Over the medium term, strategic tie-ups between online and offline players —such as the one between Amazon and Shoppers Stop where both use each other’s strengths to improve presence through the omni channel route — to offer a wider portfolio of products to gain market share and improve profitability, are expected to increase. It could also trigger further consolidation. While Future Retail has been on such a drive (having acquired Bharti Retail, Heritage and HyperCity), Prabhudas Lilladher’s Amnish Aggarwal and Nishita Doshi believe there could be further consolidation in the organised retail space, benefiting some of the domestic entities.
However, despite entry of a deeply pocketed rival and consolidation, analysts believe the market for organised listed retail is large and both the online and offline ones should do well. Analysts say offline retailers are trying to mitigate the threat through their own online platform, as well as omni channel presence. Aggarwal of Prabhudas Lilladher, while not ruling out a price war and deep discounting, says Walmart would focus more on white and private label products (jargon for products branded by a reseller for sale to the general public) by sourcing from multiple manufacturers at a cheaper price and offering these through various platforms, as has been its business model.
He also says that unlike in the past, when players struggled with higher cash burn and weak balance sheets, things have improved significantly for offline retailers. This will allow the sector to grow at a much faster rate, helping all entities. Finally, categories such as jewellery, fruit and vegetables, and apparel are segments which will continue to thrive in the offline model, given the look and feel, as well as customer habit. Offline retailers are likely to depend on the online platform to sell electronics, white goods and mobiles, where there is less need for the experience factor. While organised retail is 15 per cent of the overall retail segment, online is expected to grow at a much faster, given the smaller base. Offline retail is expected to see 18-20 per cent annual growth over the next five years.
The deal values Flipkart at slightly less than $21 billion and at 4.5 times the FY18 enterprise value to operating profit (EV/OP). Clearly, a substantial premium to existing listed players. This is on account of management control and scarcity premium (a company of this size), as well as the fact that Amazon would have become a dominant player if the transaction had not gone through. The valuations are, however, not comparable, as online entities are still in investment mode.
Analysts believe most listed retail entities, barring Avenue, are trading at reasonable valuations. This is on the back of double-digit growth in same-store sales, a much better balance sheet position over a couple of years earlier, and a multi-year 20 per cent growth story. While Avenue trades at four times the FY20 EV/OP estimates, the other listed retailers (Trent, Future Group Retail and Lifestyle, V Mart and ABFRL) trade at 1-3.5 times.