Amazon Loses Round One of Indian Retail Battle Royale

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Amazon founder Jeff Bezos understood the scale of opportunity in India’s retail sector early on.
Photo: Paul Ellis/Associated Press

Amazon is staring at an embarrassing defeat after fighting a drawn-out legal battle to block India’s most valuable firm, Reliance Industries, from buying the country’s number two retailer.

The episode won’t compel the e-commerce giant to back away from the country’s nearly $1 trillion retail market. It’s increasingly clear, however, that Amazon has its work cut out for it as it seeks to expand further in the world’s second-most-populous country.

Indian…

Amazon
is staring at an embarrassing defeat after fighting a drawn-out legal battle to block India’s most valuable firm,
Reliance Industries,
from buying the country’s number two retailer.

The episode won’t compel the e-commerce giant to back away from the country’s nearly $1 trillion retail market. It’s increasingly clear, however, that Amazon has its work cut out for it as it seeks to expand further in the world’s second-most-populous country.

Indian retail sales will amount to $1.3 trillion by 2024, up from $883 billion in 2020, according to data from Forrester Research. While Amazon and
Walmart
-backed Flipkart largely control the fast-growing but comparatively minuscule e-commerce space, India’s physical-retail sector is up for grabs. Unorganized mom-and-pop stores make up about three-fourths of it.

Jeff Bezos

understood the scale of opportunity early on and Amazon invested about $200 million in an unlisted gift voucher unit of Future Group, the number two retail player behind Reliance, in 2019. The unconventional deal came with certain noncompete clauses that prohibited Future Group from selling its prized retail assets to rivals, including Reliance, and gave Amazon a first right of refusal. Through the deal, Amazon probably hoped to someday purchase the firm Future Retail, a unit of Future Group, if India were to deregulate foreign direct investment in multibrand retail. Current law requires government permission for any foreign investment in the space and prohibits purchases above 51% of shares.

Unfortunately, that isn’t how things played out. In 2020, struggling with the fallout of the pandemic, Future violated the noncompete agreement by deciding to sell its retail business for $3.4 billion to Reliance and thus began the legal saga.

In recent weeks, however, it became clear that Reliance Industries Chairman

Mukesh Ambani
had taken matters into his own hands—despite a stay on the sale from the original deal arbitrator in Singapore. Reliance has taken possession of a large portion of Future Retail’s stores, many of which had failed to pay rent on their Reliance-held property leases. Further muddying the waters, India’s competition regulator last year suspended its approval of Amazon’s original 2019 deal with Future, after Future argued that the original noncompete agreement was a roundabout way to get around India’s 2018 foreign investment law.

The episode shows that Amazon’s road to dominance in India runs through a hostile regulatory environment that is increasingly distrustful of American tech giants and a legal system that can sometimes make enforcing contracts difficult.

This isn’t the first time Amazon has struggled in India. Indian laws don’t allow Amazon to hold inventory or sell items directly to consumers. To circumvent this, foreign e-commerce firms have operated through a complicated maze of joint ventures with local companies that function as inventory-holding firms. And with each year, rules have only tightened to favor the small retailers that form an important electoral base.

When Mr. Bezos, then Amazon CEO, visited India in 2020 and announced an additional $1 billion investment in the country on top of the several billion dollars previously announced, he got a cold shoulder from the government. India commerce and industry minister

Piyush Goyal

said Amazon wasn’t doing the country a favor and alleged predatory pricing by the firm. The government’s tone is in line with changing dynamics in online retail as well. Amazon and Walmart’s duopoly is turning into a four-way competition with Reliance and Tata Group both upping their investments in the sector.

The long-running saga pitted two of the world’s most powerful businessmen against each other for the future of Indian retail. Round one has gone to Ambani. Now, over to Bezos.

Chinese e-commerce giant Alibaba is challenging Amazon by promising fast deliveries from China to anywhere in the world. WSJ visits Alibaba’s largest automated warehouse to see how robots and a vast logistics network are helping it expand globally. Composite: Clément Bürge

The Wall Street Journal Interactive Edition

Write to Megha Mandavia at megha.mandavia@wsj.com

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