactly evincing interest, it was a matter of time before a series of domestic consolidation started in the retail industry.

“Aditya Birla Group wanted to get bigger and stronger through the merger of its two companies and in the case of Bharti and Future retail, the merger was all about getting scale and synergies when international investors were no longer interested in forging joint ventures due to several clauses related to multi brand retail,” observes Mohit Bahl, Partner, Retail Practice, KPMG.

Domestic players like Bharti Retail and Future Group can now ride on each other’s strengths. As Rachna Lath, Leader –Retail & Consumer, PwC India, added: “With the FDI in multi-brand retail still not a reality, a consolidation among the Indian players has long been on the anvil.

“This transaction gives both the players synergy and scale both in terms of geographical access and supply chain to manage the back end.”

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