India's Future Group and Bharti Retail to merge operations

India's Future Group, one of the country's largest retail businesses, is merging its retail operations with rival Bharti Retail, as they look to confront intensifying competition with e-retailers and larger bricks-and-mortar operators such as Mukesh Ambani's Reliance Retail.

The merger, which was announced on Monday after about 10 days of intensive talks, will create a $2.4bn retail business with more than 570 hypermarkets, supermarkets and convenience stores in 243 cities across India.

It will also combine the back-end distribution and logistics of the two groups, helping create a pan-India network to support the front-end retail businesses.

The front and back-end operations will be held in two separate companies, Future Retail and Future Enterprise, and investors in Future Group and Bharti Retail will hold shares in each business, though the exact financial details remain to be clarified.

"It will bring us closer to millions of consumers and create new opportunities for our supply partners," Kishore Biyani, founder and chief executive of Future Group, said. "The operational efficiencies that can be derived from the merger will create significant value for shareholders."

Investors and analysts reacted positively to the consolidation of the two companies, which have struggled to achieve the necessary economies of scale alone in a business that requires high capital investment in back-end logistics.

The merger sent shares in Future Retail up more than 12 per cent.

"Both companies are unwilling to pump in more money, but by bringing the assets together, both at the front-end and the back-end, they get a pan Indian footprint," says Arvind Singhal, chairman of Technopak, a New Delhi-based consultancy. "There are good synergies that will make them the strongest supermarket and hypermarket operator in India."

Mr Biyani has pioneered modern retailing in India, creating new formats such as Big Bazaar and Food Bazaar, which have catered to cost-conscious and aspiring middle-class consumers looking for better deals and more choices than typically available at mom-and-pop shops which now dominate grocery retailing.

Bharti Retail, a wholly owned subsidiary of Bharti Enterprises, whose flagship business is Bharti Airtel, India's largest mobile phone company, operates 216 convenience stores, supermarkets and hypermarkets, all branded as Easyday stores.

Bharti entered the retail space in partnership with Walmart, the US-based retailer which was barred by India's complex foreign direct investment rules from setting up consumer-orientated retail stores, but was allowed to invest in wholesaling and back-end logistics.

The US and Indian companies formed a 50-50 joint venture, Bharti-Walmart, which provided the back-end, wholesaling and logistical support for Bharti's wholly owned Easyday stores. Many believed Walmart would eventually take over Bharti's retail operations if New Delhi ended its ban on foreign direct investment in supermarkets.

The partnership ended in October 2013, when Walmart bought out Bharti's stake in the wholesaling business, which then operated 20 stores, after it became obvious New Delhi's de facto ban on foreign direct investment in supermarkets would not be relaxed in the near future.

The consolidation comes as bricks-and-mortar Indian retailers are facing fierce competition from large e-retailers such as Flipkart, Snapdeal and the local arm of US-based Amazon, as well as niche e-commerce players. Foreign wholesalers such as Walmart are also expanding their presence.

However, the companies said the merger must still be approved by shareholders, the Bombay High Court, and the Competition Commission of India.

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