Ritesh Kumar Singh is chief economist of Indonomics Consulting and a former assistant director of the Finance Commission of India.
Reliance Industries has already disrupted India's telecoms market, lowering prices so far that it has almost driven its rivals out of business. Now, by partnering with Facebook, it is coming after India's online retail market too.
In selling a 10% stake in its Jio Platforms subsidiary to Facebook for $5.7 billion, Reliance, owned by Mukesh Ambani, India's richest man, is trying to find another growth engine. Voice and data remain a low-margin affair and there is limited scope to improve that among brutally cost-conscious Indian consumers.
There is plenty of room for it to make a splash in India's $1.2 trillion consumer retail market. However, that means taking on established global retail giants such as Amazon and Flipkart-Walmart, which have deep pockets and proven global expertise in retailing. That is why the Facebook moves makes sense, but with the Indian economy fast heading into recession, the going will not be easy.
Subject to regulatory approval, JioMart, Reliance's online retail platform, aims to use Facebook's WhatsApp to connect consumers to 30 million neighborhood grocery stores for faster delivery of merchandise.
After Reliance made voice and data so cheap that almost any Indian could afford them, value-seeking online customers are excited about the entry of a disrupter expected to increase market competition, improve product offerings and shower discounts on customers.
It should be a win-win situation for buyers and small retailers, which can add to their product portfolios without incurring marketing expenses, needing bigger stores or increasing working capital requirements. In that sense, the JioMart model is inclusive as it helps small retailers facing competition from large online and offline retailers.
If JioMart does not force neighborhood stores into exclusive tie-ups, the shops may even retain the flexibility to join competitors like Amazon and Flipkart to cut dependency on one platform and improve their bargaining power.
However, online retail in India is mostly about capturing market share by relying excessively on discounts and promotion to push gross merchandise sales. JioMart customers might enjoy the speed and convenience of neighborhood stores, but they have to be price competitive. The result could be a price war -- just like the one in the telecom industry after the entry of Jio.
As Indian e-commerce regulations favor domestic over foreign online retail platforms, Reliance has a clear advantage. Foreign companies Amazon and Flipkart cannot have an inventory-based business model, i.e. buying, storing and selling stock; instead, they can only provide an online marketing platform to facilitate multiple sellers -- over which they will have no real control. However, this does not apply to JioMart, an Indian company, which could thus have a more complex business model.
In addition, it will have access to a massive consumer database which it can target: not just its own nearly 400 million subscribers but WhatsApp's 400 million Indian customers too, albeit there will already be a large overlap.
That may help Reliance to crack the Indian retail puzzle, but margins and profitability will continue to be an issue for a company with a debt pile of $20 billion that it wants to cut down -- including with a $7 billion rights issue, the largest ever in India, just announced.
There are still several challenges, for instance Indian companies have a poor record in post-sales services such as allowing merchandise to be returned, with the logistics and refunds involved in that.
Moreover, many neighborhood grocery stores and mom 'n' pop shops, which are used to doing cash transactions, hiding sales revenue and dodging taxes, will be hesitant, if not resistant, to formally recording transactions, at least initially.
Critics say that those neighborhood stores which do not join the JioMart network will gradually die as they will not be able to withstand competition from JioMart-affiliated stores, with their bigger product portfolios and deep discounts. Besides, JioMart is likely to drive out all the intermediaries between manufacturers and retailers, like wholesale traders.
The economic backdrop is unpromising too. With a nationwide lockdown prompted by the COVID-19 outbreak, India is faced with its worst economic crisis in decades; gross domestic product growth is likely to tumble to 1.9% this year, with no major growth engines fully functioning.
E-commerce companies such as Amazon and Flipkart should be doing well in the lockdown when no one is going out. However, an arbitrary government decision to allow them to sell only a small list of essential merchandise, following lobbying by physical retailers, has ruined their prospects.
JioMart, even with Facebook, will have to compete against the best in the business. That is a tough ask, though not unachievable.