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Reliance unit hopes to turn a new page in India’s retail story

Reliance Retail’s success, if significant and sustained, will prove that modern retail is profitable in India
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First Published: Wed, Jul 17 2013. 11 46 PM IST
Not long after Reliance Retail started operations, India’s economic growth slowed, a result of the global economic slowdown engendered by the financial crisis. Photo: Ramesh Pathania/Mint
Not long after Reliance Retail started operations, India’s economic growth slowed, a result of the global economic slowdown engendered by the financial crisis. Photo: Ramesh Pathania/Mint
Updated: Wed, Jul 17 2013. 11 57 PM IST
Mumbai: On a recent day in July, Anirudh Balotiaa was shopping at the Reliance Fresh store in Breach Candy, Mumbai. The 32-year-old product manager with a private sector company likes shopping at the store, run by Reliance Retail Ltd, part of one of India’s largest conglomerates, Reliance Industries Ltd (RIL).
“There is no other option nearby. Besides, they have a large variety of everything under one roof,” he said, explaining his reasons for shopping at Reliance Fresh.
RIL chairman Mukesh Ambani will be hoping more shoppers feel that way. Customers like Balotiaa ensured Reliance Retail broke even in cash terms (which means it made more money than it spent, excluding earlier investments, and the cost of these investments) in 2012-13, but there are other, larger issues at stake.
Reliance Retail’s success—if it is significant and sustained—will prove that the business of modern or organized retail is profitable in India, a market characterized by countless challenges related to size, scale, complexity, infrastructure and laws. And it will also challenge a notion among analysts and long-time RIL observers that the company doesn’t have what it takes to succeed in so-called consumer-facing businesses.
It’s been a learning curve for RIL, having to understand a consumer-focused business versus the big-ticket transactions it’s habituated to in its core energy and petrochemicals businesses.
“The handling of such customers requires a set of skills different from dealing with retail customers in a store, whose average ticket size of spending is much smaller in comparison,” said Arun Kejriwal, director of Kejriwal Research and Investment Services.
“RIL took time to build this competence. It has chastened itself and become a better group in terms of handling retail customers, having learnt from the mistakes of the past,” he said. “Things should be better this time round in the retail and upcoming telecom businesses, with a lot of cross-selling opportunities between the two.”
Already, Ambani, 56 , has ar ticulated his intent to make a go of both retail and telecom, the other new business of RIL. He has described the two businesses as “the future” even while referring to the company’s other, much larger businesses—energy and petrochemicals—as the “backbone”.
In 2012-13, Reliance Retail’s revenue grew 42% to Rs.10,800 crore from a year ago. On this, the firm broke even in cash terms by posting earnings before interest, tax, depreciation and amortization of Rs.78 crore, a Rs.420 crore swing from the previous year, according to RIL’s annual report.
At a 7 June meeting of shareholders, Ambani termed these numbers “a significant step” towards Reliance Retail “attaining its strategic vision”.
“With (an) established back-end, world-class infrastructure and undistracted focus on the Indian market, I am confident that our retail business would undertake multi-fold growth in the next few years by delivering over 50% revenue growth in various format year-on-year, and is on its way to achieve revenue target of Rs.40,000 crore to Rs.50,000 crore,” he added.
According to Boston Consulting Group (BCG), the Indian retail market is worth $500 billion (around Rs.30 trillion today). Modern retail accounts for $45 billion of this and is growing at a higher rate than the overall market. By 2015, BCG estimates that the market will be worth $775 billion, of which modern retail will constitute $80-85 billion.
Yet, it’s a business that’s been the next big thing in India for several years, without really living up to the promise.
Many large Indian conglomerates, including the Aditya Birla Group and the Tata group, that have ventured into the business are finding profits hard to come by. India’s largest retail group, Future Group, is in the midst of a strategic and financial restructuring brought about by years of rampant, and often indiscriminate expansion—at a consolidated level, the group had debt of Rs.6,985 crore (including Rs.1,554 crore of convertible debentures) on its books as on 31 December.
And aggressive start-ups such as Subhiksha Trading Services Ltd and Vishal Retail Ltd are either going out of business or being sold. Meanwhile, several foreign retailers, emboldened by a new policy, are knocking on the doors of the Indian market, although they have been unnerved by happenings at Bharti Walmart Pvt. Ltd, a joint venture between Bharti Enterprises Ltd and Wal-Mart Stores Inc., which is being investigated by a government agency over allegations that it flouted rules regarding investments in retail that have since been eased. The firm’s chief executive officer (CEO) Raj Jain resigned abruptly in June this year.
Changing strategies
That background is one reason everyone is closely watching Reliance Retail, which, as the RIL management suggested during an earnings press conference in April, will likely turn in a net profit by the end of fiscal 2014.
Still, it’s not as if Reliance Retail has always had all the answers (and indeed, it remains to be seen whether the answers it now has are the right ones).
Founded in 2006, it has seen at least three shifts in strategy and two in leadership.
Not long after Reliance Retail started operations, India’s economic growth slowed, a result of the global economic slowdown engendered by the financial crisis. The firm also discovered the difficulty of operating a large number of stores—by 2009, it had 600-700 Reliance Fresh stores that largely sold fresh produce and groceries—in the absence of “an adequate back-end infrastructure”, according to
one Reliance Retail executive who asked not to be identified. And it had to convince consumers that its fresh produce was as good, if not better than those sold at traditional fresh produce markets, and cost the same, if not less.
In 2010, Reliance Retail decided to get back to the drawing board and fix its retail business that had gained scale really fast. The retail formats included so-called value-business stores—Reliance Fresh; Reliance Super, a 10,000-15,000 sq. ft format selling largely fruits, vegetables and groceries; and Reliance Mart, hypermarkets that sold everything from fresh produce to furniture to electronics.
The idea was to understand what worked, cut costs, and create a back-end. Even as this was being done, Reliance Retail launched new stores in more profitable categories—Reliance Footprint (footwear) and Reliance Digital (electronics).
To really succeed in retail, though, it had to get its fresh produce stores to turn profits.
“Every retail concept has its own set of challenges. For instance, for the food and groceries retail formats like Reliance Fresh, the competition from the unorganized or kirana store is very strong. For electronic retailers, the challenges are different with online competition and high value goods requiring brand recall. Retailers have to figure out each of these formats independently,” said Gaurav Gupta, senior director at Deloitte Touche Tohmatsu.
The firm seems to have done that. “This time, we have the infrastructure in place. We have an existing supply chain and customer base to tap into 130 cities,” added the Reliance Retail executive.
Indeed, the retailer now replenishes fruits and vegetables twice a day, and is trying to reach out to younger, wealthier customers (even as it doesn’t ignore others) who do not mind paying a premium for higher-quality fresh produce. And it has even ventured into the dairy business, which has been the failing of several large firms, including multinationals, largely on account of the challenges involved in managing supply and distribution.
Behind Reliance Retail’s success-in-the-making, though, is a fundamental belief, an acquired one, that runs counter to the premise with which most companies, large and small, entered the business of organized retail in India. It is a belief in the small neighbourhood store (called the kirana store).
Small is profitable
In February 2007, Congress president and United Progressive Alliance chairperson Sonia Gandhi wrote to Prime Minister Manmohan Singh, asking him to evaluate the impact of organized retail on kirana stores before opening up the business to foreign retailers. The government duly commissioned Indian Council for Research on International Economic Relations, a New Delhi think tank and economic research unit, to study this. The results showed that the entry of organized retail (Indian, which was already allowed, and foreign) would affect kirana stores to some extent.
Since then, large Indian companies such as RIL have expanded their presence in retail, and the government recently allowed foreign retailers to invest in supermarkets, hypermarkets and fresh produce stores (or in multi-brand retail), but the kirana stores haven’t disappeared.
“People thought that the small format would die with the era of supermarkets and hypermarkets ushered in. But smaller formats like neighbourhood stores are gaining traction at present and the company is well-positioned to capitalize on this trend,” said Rob Cissell, CEO of the value format at Reliance Retail.
For Reliance Retail, this entailed a return to the past. It had started with small Reliance Fresh stores, but then moved on to the so-called big-box format.
“Reliance Retail, as a concept, was ahead of its time,” said Damodar Mall, president and chief customer strategy officer (value format) at Reliance Retail, explaining that with higher incomes and expectations, consumers expect a better shopping experience—and in neighbourhood stores that are still the best-located in cities where chaotic growth and inadequate emphasis on zoning have ensured the overlap of small businesses, residences, and retail stores.
Reliance Retail has around 500 Reliance Fresh stores, where sales, in stores that have been in existence for more than a year, grew by an average of 18% in fiscal year 2013 over the year-ago period, the highest across formats for the company.
In a 17 April note, brokerage PhillipCapital said it was “impressed” with this growth amidst a slowdown. “We attribute the same to systemic changes brought in and initiatives undertaken to rationalize store locations and sizes,” the note said.
Reliance Fresh and other value format stores of Reliance Retail (there are 760 in all) contributed around Rs.6,100 crore, or 60%, to the unit’s revenue in 2012-13, a 33% growth from the year ago.
Other retailers are beginning to focus on small stores too.
R. Subramanian, founder of Subhiksha, which exited operations shuttering more than 1,600 stores in February 2009, weighed down by Rs.800 crore debt, has also planned to revive the business and start over with the small store format, he said in an interview to Mint in October 2012.
That preference is easy to understand. Small stores address one of the major problems facing retailers in India, rental.
Real (estate) trouble
Retail in India faces two main challenges—high rentals and low profit margins—according to Pinaki Ranjan Mishra, partner (retail and consumer practice) at EY, a global professional services organization. This doesn’t mean that retailers can’t succeed because “consumption is growing at 10-15% a year”, Mishra said.
And that’s where small stores fit in. “Small neighbourhood stores are becoming more important now since real estate, especially in metropolitan cities, has become very expensive,” Cissell said.
The Reliance Retail executive official cited earlier said that a hypermarket cannot afford to pay a rent of more than Rs.30-40 per sq. ft a month, whereas in Mumbai, it’s hard to find anything for less than Rs.50 per sq. ft.
Last April, Aditya Birla Retail Ltd shut all its stores in Mumbai citing high rentals. In 2009, the retailer that runs hypermarket and convenience store chains under the More brand closed around 100 of its 750 supermarkets. It now has under 500 stores.
The pursuit of small also means that retailers are looking at smaller versions of even large formats. For instance, the typical size of a hypermarket being set up now is 30,000-40,000 sq. ft, against 60,000-70,000 sq. ft in the past, said the Reliance Retail executive.
HyperCity Retail India Ltd, a subsidiary of Shoppers Stop Ltd started with 100,000 sq. ft hypermarkets, but the average size of its hypermarkets now is 50,000 sq. ft and the company is even experimenting with a 30,000 sq. ft “compact hypermarket” format.
These smaller stores won’t stock furniture and electronics but, in association with larger HyperCity hypermarkets in the same city, will help the firm reach more people, explained Mark Ashman, CEO of HyperCity. He added that 40% of the company’s stores will be around 30,000 sq. ft in size.
Issues related to rentals and profit margins can be addressed by juggling formats and reviewing strategies and indeed, all “retailers are now looking at consolidating, improving their back-end operations and focusing on improving their efficiencies”, according to Rachna Nath, leader (retail and consumer) at audit and consulting firm PricewaterhouseCoopers.
There is a third issue as well, according to some analysts— customer loyalty.
“Retailers have to differentiate. Today, there is no customer loyalty to any particular format or retailer,” said Anil Talreja, partner at audit and consulting firm Deloitte Haskins and Sells, although he admitted that price will remain the biggest attraction for consumers.
The price card is one Reliance has shown it can play very well, and as for everything else, the company has used its initial experience to expand formats that work, even as it learnt from the experiences of international retailers such as Wal-Mart and British retailer Tesco Plc.
A long road ahead
Reliance Retail’s start-up team of Raghu Pillai and K. Radhakrishnan was replaced in 2009 by Gwyn Sundhagul, who was previously the chief marketing officer and director at the Thai arm of Tesco, and his team. Their job was to fix the business that had rapidly gained scale. In 2011, Sundhagul was replaced by Cissell, former chief operating officer of Wal-Mart in China as chief executive-value formats, and Shawn Gray, former vice-president at Wal-Mart, China, as chief operating officer.
But if it has had to work, and rework its strategy and also change leadership, Reliance Retail has had the good fortune of being backed by one of India’s richest firms. RIL had cash and cash equivalents of Rs.82,975 crore on its books as on 31 March. The parent’s investment in Reliance Retail by way of equity and preference shares at the end of fiscal 2012 stood at Rs.7,800 crore.
The road to profitability is a long one, said analysts.
“To succeed in this format retailers will have to have deep pockets, bandwidth and an understanding of the retail business,” said Mishra of EY.
On the strength of published numbers alone, RIL’s retail business appears to be self-sufficient.
For instance, in fiscal 2013 the parent company received more money than it invested in its retail operations.
According to RIL’s latest annual report, its total investment in Reliance Commercial Associates Ltd (the holding company for RIL’s retail operations pursuant to a restructuring exercise) stood at Rs.5,667 crore, versus Rs.5,220 crore in fiscal 2012, an incremental Rs.347 crore.
And as on 31 March, RIL had fully redeemed its Rs.2,580 crore investment in optionally convertible preference shares of Reliance Retail, which also carried 9% interest.
A similar amount of Rs.2,647 crore was invested in the preference shares of Reliance Jio Infocomm Ltd—the conglomerate’s fledgling telecom business.
Despite the withdrawal of investment by the parent, Reliance Retail continued to expand its store presence across India. The firm had 1,466 stores across verticals at the end of 2012-13, 39% more than the year earlier.
Yet, it is likely that Cissell and Ambani are looking at more than numbers—at customers such as Balotiaa, who has visited the Reliance Fresh store he frequents around 20-30 times in the last six months. His preference for the store should please a company that’s repeatedly been told it can’t succeed in customer-centric businesses.
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First Published: Wed, Jul 17 2013. 11 46 PM IST