Facebook versus Amazon: WhatsApp-JioMart in India

Ecommerce Sector Investment Risk Level: Medium June 13, 2020

Facebook & Reliance: WhatsApp-JioMart Deal

We were able to go beyond headline news and get a very inside angle on the investment between Facebook (FB) and Reliance’s (RIL) “” digital platform which occurred on April 22, 2020. We spoke with senior management at India’s Facebook division, and also retrieved insights from our own business associates and contacts in India [being of Indian origin myself]. This has led us to assess that this latest Facebook-Reliance Jio deal has long-term significant accretive value, especially in a growth market such as that of India’s.

The investment made by tech-giant Facebook in was valued at $5.7 billion (~30% of FB’s 2019 year-end cash balance), for a 9.9% stake. It was heralded by financial experts as being a big leap forward towards the company’s Facebook [FB] 1-year chart long-term goal of becoming a platform for commerce. Facebook’s investment was the largest and foremost capital infusion made, after which 12 other investments were happened successively in the span of two months by other companies, not just locally, but on a global level. Most recently, Qualcomm (QCOM) and Intel (INTC) took a 0.15% stake ($97 mn) and 0.39% stake ($254 mn) in the company (further detail on the 13 investments in 12 weeks - here). Qualcomm is a leader in 5G, and Intel is a chief computer processor manufacturer listed on Nasdaq.

Since April 2020, have in total raised ~$16 billion by selling a 25.24% equity stake in Jio Platforms. Jio has become a hot commodity, as seen by bidders and the market. This has brought Jio's enterprise value to $69 billion, and it plans to wrap up most of its private fundraising by the third quarter of 2020. It might then explore a potential IPO in the US markets in 2021, as tensions Reliance [RIL] 1-year chart escalate between U.S.-China over the trade war and the new HK security law, leading US-based Chinese companies to now eye their homeland for listings amongst a slew of sanctions being imposed by Washington. This might be an opportune time for a public offering on Nasdaq for Jio - opening up American investors to an internet company with a billion-plus market that could be relatively more attractive given the de-listing of Chinese firms -and potentially accruing 70% additional returns for Facebook in the process.

Focal-Point: WhatsApp & JioMart

The focal-point of this FB-Reliance deal will be WhatsApp and Reliance’s JioMart subsidiaries, respectively. The resulting service will afford small retailers Amazon [AMZN] 1-year chart the opportunity to better connect with the wider market of consumers across the Indian subcontinent, via the WhatsApp messaging application. To give some insight into both applications on an individual basis, let’s take a glance at both services from an Indian market outlook. WhatsApp is a messenger service with 2 Analysts: Milan Mehta ([email protected]) +1 617-848-8279 billion users worldwide, with 400 million Monthly Active Users (MAU) of that Shachi Seksaria user-base residing in India, making it by-far the largest market – Brazil, lags behind a distant 2nd with only 120 million MAUs.

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JioMart, on the other end of the spectrum, is a joint venture between ,

India’s largest retail chain, and Reliance Jio Platform, the biggest telecom network in India with over 385 million subscribers. The joining of these platforms - WhatsApp and JioMart - will create great potential to enhance business opportunity in India.

How will it work?

WhatsApp -JioMart [WJ] wants to create an e-commerce platform for disorganized retail, consisting of small businesses neighborhood convenience stores or more commonly termed as 'kiranas' in India. JioMart will act as a bridge for these kirana stores that sell your everyday small-ticket items (ex. milk, bread, cereal, tea, grains, cooking oil, etc) to the consumer. From your average-Joe to the elite upper-class, there is no limitation to who this service can cater to in the country.

These stores - they are unique because they have no door - nor any formal entrance.

This is what sets them apart from your typical 7-Eleven, or even more noticeably your typically well-established CVS or Walgreens pharmacies. These small retail establishment scattered across India’s brimming metropolis account for 90% of the retail market for nominal day-to-day purchases.

Whatsapp will act as a Facebook’s WhatsApp will help to further supplement this JioMart’s market share of payment service connecting neighborhood curbside shops, by leveraging on its social media presence, shortening the gap between the consumer and small retailers. The scheme between these two unorganized retail in India – entities will combine to work in a 2-step system of payment and order fulfillment – ‘kiranas’ – to JioMart’s efficient delivery and handling services. JioMart has already started 1. WhatsApp - People will have access to a catalog or “mini-store” on the their browser platform, WhatsApp application, to which they can browse every-day grocery items WhatsApp will work to greatly (things you may commonly find at your local 7-11). Their final order items on enhance their market scope, in WhatsApp will be sent to JioMart for fulfillment. the largely untapped market 2. JioMart: Reliance’s ecommerce platform will step in and assign a environment of India. neighborhood store to that WhatsApp order and send the individual an invoice on their mobile. Therefore, JioMart will be taking care of order fulfillment, and dispatch.

It is to be noted that their payment system, called “Pay”, is still seeking approval from the New Delhi courts to become fully operational. According to the Business Standard, its digital payment service will be rolled out in a phased manner. In the first phase, WhatsApp had offered payment services to 10 million users on Feb 10 - this is a good init ial start in our view. They are working around this and it should start to gain traction soon, like it has with their push for Pay in Brazil with 120 mn users and 10 mn business es taking part.

Comments on the rollout of JioMart-WhatsApp –

“You can browse shops and talk to the shop owner. And ultimately, where we do want to take this flow is for you to be able to place your orders.”

— Ajit Mohan, Head of India for Facebook, TechCrunch, April 2020

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“The largest Facebook and WhatsApp communities in the world are in India, and we think that there's an especially important opportunity to serve small businesses and enable commerce there over the long term. So, by bringing together JioMart, which is Jio's small business initiative to connect millions of shops across India, with WhatsApp, we think that we're going to be able to create a much better shopping and commerce experience. And there's a lot more that we can do here, and I'm looking forward to making progress with the team at Jio.”

— Mark Zuckerberg, Founder-CEO of Facebook, Q1’20 Earnings Call India is expected to become the second largest ecommerce The Ecommerce Market Boom market by 2034.

The ecommerce market in India was valued at $38.5 bn and is expected to grow to $200 bn due to a surge in the number of internet users. It is expected to become the second largest ecommerce market in the world by 2034, surpassing the US. The ecommerce penetration of retail sales in the US has spiked 11.1% in the last 8-week period during Covid-19 – see line chart below. This trend will further influence global ecommerce going forward into 2021, as social distancing shrouds consumer buying decisions and brick-and-mortar stores continue to shut down throughout the world. The ecommerce sector is expected to grow 1,200% by 2026 as a result of this secular trend.

The smartphone market is the fastest growing market and in 2022 it is expected to reach 859 mn users – shipments increase 8% y-o-y making it the fastest growing market amongst the top 20 smartphone markets globally. In 2019 it was inferred that one in One in every three Indians every three Indians shopped via a smartphone. Most of the smartphones purchased are shops with a smartphone. inexpensive, with Xiaomi leading the market in QoQ unit share, ushering in the influence of the rising middle class and the fall of high-priced phones like Apples’, which are doing well in developed countries, such as in the US where they are market leaders. Data from IBEF.

Two of the primary areas of focus (ecommerce and smartphones) with the former giving us a picture of how JioMart might do, and the latter telling us how Facebook will do i.e. more number of smartphone users, the more the access to WhatsApp’s services.

JioMart’s Growing Success

JioMart has already begun as a web-based browser platform in India, offering 50,000+ products in 200 cities to over 20 million people. It has partnered with 90% of unorganized retail in the country. This is a statement from , CEO of Reliance and Asia’s current richest person, regarding the project's vision of ecommerce, which he refers to as ‘new commerce’: JioMart has already begun as a web-based browser platform in “The main purpose of new commerce is to completely transform the unorganized retail India, offering 50,000+ market, which accounts for 90% of India’s retail industry. The 3 million merchants and products in 200 cities to over 20 kirana shop owners, who generate direct and indirect livelihoods for over 20 million million people. people, form the backbone of India’s commerce eco-system.”

- Mukesh Ambani, Chairman & MD of Reliance Industries Ltd.

Ambani hinted at the need for Facebook and WhatsApp platforms as he highlighted at social media as a powerful way for creating openings to a highly lucrative space in a developing country like India.

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nd During Reliance’s 42 Annual General Meeting, he stated that a foray into this market could be a $700 billion opportunity. This was stated a while ago, but we believe that the traction is going to begin now more than ever. The lockdown has brought on unusual circumstances for retailers, and they are turning to ecommerce as a solution. JioMart-WhatsApp could have Most kirana owners have maxed out on their savings and find themselves in insolvent a $700 billion opportunity as situations. India’s large population has made it hard for businesses to receive adequate they foray into this lucrative stimulus from a cash-strapped government. and fast-growing market of Hence, the number of kirana stores partnering with JioMart's e-commerce services is ecommerce in the country. slated to increase as a result of the Covid-19 lockdown. As more user connect to

JioMart, it will create a bigger market for WhatsApp as they roll-out Pay working around regulatory pushbacks. They have already initiated a successful trial run in the financial hub of , India in late Dec ’19.

Trial Test Run in Mumbai

A trial test run for JioMart-WhatsApp happened in late December 2019 in Mumbai where WJ was chosen to be available to users in , and . The trial run posted positive results.

The way it would work is that a user would text “Hi” to +91-8850008000, and this would send them a prompt to which, when clicked, would open up the catalog where one could select the grocery item that he/she would wish to purchase. Once the order would be placed, JioMart would automatically assign a neighborhood store to the Trial test-run is successful with person and send an invoice through WhatsApp (which is still in the process of being more than 1,200 neighborhood fully functional, as mentioned earlier). More than 1,200 neighborhood stores are stores participating in this pilot engaging in this pilot program. When further asked, Jio declined to comment. On program. further features and collaborations, Facebook India mentioned in an article:

“One of those collaborations may allow users to find local stores around them on WhatsApp, talk to store operators and place orders from within the Facebook-owned instant messaging service”

- Ajit Mohan, Head of India for Facebook.

Competition with Amazon

Now you might be thinking, but what about Amazon (AMZN)? When it comes to ecommerce, the competition that comes to mind is always global-giant Amazon, however a new player (JioMart-WhatsApp) may try to enter and attempt to create some sort of disruption within the market. Amazon is currently at its all-time highs and the Amazon might buy a $2 billion company is growing rapidly. In India, they might hit gross sales of up to $32 billion by stake in Bharti Airtel, one of FY 23. They and FB are very much in competition with one another when it comes to the two major telecom growth in India. networks in India, the other being Jio. If this happens, then Facebook has invested $5.9 billion in India till date with Jio, whereas Amazon has Facebook and Amazon will be invested a little more, with $1 billion further announced recently, capping the total going head-to-head. investment into the country at $6.5 billion. They have also planned to purchase a $2 billion stake in Bharti Airtel, one of two telecom giants, the other being the Jio network.

This will create more competition amongst Facebook and Amazon, who will have major investments in two of the biggest telecom/digital platforms in the India.

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Furthermore, turning the spotlight to ecommerce, Amazon holds about 30% of the entire market, and is the most visited shopping site. Given all these developments we still think that WhatsApp stands to gain further ground and traction going forward.

Amazon also is still facing competition from Walmart-owned Flipkart which is also a major ecommerce player in the region.

Catalysts and Advantages over Amazon

WhatsApp has an edge in India since the country represents 20% of its total user base.

Facebook has ample Free Cash Flow, with a 5-year CAGR 28.3% FCF growth, which can be used in this project. Facebook won’t just be using WhatsApp, but it can use Instagram as well as its own primary platform (Facebook, itself) to market this new JioMart -WhatsApp partnership. This process has already begun with sponsored ads already appearing on Instagram.

This outreach has allowed FB to take advantage of not just one, but all of its apps under Facebook has an edge simply its belt. It’s marketing and influence on people to use its applications will fare better because of its wide repertoire than Amazon’s given the near and long-term outlook. In terms of MAUs in India, of social media platforms WhatsApp is ranked No. 1, Facebook is No.2, and Instagram is No. 8. Amazon falls which it can use to widen its below all of these at No. 9. – see image below. Facebook’s social media presence is marketing appeal. widespread, and we also think that if WhatsApp ‘Pay’ successfully kicks off with JioMart, then we will start to have a presence like that of China’s one-stop WeChat application - supporting multipurpose functions of messaging, social media, and mobile payment. WhatsApp, in cohesion with Facebook, has the potential to become a similar and a popularly accepted platform in India.

Plus, going down the road, FB can further introduce AI-based and VR customizations to improve the overall shopping experience for the consumer, like it has done recently for the newly introduced Facebook Shop. Use of AI to bring relevant products to the user at the right timing, will help in marketing and understanding user-engagement patterns. This and the proliferation of social media has the ability to justify FB’s 9.9% stake in Jio and make it well worth the investment in a very untapped market environment.

The ‘next billion’ lies in South Asia, with India representing a large part of that target market audience. According to the following data, the most ‘unconnected audience’, of 1 billion lies in India. Rural usage of smartphones With the introduction of Jio telecommunication in early 2016, mobile internet has has seen tremendous surges, become more affordable for the users with relatively less income. Plummeting rates and this will help WhatsApp have led to a rural usage spike of 56% versus a comparatively minor rise of 14% in since popularity of Amazon is urban settings. Mobile internet users on smartphone devices is growing at a very fast less among these communities. clip in India, with projected numbers to reach nearly 500 mn by 2022 in India. This growth is going to be seen in rural (middle-to-lower income class) mobile internet use, and not in urban regions as it has already scaled there. The last 5 years of mobile inter net users has seen a 12% CAGR.

This substantial growth is going to benefit WhatsApp over Amazon because it is used more predominantly in poorer communities. Reason being, is that people of lower socioeconomic class don’t necessarily have a bank account, let alone a credit/debit card on them . When they purchase a mobile smartphone, they will more likely install WhatsApp in order to stay in touch with their friends and family, over Amazon. The people with less education would prefer a service of JioMart-WhatsApp due to its ease of use and user-friendliness, something that they are more accustomed too.

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That is one of the first applications they will install, with 400 mn users and growing. This is the reason we strongly believe that Amazon will not make headway very easily in such communities.

India has the second-highest number of internet users with 483 million in 2018, and interestingly, 390 million of those users accessed the internet from their mobile phones. For context, that’s more Indian mobile phone users than the entire population of the

United States. From the data taken from Statista, most rural people use WhatsApp for

1 – 2 hours a day. Going forward, the Indian smartphone market is expected to expand 390 million people in India at the fastest pace globally, with a CAGR of 14.5%, from 2018 to 2023. This is a catalyst access the internet through as a large part of the population in India [a growing portion being rural] will be their mobile phone – to put accessing the internet through their mobile devices, and most of them will be using that into context, that is more WhatsApp. than the entire population of the United States. “In India, smartphone usage accounts for 89 percent of total digital minutes spent in a day.”

– The Quint

The proliferation of the smartphone, internet usage, and market dominance will help catapult Facebook over arch-rival Amazon, yielding to better ROI in the medium-term of 2 -3 years as things pick up quickly in JioMart-WhatsApp joint-venture. Furthermore, the following two factors are important to consider. Reliance have swayed Presence of Reliance petrochemical, and telecommunication policies in Reliance also has political clout and is a very powerful player, so it can make sure that their favor with the help of Amazon doesn’t make headway. Cases in the past have shown this to be true, where their connections to they have had power over technology and won legal cases. They have swayed government agencies and petrochemical, and telecommunication policies in their favor with the help of their officials. This will help the connections to government agencies and officials. business grow at a faster clip, with fewer, if any, headwinds. Opportune time for entry

We think that this is an opportune time for WhatsApp-JioMart to enter India. As Covid- 19 has left India’s economy in shambles, with record-low GDP growth contractions to

2.5%, and unemployment reaching almost 25% causing a state of desperation amongst small -business owners and retailers to stay buoyant. This could be a good entry point and they have already taken a stab at it to see whether it can work, in the financial capital of the country, Mumbai. Plus, it has led to various new business owners (or in some cases homeowners) to try running small businesses of their own. Homemakers are going online during the lockdown, with Other opportunities not limited to ‘kiranas’ unemployment nearing almost record 25% levels, and During this time, uniquely, many people who are unemployed (nearing 25% marketing their businesses nationwide) and out-of-work are turning to Facebook to market their business to through Facebook. Selling food customers in hopes of getting noticed. These businesses involve not just grocery items items, garments (Indian ethnic like small neighborhood stores have been trying to sell, but rather also include wear, selling services for household items, delicacies, garments (Indian ethnic wear), services like yoga classes, fitness, etc. etc. Small businesses can now easily get access to varied online platforms and social media and use digital marketing for attracting customers.

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The WhatsApp feature of conducting business has already been added to some pages - could this be another way that the application is making its way into India (other than with JioMart)? Nonetheless, this is a growing trend and it could very well turn out to be a profitable one for Facebook going forward.

Bottom-Line: Facebook to benefit with WhatsApp in India

Facebook sees more advantage

In such a populated country, with so much market potential (12% smartphone internet over the behemoth Amazon in users CAGR in last 5 years) and FCF 5-year CAGR of 28.3%, we see lots of accretive this current setting, simply value added with Facebook’s investment into Jio’s ecommerce platforms. We highly because of Indian economic suspect that WhatsApp-JioMart will really take off in a few months, especially as kirana state, culture, and secular stores realize the value of being online at 25% unemployment levels and both JioMart trends coming off of the and WhatsApp, with the latter’s successful initial trial run underway, beginning to see tailwinds of Reliance. traction. With the growth of Facebook’s social media, internet proliferation and increasing smartphone usage, backed by a very powerful Reliance, we see Amazon lagging behind in India. Furthermore, if this venture takes off and the app is a resounding success, in the wake of what may likely be a publicly listed Jio in the US markets, then Facebook’s investment will stand to yield high returns.

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