How Reliance-Future Retail deal impacts DMart, FMCG companies

The takeover of Future Group's retail business by Reliance Retail has changed the dynamics of the organised grocery retail space.

With the combining of the numbers one and three players, it means greater competition for the number two player, DMart, in the organised retail space, Credit Suisse said in a report.

Reliance's revenue and retail space will receive a big jump from this transaction considering the revenue of Reliance Retail in FY20 was Rs 34,600 crore while Future Retail's annualised revenue of FY20 (based on 9MFY20 results) was around Rs 10,000 crore.

Avenue Supermarts and Reliance Retail were the two strong players in the grocery market, while Future Retail remained the weak one with high leverage. "The weak competitor being acquired by a stronger one is negative for Avenue which now becomes a distant No. 2 in a largely two-player market," said the brokerage.

Source: Credit Suisse Report

After the transaction, Reliance Retail will become 2.5x larger than DMart in revenue terms, which will be a big concern for the retailer.

DMart's stronghold over its business in Mumbai could weaken now as Reliance will majorly strengthen its position in big cities first, said the broker's note.

Source: Credit Suisse Report

Since Reliance Retail did not have a stronger presence in Mumbai, it can now use Future Retail's larger reach to its benefit.

Reliance’s large-format business SMART has about 15 stores in Mumbai while Future’s large-format Big Bazaar has around 24 stores in the city. Thus, cities like Mumbai will become lot more competitive.

According to the brokerage, Reliance will have increased bargaining power with the FMCG industry but organised retail will continue to have a small share in business of FMCG companies, at about 10-15 percent of revenues.

Source: Credit Suisse Report

The report added that even if there are changes to terms of trade like higher margins for retailers and increase in working capital cycle, it is unlikely to materially impact the overall financial metrics of the FMCG companies.

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