India’s e-commerce battlefield gets ready for bloody wars

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November 14, 2024

Economic Times
14 November 2024

The Swiggy IPO is making news for being the most successful in a decade in its category. The food and grocery delivery firm yesterday listed at a 5.6% premium to its IPO price of Rs 390, making it the first company with an issue size of over Rs 10,000 crore in the past decade to have listed above its offer price, ET has reported. The stock closed 17% above its issue price at Rs 455.95 in a weak market, surpassing analysts’ expectations of a tepid debut. The company’s market capitalisation at close on Wednesday was Rs 1.02 lakh crore.

Swiggy’s impressive debut also indicates the incoming deluge of cash in an emerging business, quick commerce. Swiggy plans to plough more cash into its quick-commerce business, Swiggy Instamart. Swiggy’s bigger rival, Zomato, is also planning to fatten its war chest. Zomato plans to raise fresh funds through a qualified institutional placement (QIP) despite sitting on $1.5 billion, or about Rs 12,600 crore. The money will also fuel its quick commerce business, Blinkit. Zepto, another quick commerce player, is also raising money. ET reported last month that Zepto is in talks to raise $100-150 million from a group of domestic family offices and wealthy individuals. It last raised $340 million in August. Swiggy Instamart, Blinkit and Zepto are the top three players with over 85% market share.

The floodgates of capital opening into the quick commerce sector would worry the big e-commerce platforms which have already started feeling the heat from quick commerce.

The quick rise of quick commerce

While quick commerce becomes the preferred medium for immediate needs and impulse purchases, e-commerce is favoured for more planned purchases like home, beauty and personal care. But now quick commerce firms are diversifying beyond groceries, small-value items, etc. and invading the home turf of e-commerce players.

Quick commerce is already conquering kirana, the neighbourhood small retail business, as well as hitting modern retail. As consumer preferences shift towards the convenience of last-minute grocery deliveries, quick commerce companies are outpacing traditional retailers, with 46 per cent of consumers surveyed reporting a cut in purchases from Kirana shops, a recent report has said. The quick commerce market size is expected to reach $40 billion by 2030, a jump from $6.1 billion in 2024, according to the report by Datum Intelligence.

Quick-commerce operators such as Blinkit, Swiggy Instamart and Zepto are aggressively trying to lure away consumers from large ecommerce platforms like Amazon and Flipkart by matching their prices across groceries and fast-selling general merchandise, triggering a price war in the home delivery space, ET reported a few months ago. This is a departure from the earlier pricing strategy of quick-commerce players who typically charged 10-15% premium over average ecommerce marketplace prices for instant deliveries, industry executives had told ET.

A recent ET study of prices of 30 commonly used products in daily necessities, discretionary groceries and other categories, including electronics and toys, in both ecommerce and quick-commerce platforms reveal the pricing disparity has been bridged. “The pricing premium which quick commerce used to charge for instant deliveries is gone with these platforms now joining a race with large ecommerce to offer competitive pricing to shift consumer loyalties,” B Krishna Rao, senior category head at biscuits major Parle Products had told ET.

The increasing competition is putting pressure on ecommerce majors to reduce delivery time.

“Price matching by quick commerce is to acquire market share and is part of market acquisition cost even when it might not be profitable at a per unit transaction level,” Devangshu Dutta, CEO of consulting firm Third Eyesight, had told ET. “They may have to sacrifice margins in the short term to get customers shopping more frequently.”

After challenging kirana and modern retail, e-commerce is the next frontier for quick commerce companies.

The challenge shaping up for e-commerce giants

With Swiggy, Zomato and Zepto raising a huge amount of money, the war between quick commerce and e-commerce is likely to turn bloody, besides increasing internecine competition among quick commerce players themselves.

Quick commerce, which began with the delivery of groceries and essential items, has now expanded to include a diverse range of products. This includes electronics, clothing, cosmetics, household goods, medicines, pet supplies, books, sporting equipment, and more.

E-commerce sector offers a vast opportunity for growth of quick commerce business. The Indian e-commerce market is projected to grow at a compound annual growth rate (CAGR) of 21% and reach $325 billion in 2030, as per Deloitte’s report released on Monday. This huge potential is luring big players. The Tata group’s ecommerce venture Neu is set to enter the quick commerce segment branded as Neu Flash, rolling it out to select users selling grocery, electronics and fashion, ET reported last month. Mukesh Ambani’s Reliance, leveraging its vast network of supermarkets, is expanding into the 10–30 minute delivery segment. Ambani wants to ensure quick commerce helps bolster its business ahead of an IPO of Reliance Retail, which was last year valued at $100 billion, and has backers including KKR, sources told Reuters recently.

Besides entry of big ones like Tata and Ambani, the deluge of fresh investment into business by the incumbents such as Swiggy, Blinkit and Zepto will pose a big threat to large e-commerce players Amazon and Flipkart. Swiggy has recently hired two Flipkart executives to boost its senior leadership. They have joined two other executives that Bengaluru-based Swiggy had hired from the Walmart-owned ecommerce major in the past few months.

Swiggy and Zomato are both assessing several new services as they diversify beyond their core businesses, ET has reported a few days ago. Swiggy is all set to launch a pilot programme for a services marketplace, labelled ‘Yello’, which will host professionals such as lawyers, therapists, fitness trainers, astrologers, dieticians, according to sources. It is also testing a premium membership service called ‘Rare’, for affluent customers providing them access to high-end events such as Formula 1 races, music concerts, upscale art exhibitions, in addition to VIP hospitality and priority reservations at luxury restaurants.

Zomato has previously been bold in its diversification moves by buying Paytm’s events and ticket business for Rs 2,048 crore. It is now trying out a concierge-like service to help users place online food orders over WhatsApp. Human customer relationship agents will provide the Gurgaon-based company’s new service instead of its usual approach of deploying chatbots, a person familiar with the move has told ET recently.

Apprehending challenges by quick commerce players, Flipkart has already started its own quick commerce business Flipkart Minutes. While still far behind its established rivals, Flipkart Minutes hit daily orders of 50,000-60,000 during its Big Billion Days sales, people with knowledge of the matter told ET last month.

Further investment and bigger players entering the sector will heat up competition among the quick commerce companies even as they will grapple with new challenges such as logistics as they expand. But a bloody war could soon be seen on the e-commerce battlefield as emboldened by huge popular response the quick commerce companies start invading on the well-guarded turf of Flipkart and Amazon.

(Published in Economic Times)

Inside the lucrative world of soft-drink bottling

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September 16, 2024

Priyamvada C., Mint

16 September 2024

When the late George Fernandes, the industries minister in the short-lived Janata Party government of 1977, issued a diktat to multinational corporations Coca-Cola, IBM and AstraZeneca to dilute their stake in their wholly owned subsidiaries to 40% in favour of Indian shareholders, Coca-Cola and IBM chose to exit India. Later, during P V Narasimha Rao’s proliberalisation government in 1993, Coca-Cola returned. It bought out Ramesh Chauhan’s Delhi Bottling Company and Coolaid, the bottling companies of five carbonated drinks, in 1998.

With Coca-Cola India now said to be evaluating options to list its wholly owned bottling subsidiary – Hindustan Coca-Cola Beverages (HCCB), Mint explains the rationale behind companies considering such moves.

What caused the change in strategy?

Experts said there is a trend of consumer giants spinning off their units to optimise their balance sheets, go asset-light and focus on their core brands and business models. Coca-Cola India’s ambitions to list HCCB come almost a decade after rival PepsiCo’s bottler, Varun Beverages, listed on the local stock exchanges, yielding significant value for the Jaipuria family.

Unlike PepsiCo, Coca-Cola owns its bottling franchise, just as other MNCs including consumer goods major Whirlpool, ball-bearing specialist Timken, and tobacco giant BAT, who are keen to take advantage of the valuations that Indian investors give to well-run MNCs. Varun Beverages commands a market valuation of ₹2.09 trillion. Hindustan Unilever and Colgate-Palmolive (India) are examples of multinational companies that have listed in India.

Coca-Cola’s move is seen as a strategic attempt to yield significant benefits, including financial gains, risk mitigation and other exit opportunities. The Economic Times was the first to report on HCCB’s listing plans in May.

How does the parent company benefit?

Through such moves, the parent company can reduce exposure to risks associated with bottling companies, which include fluctuations pertaining to raw material, regulatory changes and local market conditions, said Alpana Srivastava, a partner at Desai & Diwanji. While spinning off bottling subsidiaries is more prevalent in the beverage industry, she said other fast-moving consumer goods and retail companies may explore similar strategies to optimise their balance sheets in the current environment.

Earlier this year, HCCB announced the transfer of its bottling operations in three territories in north India to streamline supply chains in the region. However, the bottler declined to comment on its IPO plans.

As part of the transition, the Rajasthan market will be owned and operated by Kandhari Global Beverages, which operates in parts of Delhi, Himachal Pradesh, Haryana, Punjab, Chandigarh, Jammu & Kashmir, and Ladakh.

The Bihar market will be owned and operated by SLMG Beverages Pvt Ltd, which runs bottling operations in Uttarakhand, parts of Uttar Pradesh, Madhya Pradesh, and Bihar. The Northeast market and select areas of West Bengal will be owned and operated by Moon Beverages Pvt Ltd, which operates in parts of Delhi and Uttar Pradesh.

What other factors motivate such spin-offs?

Besides providing liquidity for the bottler, listing may offer tax benefits such as reduced capital gains tax or more favourable transfer pricing rules and optimise the overall tax burden for both the parent company and the subsidiary, Srivastava explained. It may allow both entities to be valued more accurately based on their individual capacities in growth, risk profiles and capital intensity.

This comes in the backdrop of companies looking to make the most of a bullish stock market to unlock more value for shareholders by listing their manufacturing subsidiaries. It enables the companies to raise more capital, which can be used to strengthen their market presence and reduce debt, said Devangshu Dutta, founder of Third Eyesight, a management consulting firm. He said the core value generator for companies such as Coca-Cola and Pepsi are brands and marketing rather than manufacturing.

In April, private equity firm Lighthouse Funds invested ₹700 crore in Parsons Nutritionals, a contract manufacturer specialising in packaged foods, beverages, and personal care products, underlining investor appetite in this sector. Other co-investors include the International Finance Corporation, a member of the World Bank Group, Evolvence India, HDFC AMC’s Fund of Funds, and various family offices.

However, there may be legal considerations, too. While exclusive contracts exist, the bottler may have partnerships with other companies in its distribution portfolio, which may have to be reviewed and renegotiated. There may be regulatory compliance and other anticompetitive considerations when it involves such big entities.

Other instances of such moves

While there are fewer examples of bottling companies listed in India, this practice is more common globally. Coca-Cola has listed most of its bottling subsidiaries in other global markets such as North America and Europe.

While there is no shareholding between PepsiCo and Varun Beverages, there is an exclusive arrangement for Varun Beverages to bottle, use trademarks, distribute, market, and sell PepsiCo products across India. The beverage giant benefits from royalty and licence fees. Over the past year, Varun Beverages’ revenue rose 22% to ₹16,400 crore while its profit increased to ₹2,056 crore from ₹1,497 crore in FY22. As of Friday’s close, the bottler’s shares had gained almost 30% to ₹645.20 since the beginning of this year.

Any potential listing opportunity for HCCB may allow a staggered exit for Coca-Cola India from managing local operations, monetising its stake and participating in future licence fees and/or royalty arrangements, said Dhruv Chatterjee, a partner at Saraf and Partners. He added that there are indications in the retail and fast-moving consumer goods category of similar divestments. Coca-Cola India did not respond to Mint’s request for comment.

Ravikumar Distilleries is an example of a listed manufacturing company that has tie-ups with liquor companies Radico Khaitan, Shashi Distilleries and John Distilleries, in addition to manufacturing and marketing its own liquor products. Bengal Beverages is an unlisted bottler that manufactures and distributes non-alcoholic beverage brands under licence from Coca-Cola across categories such as sparkling soft drinks, juice and water.

What kind of contracts exist between the bottler and the parent company?

Many bottling plants are usually set up by companies as a joint venture with a local partner. The bottler procures the concentrate from the companies. About 14-15% of the concentrate cost goes to the bottler, which translates into revenue for the brand, according to a person familiar with such discussions who spoke on condition of anonymity. The company spends a part of this revenue on marketing activities that target mass audiences through television, radio and newspapers.

Depending on the terms of the contract, the bottler may be expected to spend a portion of its revenue on marketing through outdoor settings such as billboards, flyers, social media and events. The arrangement between a bottler and a company may be either a pure bottling arrangement (or contract manufacturing) or a bottling and distribution arrangement, where the bottler is also responsible for marketing, branding, and last-mile distribution.

How has the carbonated beverage market fared?

Market research provider Statista estimated that the carbonated drink market in India clocks about $2.4 billion in revenue and is expected to grow by 6.98% annually over the next four years. The volume consumed at home and other outdoor locations is likely about 4.2 billion litres this year.

In 2022, Parle Agro’s brand Appy Fizz and Coca Cola dominated with a 31% market share each, followed by Fanta, Pepsi, 7UP and Sprite, among others. Other brands such as Reliance-backed Campa Cola are expected to challenge the dominance of these companies.

Before Reliance acquired Campa for ₹22 crore in 2022, the soft drink had been launched by Pure Drinks Group in the 1970s. The group was behind the launch and distribution of Coca-Cola in 1949, before the US company was shunted out of the country in 1977.

Pure Drinks and Campa Beverages subsequently launched Campa Cola to fill the gap left by foreign soft drink companies in the country. However, Coca-Cola and PepsiCo re-entered the Indian market in the 1990s, throttling local competition.

(Published in Mint)