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Why Amazon Wants 26% of India’s Largest Brick-and-Mortar Retailer

Amazon is reportedly in talks to purchase a sizable chunk of India’s largest brick-and-mortar retailer.

According to India’s Economic Times, the Seattle-based e-commerce company is looking to acquire a 26 percent stake in Reliance Retail, the country’s highest-grossing chain of retail stores.

The chatter about an Amazon and Reliance alliance began when reports surfaced about the Indian retailer’s failed negotiations with China’s Alibaba Group. According to a Times interview with Reliance, the talks fell through because the two companies couldn’t agree on a valuation for the deal.

The premature breakup set the stage for Amazon to slide in with a proposal of its own.

While the e-commerce giant declined to confirm the negotiations, Reliance disclosed to the Times that Amazon is looking to become a minority shareholder, revealing that Amazon’s trepidation about the deal stems from anxiety surrounding compliance with the new foreign direct investment (FDI) norms for e-commerce, which took effect in February.

Amazon wants Reliance Retail as true omnichannel partner, and hopes to leverage the brand through the Amazon marketplace as well as taking advantage of the franchise’s extensive brick-and-mortar presence. According to FDI norms, however, a retail platform like Amazon should not own more than a 26 percent stake in any of its own sellers, lest it be deemed a group company. The infringement would effectively bar such an arrangement, a Reliance executive told the Times.

Reliance Retail owns and operates a suite of fashion, lifestyle and grocery chain stores across the country, including neighborhood stores, supermarkets, wholesale cash and carry, specialty and online stores, according to its website. The company also claimed that its pervasive presence in cities and towns “has democratized access to a variety of products and services across diverse segments for Indian consumers.”

For Amazon, the move into Indian brick-and-mortar commerce is a strategic one. Though the country has its share of e-commerce heavy hitters, online currently only accounts for 3 percent of India’s retail market. Much of the country still shops in person, at convenient neighborhood outlets. As of this June, Reliance Retail operated 10,644 retail stores in more than 6,700 cities, according to the Times.

Despite the popularity of brick-and-mortar retail India, an e-commerce explosion is likely coming. According to a study from Deloitte India and the Retail Association of India, Indian online commerce is slated to grow into a $84 billion industry by 2021, nearly quadrupling in size from 2017 ($24 billion).

In August 2018, Walmart acquired a 77 percent stake in popular Indian retailer Flipkart, which trails only Amazon India in popularity. Silicon Valley stalwart eBay also launched a bid for India’s online business in July through its partnership with Paytm Mall, an e-commerce marketplace run by Paytm, India’s leading online payment system.

The e-commerce sector’s growth is an inevitability, and Amazon must continue to push online expansion—or risk being beat out by other power players.

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