Building a Brand Vs. Buying it out – which one makes sense?

In current times, we see scores of companies buying out smaller players, including competition brands. While this has been in vogue for many years (and across industries including manufacturing, automobiles, chemicals, real estate and so on), it’s only in the recent years we see more of these acquisitions in public news. Though Reliance Group has been in the forefront of acquiring well-performing brands in the consumer space since 2020, others like Aditya Birla Retail and Madura Garments have also been on a buying spree. Zomato is about to acquire Blinkit, (formerly Grofers) while many moons ago, Ola (Cabs) acquired Foodpanda and buried it eventually for reasons best known.

The biggest mystery that remains in the Indian retailscape is American behemoth Walmart acquiring India’s homegrown e-commerce giant Flipkart in 2018 for USD 15 bn against a 77% stake valuing the latter at USD 20 bn. Most recently, India’s once-upon-a-time largest retail conglomerate Future Group was acquired by Reliance Group in 2020 for USD 3.4 bn amidst the Covid-19 led meltdown of India’s retail industry in what is considered a distress sale by the Retail King of India Mr Kishore Biyani.

So why is there so much importance, money and hurry to buy brands instead of building them painstakingly? Well, there lies the answer.

For the “haves” in the business economy, buying something a bit expensive than it’s current real worth is far better than building it painstakingly, which not only takes time but also requires umpteen resources – financial and human Resources at that.

Take for example, Flipkart. Since 2007 when it started selling books online, it had raised close to USD 7 bn. It’s turnover for the year 2018 when it was acquired by Walmart for USD 7.5 bn was around USD 4 bn. Back then, Flipkart had 54 mn active users and sold 261 mn units a year. Cut to FY 2021-22, the estimated business size of Flipkart’s varied businesses is a little less than USD 8 bn and 100 mn users!

Now, if Walmart had to set up a base in India in 2018 instead, compete with American arch rival Amazon in the Indian turf, fight out Flipkart and eventually offer consumer goods better than offline retailers in India, the company would have taken more time to build critical mass here. Further, Walmart’s JV with Bharti Group (Airtel) couldn’t scale pan-India due to FDI regulations as well as its JV partner’s reluctance to look beyond their fort, that is Northern India.

Amazon, on the other hand entered India exactly a decade back and has managed to hit a turnover of about USD 3 bn incl its wholesale and e-commerce business. The company has invested over USD 6 bn in India all these years. If only Amazon Inc. had acquired Flipkart, whose founders Sachin & Binny Bansal were ex-Amazon India employees, things would have been completely different for Jeff Bezos and his company, which is fighting an-almost losing battle with Mukesh Ambani’s Reliance Group pawning the Future Group as it’s bait.

Take Reliance Retail which seems to add 4-5 new brands / companies in the retail ecosystem to its kitty every quarter. If the company had to build each one of them from scratch – firstly, there is no guarantee it would even succeed individually compared to each one of them whom it has acquired. The Future buy gives the company immediate access to over 1,800 retail locations incl. Central Malls, Big Bazaar, Brand Factory and FBB – the budget fashion retail chain and scores of individual brand stores such as Lee Cooper in one go. On the other hand, Reliance could take 2-3 years to build such a large network though cash is no constraint to the company.

Even globally this is somewhat similar. Thailand based Central Group acquired UK’s Selfridges late last year for over USD 4 Bn.

So its only logical to acquire something once it has a certain business maturity compared to start putting them apiece from the beginning. The analogy of an under-construction house vs. a completed apartment is appropriate in this case. Many folks book an apartment when the construction has just begun, or perhaps even before. The calculation is it would get valued at 50% more in 18-24 months and become an easy buy for someone who’s investment model is to start getting returns (read: rent) from day 1.

While there is not right formula of which model is right, it is but difficult to miss the fact that the ones who have been acquired have done much better for the buyer company than building them right from scratch.