The next crucial step for the Rs 27,513-crore Reliance-Future Group deal would be the competition regulator’s approval. Reliance Retail Ventures Ltd.’s acquisition of Future Group’s retail, wholesale, logistics and warehousing assets would involve an extensive scrutiny of markets both companies overlap in.
So far, the Competition Commission of India has looked at pure-play retail market deals. For instance, Amazon.com NV Investment Holdings LLC’s investment in Shoppers Stop Ltd., Future Retail Ltd.’s acquisition of Heritage Foods Ltd., Wal-Mart International Holdings’ investment in Flipkart Pvt.
But Reliance-Future Group deal will be the first one where the CCI will have the opportunity to examine the entire value chain in the retail industry, Rahul Rai, an independent competition lawyer, told BloombergQuint.
"The four verticals—front-end retail, wholesale, logistics and warehousing—will be looked at as separate markets which are linked to each other. Within front-end retail, there’s offline and online. So the regulator will examine the vertical and horizontal overlaps in all these markets," Rai said.
Horizontal overlap refers to situations where parties to a deal are competitors in the same market; and in vertical overlap, the parties are involved in different stages of the supply chain for a product or service.
Reliance-Future Group Deal: Market Assessment
An M&A deal receives CCI’s clearance once the regulator has concluded that it won’t have an appreciable adverse impact on competition in the relevant market. What constitutes the relevant market—by product and geography—is a crucial step in the regulator’s assessment of a transaction.
A closer look at CCI’s previous orders gives some indication of how the front-end retail market may be delineated in the Reliance-Future deal.
In the past, the regulator has categorised business-to-consumer retail as organised and unorganised. The organised segment includes supermarkets, hypermarkets, retail chains, e-commerce and also private departmental stores; whereas the unorganised segment includes traditional format of low-cost retailing run locally by the owner or caretaker, according to CCI’s earlier orders. It has further segmented organised retail on the basis of category of products such as food and beverages, clothing and textile, beauty and personal care, consumer durables, home décor and furnishing and footwear.
The relevant geographic markets are typically local in nature, CCI has noted in some of its earlier orders.
For food and groceries, the regulator has looked at a 5-km catchment area, Karan Chandhiok, partner at Chandhiok & Mahajan, pointed out. But in none of the earlier cases, where the regulator has talked about retail market segregation, it’s had any cause for concern, Chandhiok said.
"And so, there’s no single definitive relevant market definition in CCI’s earlier orders that can be applied to Reliance Retail-Future Group deal. Every segment of the market (electronics, food and groceries, apparel) requires its own assessment," he said.
Similarly, overlaps will need to be assessed in the warehousing and logistics market—in these, there are market leaders, unorganised players and Reliance Retail is unlikely to emerge as a significant player even post this deal, Rai said.
It may be able to negotiate a bulk deal with manufacturers depending upon warehousing, logistics capacity post this deal. But given the size of the retail market, that’ll most likely lead to better pricing for customer acquisition. This efficiency that Reliance Retail can generate because of backward integration with the help of Future’s logistics and warehousing arm can help them build their case for short to mid term.Rahul Rai, Independent Lawyer, Competition Law
In the long run, will Reliance Retail get to a stage where it starts dictating the prices—that’s a question that the regulator may examine, Rai explained.
The other aspect that the regulator will examine is as to how the parties are vertically related—how they are procuring goods, warehousing and moving them, and further downstream, there will be things like loyalty cards, wallets, payment platforms, etc., Chandhiok said.
The JioMart Effect
Reliance Retail’s acquisition of Future Retail’s grocery and apparel business would take its market share to 38% of organised grocery retail from 22% earlier, according to Motilal Oswal’s estimate. In a note, the brokerage has observed that post this deal, the organised grocery market, with the only other player being DMart, has now virtually turned into a duopoly. Reliance Retail targets deep penetration in this space, and DMart focuses on the cluster approach, it pointed out.
“With the entry of giants such as Amazon, Flipkart, and other online players, the cumulative size of the online grocery market, once ignored for its non-viability, has now reached an estimated stellar scale of Rs 200–250 billion (Rs 20,000-25,000 crore). This may be viewed as the third dominant force in the retail market. This deal should further aid Reliance Retail in its online venture Jiomart.” — Motilal Oswal Note
And that’s what distinguishes this deal from earlier transactions CCI has assessed in the sector—Reliance Retail and Future Group’s online presence via JioMart and Big Bazaar, respectively.
It’ll be interesting to see whether CCI will look at online and offline as two separate markets in this deal, Chandhiok said. Previously, he added, it would be par for the course to expect CCI to consider one relevant market that includes both online and offline modes of distribution.
But in January 2020, CCI moved the goalposts by ordering an investigation into Amazon and Flipkart. In this case, Chandhiok explained, the regulator considered Amazon and Flipkart’s position and behaviour in the “online retail market”.
In this case too, the parties—RIL and Future—would want the market definition to be as broad as possible. For instance, suggest offline and online as one large market. But given the prima facie view CCI has already taken in the Flipkart-Amazon case, the regulator will find it hard to accept this broader market definition, especially since this matter is being litigated in court.Karan Chandhiok, Partner, Chandhiok & Mahajan
Additionally, in the context of JioMart, the regulator is likely to raise some questions, Rai said. In short, “What is JioMart’s plan?”
Is it to streamline the supply chain of a kirana store? The regulator may want to ask whether JioMart intends to use kirana stores as fulfilment centres by becoming a wholesaler to them and, if and when it happens, use WhatsApp for seamless payment? Or use JioMart and rebrand Big Bazaar outlets to compete with mom-and-pop stores?Rahul Rai, Independent Lawyer, Competition Law
In the absence of any clear implementation plan or market share at this stage, the JioMart angle is unlikely throw the deal off track, Rai said.
The Non-Compete Concerns
As part of the deal, Kishore Biyani and his family members have agreed to a non-compete clause of 15 years. They have agreed to not operate in any retail segment except home furnishings where Reliance Retail currently doesn’t have a presence, The Economic Times reported.
So far, the regulator has accepted non-compete clauses that seek to restrict the seller for 3-4 years and to the main products of the business being acquired. But the CCI has also allowed for non-compete clauses of longer duration, even 8-10 years, in sectors such as infrastructure.
The 15-year period will obviously attract CCI’s attention and there will be a back and forth on this, Rai said. The legal test for non-competes is if it’s reasonable in scope—both in duration and products, he said.
The test of reasonable is linked to the value of the enterprise you’re buying. As part of the deal, you’re also acquiring the backend sourcing agreements. It’s not unthinkable that over the years, the promoter would’ve developed a relationship with the vendors. So Reliance could have a genuine fear. Also, in retail, the entry barrier is low.Rahul Rai, Independent Lawyer, Competition Law
These are some of the justifications that Reliance could offer, and it’s possible that the regulator may finally accept somewhere between 10 and 12 years, Rai said.