Mumbai: Reliance Retail Ltd, the wholly owned subsidiary of India’s largest private sector company, Reliance Industries Ltd, says it wants to invest at least Rs1,000 crore on technology, as it tries to create a competitive advantage for its nascent retail venture.
Reliance’s super-sized bet on technology stems from what it says were good business results from similar investments in its petrol pumps business.
Those investments helped Reliance tightly monitor and control fuel supplies and deliveries, as well as provide robust information on sales, in addition to the ability to check for potential adulteration at the pumps.
“We also have the ability to change prices automatically at all our fuel pumps and can even stop dispensation of fuel if we suspect adulteration,” said a Reliance spokesperson. “When we made this investment in fuel retailing, it was one of the largest tech investments in 2003.”
Now Reliance wants to replicate similar systems at its retail chain where the gameplan is to buy directly from farmers and producers and achieve economies of scale across hundreds of retail stores. The bulk of organized retailing, especially high-volume items such as fruit and vegetables, remains a low-margin business, so tight inventory controls and management, using technology, could help boost profits.
And, while Indian companies are increasingly making large bets on new ventures, Reliance has been at the forefront of mega projects.
The company has said it will earmark Rs25,000 crore by 2012 for its retail business and is betting it will be able to annually sell Rs90,000 crore worth of items from its stores, which will include hypermarkets, supermarkets and specialty stores, by 2010. By comparison, the total sales of India’s largest retailer, Pantaloon Retail (India) Ltd, for nine months ended March were Rs2,358 crore. Reliance’s tech spending plans, on paper, are between 10 and 15 times the cumulative spend by Pantaloon on technology.
“So far, we have spent around Rs100 crore on technology, including the costs for the roll-out of our enterprise resource planning software. Our annual tech spend on software and hardware is now in the range of Rs8-10 crore,” says K.K. Rathi, chief financial officer Pantaloon.
Says Technopak Advisors Ltd senior consultant Pratichee Kapoor: “Globally, retailers such as Wal-Mart and Tesco spend around 1.5-2% of their total investment in setting up IT support and infrastructure. In India, it could be 1% since labour and IT support expense is comparatively cheap.”
Reliance says it has lined up a slew of consultants for its tech spend and a senior company official rattles off names of Cap Gemini, Ernst and Young, Technopak, as well as system integrators and software providers such as IBM, Satyam Computer Services Ltd and Tata Consultancy Services Ltd. The official, who is incharge of technology initiatives for the Reliance group, didn’t want to be named as per company policy. “The spend includes the cost of hardware, software, including SAP, which we will use to run the business, and Retalix point of sale terminals software,” he said.
Retalix StorePoint is a point-of-sale and back-office software system for convenience store formats. The system also helps in managing supplies as well as helping with forecasting and ordering items for stores. The system, from Israel’s Retalix Ltd, is also used to schedule staff, a key aspect of relatively labour-intensive retail outlets.
Most of the technology providers and consultants named by Reliance declined to comment for this article, citing policies about not discussing specific clients.
While Reliance’s tech investments seem rather big for a chain that currently operates about 135 Reliance Fresh stores and two Reliance Digital stores, which sell electronics, the company plans hundreds of stores across India, targeting some 784 cities and towns.
And it is staring at a lot more company from the likes of the Tata’s and the Wadia’s, who control Bombay Dyeing. The Aditya Birla Group too plans to invest about $3.5 billion over the next three-four years to open more than 6,000 retail outlets.
Meanwhile, Bharti Enterprises, in tandem with Wal-Mart Stores Inc., is planning to invest $2-2.5 billion in its retail business.
Reliance’s model for retail is big on food and consumables, unlike that of Shoppers Stop Ltd, which is focused more on apparel.
Even for Pantaloon, lifestyle retail, comprising largely of garments, is where the profit lies. While fruit, vegetables and dairy products draw buyers, most organized retailers make much of their money in apparel and household products.
“Retailing of food and grocery products comprises 75% of the total retail market but the share of organized sector in this segment is only 1%. Since supply chain infrastructure plays an important part in deriving cost efficiencies and maintaining quality, we believe that about 20-25% of the proposed investments will go towards creating robust back-end infrastructure,” according to a research report by Mumbai brokerage Edelweiss Capital Ltd.
Organized retail sector in India is expected to receive investments of over $22 billion over the next five years, says Edelweiss. The Images India Retail Report 2007 predicted the organized retail sector would grow to $45 billion by 2010 from a base of $12.4 billion in 2006.