Retail
Chronicles Monthly Newsletter | Volume 6 | Issue 8 | November 2020Â
CONTENTS 03 E X X O N M O B I L
MERGER: BREAKING ALL THE STANDARDS
ExxonMobil is one the largest refiners in the world. The Corp was formed in 1999 after the merger of Exxon and Mobil, when the Parent company Standard oil was split into 34 companies.
07 K R A F T
HEINZ CO.
The Kraft Heinz merger teaches us how improper strategic planning can become the cause of downhill of a company
10 A N O T H E R
SIMPSONS PROPHECY COMES TRUE Homer Simpson probably won't become the newest member of the Avengers, but anything's possible now that Disney owns 21st Century Fox.
13 F L I P K A R T - W A L M A R T Flipkart-Walmart deal and its impact on the Indian economy and a win-win situation for both the companies.
1 6 MERGERS
AND ACQUISITION
Reliance Industries and Future Group: Mergers are like marriages. They are the bringing together of two individuals.
WRITERS Nithin | Shikha | Riya | Shubham Bhandari |
Prince Gada
SENIOR DESIGN TEAM Ayush Goyal | Jeet Doshi | Pushpak Holani | Shikhar Gupta |
JUNIOR DESIGN TEAM Nilesh Agarwal | Prachi Sharma | Prashant Sihag | Abhishek Kulkarni | Shivani Kunkolienkar | Sneha Patel |
EDITING TEAM Abhishek Wakode
NITHIN B MBA
NITHIN B MBA
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october, 2020
These news often grab the public attention and create speculations about the oil prices soaring high. Oil and gas being one of the exhaustive natural resources, is an El Dorado of the modern world, where nations try to establish supremacy hoping to capture the oil market into their claws. With the economical advancements, the dependency on the oil and gas has also seen a dramatic increase as there is a constant surge in the demand for the petroleum-based products. Oil and Gas industry is one of the biggest sectors and a major contributor for the national GDP. The core business activities involve the process of exploring, extracting and refining oil to its supply and marketing.
the refineries. The refinery at Altona, Melbourne is one of the oldest and also the smallest of the nation’s 4 refineries. 90,000 barrels of oil is processed per day which constitutes to half of the fuel consumption of the state of Victoria. ExxonMobil is one the largest refiners in the world. The Corp was formed in 1999 after the merger of Exxon and Mobil, when the Parent company Standard oil was split into 34 companies. It owns 37 oil refineries across 21 countries constituting a combined daily refining capacity of 6.3 million barrels.
ExxonMobil: The energy lives here
Exxon was the largest oil producer in the world with a total enterprise value of $182.4 billion and a market capitalization of $173.1 billion. Exxon brand is still used by ExxonMobil for its downstream operations like filtering of the raw materials, extracted from the upstream operations. Exxon grew vertically by acquiring relatively smaller companies.
ExxonMobil is the world’s largest publicly traded energy company made into the headlines recently where in ExxonMobil Corp was seen urging the Australian government to release aid to the refineries owned by ExxonMobil. The lockdown implications have deepened the woes of Retail Chronicles | Page 4
Exxon: formerly The Standard oil company of New Jersey
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By the late 1990s, Exxon diversified its portfolio. From the Upstream, downstream operations to power generation, production and sale of various chemical products, coal and minerals, Exxon was omnipresent. Exxon Valdez oil spill in Alaska is considered to be the second worst oil spill in the world after the Deepwater Horizon oil spill. 10.8 million US gallons of oil got spilled for days. Exxon was criticised for its slow response to the clean-up efforts. As much the ocean habitat, the reputation of the company suffered. The expenses and fines paid to the victims added to the misery of dwindling profits.
promotions to position themselves as a more sustainable energy source provider. The decreasing oil prices coupled with the worsening financial health triggered Mobil to seek for potential acquirer or a partner.
Mobil: formerly The Standard oil company 1999: The year of merger of New York Mobil dominated the global petroleum industry from the mid-1940s until the 1970s. Before to the merger, the value of the Mobil Corporation accounted for &76.6 billion. Over the next two decades, the company expanded its business by the acquiring 45% stake in Magnolia Petroleum Company in the US. Post the economic instability and the oil crisis, despite the poor financial indicators, Mobil was concerned more with reshaping the brand image and invested heavily on
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Exxon and Mobil joined to form ExxonMobil Corporation in anticipation to become the global competitor in an industry where uncertainty was the only certain thing. The merger was considered to be one of the most successful mergers with Exxon-Mobil being the largest company in the world. The market value was estimated to be around $407.8 billion. The merger was an example of horizontal merger which led to the reduction in competition in the oil industry potentially reducing the price war, which could have led to the under valuation of the product. Also, it allowed the corporation to cut down the costs with the reduction in the workforce, catalysing the operations. The merger facilitated the exchange of 1bn shares of ExxonMobil for all the outstanding shares of Mobil. Exxon owned 70 percent of the entity with Mobil owning the remaining. Also, it helped ExxonMobil to diversify its portfolio with crude oil and natural gas
November, 2020
production, petroleum refining & marketing, and petrochemicals eyeing on cash inflows and long-term return on investments. ExxonMobil owned 21bn barrels of proven oil reserves and its equivalent in natural gas, about 1% of the worldwide total. Declining Standards? In an industry which is accustomed to the economic highs and lows and the price volatility, 2020 has not been kind enough. Oil prices are highly dynamic and volatile. Factors such as supply, demand, development of alternative fuel, geopolitical crisis as well as the activities carried out by the OPEC countries contributes to the price volatility. With the COVID-19 bringing the global operations to a standstill, many companies struggle to swim against the
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crisis as well as the activities carried out by the OPEC countries contributes to the price volatility. With the COVID-19 bringing the global operations to a standstill, many companies struggle to swim against the tides. With the increased focus on sustainable energy and the other alternatives, oil and gas companies have a tougher time ahead. With the shares tumbling and things going haywire, ExxonMobil plans to reduce global headcount by about 15 percent through 2022 by cutting 1900 US jobs. By significantly cutting down on costs and with proactive measures, ExxonMobil hopes to sail ashore.
November, 2020
Heinz Kraft Co.
SHIKHA MBA C Retail Chronicles | Page 7
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The beginnings
The Merger
Heinz was found in 1869 as a condiments company and the first ever product was processed radish. The company also went bankrupt in 1875 after the founder John Heinz found another company and the Famous Heinz Tomato Ketchup was born out of this company. The company continued to grow and was later named HJ Heinz company. On February 14, 2013, Heinz agreed to be purchased by Berkshire Hathaway and 3G Capital for 23.25 Billion dollars.
In March of 2015, two of the biggest household names in the world decided to come together to grow even bigger. This was the biggest merger ever done in the history of the packaged food industry. The Members of the boards of Kraft Foods and HJ Heinz merged the two companies and that’s how Kraft Heinz Co. was born.
Kraft was found in 1903 as a wholesale cheese company. It has been part of a lot of mergers and has went through many name changes. It was in 1915 that Kraft launched its revolutionary product- pasteurized processed cheese with a much a longer shelf life than fresh cheese and as just as delicious. This led to immense growth and recognition for the company. Retail Chronicles | Page 8
This merger made Kraft Heinz the fifth largest food and beverage company in the world and third largest in the United States with a net worth of 29.1 Billion dollars just behind Mondelez International. In fact, Kraft and Mondelez were the same company but they split in 2012 with Kraft keeping the brands that weren’t doing as well. The legendary investor Warren Buffet who grew Berkshire Hathaway to be the seventh largest company in the world as of 2019 saw a great opportunity in Kraft. The director of 3G Capital who is also Brazil’s November, 2020
popular these days and Heinz Kraft didn’t adapt to this changing perspective of the consumers and so rapidly changing consumer preferences proved this massive merger a failure. What happened next
richest man also saw this potential and so both of them decided to invest their money into reestablishing the company in the food industry again. The shareholders of Heinz held a 51% stake in the newly formed company which included 3G Capital and Berkshire Hathaway and the remaining went to shareholders of Kraft. What went wrong The combination of the two companies aimed at increasing revenues and profits by bringing Kraft’s big-name brands. Cost cuts in the form of reduced human capital, as well as better opportunities for bargaining with retail outlets, restaurants and food companies were also planned. But in the hindsight, this wasn’t the bestmerger in the history.Instead, the company has been losing the steam causing investors to rethink their decision. The company didn’t adapt the consumer preferences and focused on cost-cutting, alienating their market and not focusing as much on the growth of the company. Healthier alternatives to snacks are becoming increasingly
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It's been all downhill for the company since. Shares have plunged more than 60% during 2017 and 2018. Its competitors have already latched on the bandwagon and were quick with new mergers and acquisitions in order to diversify the portfolio to adapt to the changing demands of their consumers. But Kraft Heinz didn’t bother to take it all too seriously and almost had a tunnel vision with cost reduction in focus. Today Kraft Heinz Co. holds more than 200 iconic brands that together draw in about $25 billion in annual net sales. But it has been on a declining spree ever since the merger. This story of one of the biggest mergers in the history goes to tell us- not everything that shines is gold and money can’t buy you success. Right process and strategy defeats everything.
November, 2020
MBA-B Riya Upesh Shah Retail Chronicles | Page 10
November, 2020
Competition is what you cannot isolate from a business. It is because of competition that businesses are driven to put their best foot forward and take decisions that create history. When a newcomer like Netflix revolutionized the entertainment industry, it was clear how Disney needed to pivot to be ready and become a part of the streaming revolution. The launch of Disney +, an over-the-top streaming service owned by The Walt Disney Company happened in the second half of the year 2019. This event succeeded the acquisition of 21st Century Fox by The Walt Disney Company in the earlier half of that year. Robert Iger, the chairman, and chief executive officer at Disney commented on how this deal was an extraordinary and historic moment for the company, which to be fair is true. At the beginning of 2019, the era remained of the “Big Six” studios in Hollywood. However, this acquisition ended the said era and prompted the “Big Five” namely Warner Bros, Universal Pictures, Sony Pictures, Paramount Pictures, and Walt Disney Studios.
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Who saw it coming? While we cannot comment on who all saw it coming, what is fascinating to note is how the animated show from the Fox called ‘The Simpsons’ which is known for its prophetic foresight predicted Disney owning Fox. This is nearly 20 years back on episode 5 of season 10. On March 20, 2019, Disney’s $71.3 billion purchase of film and TV assets held by 21st Century Fox was complete. This wouldn’t have happened if it weren’t for Disney+ and the cord-cutting revolution led by Netflix.
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What did the deal bag in for Disney? Disney’s acquisition of Fox is perhaps one of the most complicated acquisitions of one media company by another. As it claims to create significant long-term value for the company, it becomes crucial to understand what exactly did Disney purchase at such a hefty price. Before acquisition, Fox was already an entertainment powerhouse. The fourthlargest conglomerate owned by mogul Rupert Murdoch comprised of 20th Century Fox, Fox Searchlight, Fox 2000, Blue Sky Animation Studios, The Fox News, FX Cable Stations, Fox Sports Stations, and National Geographic TV holdings. It also held a 30% share of Hulu Streaming among other international holdings. To help put it in perspective, The Walt Disney Company, whose catalogue of content already included Star Wars, Marvel, and all of Pixar animations now had access to content such as X-men and Deadpool, Avatar, 30 years of The Simpsons and of course, the Indian TV giant Star India. Other promising inclusions are of independent films such as Slumdog Millionaire, 12 Years a Slave, Birdman, and The Shape of Water, all of which have won an Oscar for the Best Picture.
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What does this acquisition mean a year later? 12th November 2020 marked one year since the initial launch of Disney+. With 73.7 million paying subscribers as of October 3rd, this streaming platform has already outperformed other rivals in terms of the first-year results. With the revenue numbers growing along with declining operating losses, their performance has surpassed expectations. The acquisition of Fox has definitely played a part. This is major because as Disney+ remains a familyfocused service, the said acquisition provides an opportunity to attract those customers that didn’t fall in the above category via shows like The Simpsons and the X-men series. Climax We live in an era of media consolidation. This Fox/Disney deal was first time in ages since the decay of MGM in the 1980’s that made the name of a media giant simply disappears in thin air, which takes us back to the start. Competition paves way for rebellion against the traditional lenses as it encourages out of box thinking to solve problems and evolve. One such solution is the $71 billion media acquisition.
November, 2020
Shubham Bhandari - MBA RM Retail Chronicles | Page 13
November, 2020
Introduction The Indian E-Commerce industry is expected to grow to USD 200 Billion by 2026 and everyone wants to have a bigger bite of this cake. On 18th August 2018, Walmart Inc acquired 77% stake in the Indian E-Commerce company, Flipkart for a whopping USD 16 Billion. This investment directly puts Walmart on the map of Indian E-commerce market. Walmart is an American multinational Retail corporation founded by Sam Walton in 1962, headquartered in Arkansas and Flipkart is an E-Commerce company operating in India, Founded by Sachin Bansal and Binny Bansal in 2007. What’s in it for Walmart? Flipkart has a userbase of more than 200 million customers and is the biggest E-Commerce player in India with
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a 32% market share. Flipkart acquired online fashion retailers -jabong and Myntra in 2016 and 2014 respectively. Flipkart had also acquired UPI Mobile Payments App Phonepe. E-kart, the supply chain arm of Flipkart makes an average of 50000 deliveries in a day and also serves in more than 800 cities. Walmart’s experienced strategies in supply chain would be a great addition. Indian E-Commerce sector is very lucrative and is supposed to grow at 30% CAGR. India is a country of more than 1.3 Billion people, growing middle class, affordable phones and internet connection, by investing in Flipkart, Walmart will get a direct entry into India and a chance to compete with Amazon. Walmart will be able to increase its brand awareness and also extend its supply arm in Indian kirana stores.
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What’s in it for Flipkart? With the acquisition by Walmart, the valuation of Flipkart has increased to USD 21 billion which was USD 12 Billion before the deal, this makes Flipkart the most valued start-up in the Indian space. Flipkart would benefit from highly experienced and improvised supply chain mechanism of Walmart; Walmart’s investment will also help increase the market infrastructure of Flipkart.
Positive Impact on the Indian Economy: 1)More variety, Low price: As all the Ecommerce companies trying to get the top spot in the market, the price battle continues and this in turn benefits the consumers and they are also trying to provide variety among their products so the consumers have a lot to choose from. 2)Employment Opportunities: With more investment flowing in the Indian Ecommerce market, Flipkart will try to increase the output, increase productivity and that will lead to job creation.
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3)Investment: As the world’s biggest Retailer is pouring huge funds into the Indian E-Commerce sector, it will lead to more companies investing in the market.
Negative Impact on the Indian Economy: 1)Brick and Mortar stores may shut down: Goods available on E-Commerce stores at very low prices as compared to Retail stores, may lead to consumers buying from online stores rather than brick and mortar stores. 2)Threat of PAN Indian Protests: Confederation of All India Traders (CAIT) has threatened to go for a nationwide protest against the US-based retail giant due to predatory pricing. These protests may hurt our economy and also cause social chaos. Win-Win Situation: Walmart gets a direct entry into the growing Indian E-Commerce market and Flipkart gets investment as these ECommerce companies are loss making. This acquisition was a Win-Win situation for both Companies.
November, 2020
Merg e
ions sit
A d c n q a u s r i
Reliance Industries and Future Group
Prince Gada -MBA RM Retail Chronicles | Page 16
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Background of both the companies and Indian retail space-: Future Group led by Kishore Biyani is the market leader in the segment of organized retailing with flagship stores, brands and outlets like Big Bazaar, Food Bazaar, Hometown, Hyper city, EZone, Nilgiris 1905, Central, Brand Factory and the list goes on. The Group had the largest selling space in the organized retail space as of 2016. The Indian Retail space is quite interesting when it comes to its composition with organized retail covering just 12% of the industry as of Aug,2019. Of that 12% percent, big conglomerates like the Future Group, Reliance Group, Tata Group, Avenue Supermarket Ltd, Aditya Birla Group, Landmark Group and Raheja Corp who run most of the hypermarkets, super stores, and supermarkets, just account for 2.5%.
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The remaining 97.5% consists of various small and medium scale retail players. In August 2020, it was announced that Reliance industries will purchase a stake in Future Group. With the recent flow of investments into Reliance Industries, RIL has kept itself in a favorable position to acquire a stake in the group which was under the pressure of mounting debts. Reliance retail has various offerings under its banner like Reliance Digital, Reliance Fresh and Reliance Trends. The company also ventured into e-commerce through its brands like Ajio and recently launched ‘Jio Mart’. Reliance Industries has ambitious plans of expanding its retail arm and taking advantage of India’s rising middle class incomes and spending. Now let’s understand the reasons and implications of this deal on the entire retail sector and consumers. November, 2020
Deal between Amazon.Inc and Future Group -:
What led to this deal? The reason behind the deal lies in the mounting debt of the Future group. A similar incident happened before the restructuring of the Future retail where Kishore Biyani sold its flagship brand ‘Pantaloons’ to Aditya Birla Nuevo in 2012. The deal was successful in rescuing Future Group at that point of time. As the years passed, Future Group not only raised several fashion brands and stores but also strengthened the existing ones. The Future retail stocks were having a bull run in the stock market till 2019. With the consolidation, expansion and convolution, the company had to raise funds which eventually led to a debt of $2.2 trillion records available in August 2019. In 2020 the business took a major hit when lockdowns were imposed in response to Covid-19, the group defaulted on an interest payment on 22nd July, 2020. Reliance Industries came to the rescue of the group and debtors where it agreed to hold 13.14% stake and bail ₹12,000 crore debt for a consideration of ₹24,713 crore.
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In 2019, Biyani’s Future Retail had signed a deal with global e-commerce giant Amazon. The deal stipulated that Amazon will acquire 49% stake of Future Coupons, the promoter firm of Future Retail for a consideration of ₹2,000 crore. The deal also provided Amazon rights to exercise a call option to acquire all or part of Future Coupon’s promoter, Future Retail shareholding within a span of 3-10 years. The deal was strategically important for Future Group in order to protect itself from the expansion of ecommerce as it allowed Future Group to market its private label products through Amazon with all of the accommodations from Amazon in terms of delivery and logistics support.
Arbitration proceeding at SIAC initiated by Amazon against Future-Reliance deal: Fumed by the Future-Reliance Deal, Amazon initiated arbitration proceedings at Singapore International Arbitration Centre (SIAC) as it was considered that the deal between Reliance Industries and Future Group was in violation of the agreement formed between the Future Group and Amazon last year. The agreement provided for arbitration at SIAC in case of any dispute
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Creation of monopoly?
Singapore has a reputation of a land of law, order and neutral standing, that’s the reason why foreign investors prefer to have arbitration in Singapore. Arbitration is one of the methods for settlement of legal disputes with regards to an agreement by a neutral third party which is agreed by both the parties, as provided in the Indian Contract Act,1872. The arbitration Centre ordered Future Group to restrain from proceeding with the deal agreed between Reliance Industries and Future Group on 31st October, 2020. However, the order was suspended by the Delhi High Court on 10th November, 2020 leaving Amazon at the suffering end. Such judgments and rulings will also have an effect on confidence of foreign investors.
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With this deal happening, critics fear polarization and creation of monopoly in the retail industry which may affect small and medium players negatively due to their high economies of scale. In reality, this could lead to monopoly only in a few formats of organized retail like hypermarkets and superstores, thus the claim of complete monopoly over retail is exaggerated in nature. The retail will continue to remain competitive due to its segregated nature of ownership and distribution across rural and urban areas. Hypermarkets and Supermarkets store formats are not in a position to operate in Rural India and the urban market will get saturated at one point of time. Thus, it won’t give rise to direct monopoly, but in order to ensure more competitiveness and prevention of such possibilities, FDI in retail should be liberalized. The reason for the previous assertion is that if it does not happen, the days are not far where monopolies can be established at the domestic level. Monopolies, irrespective of domestic or foreign origin are not a good indicator for the health of any industry.
November, 2020
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