BackThe transformation of Reliance Industries
A three-part revamp plan: telecom backbone by Reliance Jio, retail network in 900 cities and an e-commerce system atop these two
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Mumbai: Billionaire Mukesh Ambani’s Reliance Industries Ltd (RIL) is looking to transform itself. From arguably the country’s biggest industrial powerhouse to possibly a force to reckon with in consumer-centric businesses such as telecom, retail and now, e-commerce. At least that’s what the plan appears to be, difficult as it may be to implement.
This plan has three parts: a telecom backbone built by R-Jio, which will be ready for commercial launch by December, a network of retail stores which will be expanded to 900 cities this year, and an e-commerce platform built atop those two.
“This year will bring about disruptive shopping experience for consumers as they embrace technology and get access to anytime anywhere shopping. With the advanced Internet infrastructure built by Jio and a robust physical retail business built by Reliance Retail, we will create a differentiated e-commerce model for India," said Ambani, speaking at the company’s 41st annual general meeting on Friday.
In some ways, what Mukesh Ambani is doing now appears to mirror what father Dhirubhai Ambani did in the 1970s and ’80s, by ensuring that RIL was present across the entire value chain of the textile and petrochemicals business, which later extended as far as oil and gas exploration and production.
This time around, that same philosophy is being implemented across its non-core businesses ranging from telecom to retail.
To be sure, RIL has been in the retail business since 2006. The business which has been profitable since 2013-14 with a presence in 200 cities, is now being taken to the next level. The brick-and-mortar business will be rolled out across 900 cities by the end of this year. This will coincide with the launch of R-Jio’s fourth-generation (4G) telecom services, for which the fibre network is mostly in place.
The grandiose plan, or, for the sceptics, a wishful pursuit, will be anything but easy to implement for a group whose investors are already concerned about heavy investments made in non-core businesses like telecom.
“There is no company in the world which has ever done such a thing. You will see that only in India where there are conglomerates with diversification ranging from retail, telecom, construction, textiles, etc. Still, none of the companies have ever tried integration," said Mahesh Uppal, director, ComFirst, a consultancy on regulation and policy related to various sectors, including telecom.
He said integrating telecom with online and offline retail is a services business where good project management skills and deep pockets will not be sufficient for success.
“RIL has yet to demonstrate strength in a services business. But if they do, it will set a precedent," said Uppal.
Building the retail network
The first challenge for RIL will be setting up a vast store network, which is no mean feat.
For perspective, Bata India Ltd, India’s largest footwear retailer present in the country since 1932, is only in 500 towns. Raymond Ltd, which was set up in 1925, is in 400 towns. Future Group, the parent of listed retail companies Future Retail Ltd, Future Fashions Lifestyle Ltd and Future Consumer Enterprise Ltd with chains such as Big Bazaar, eZone, Easy Day and Nilgiris, is present in 244 cities with 1,200 stores spread across 18 million sq. ft.
To better this, Reliance Retail, RIL’s retail arm, which currently has a network of about 2,600 stores across 200 cities, will need capital and human resources, said Arvind Singhal, chairman of retail consulting firm Technopak Advisors Pvt. Ltd.
“The present network with its distribution and logistics can support the new expansion," said Singhal, adding that for Reliance, it may not be a big challenge to expand from 200 to 900 towns.
To be sure, Reliance Retail has made provisions for raising funds of ₹ 4,500 crore in March, according to notes released by the company in March. Currently, Reliance Retail has a workforce of 50,000 associates across the country.
Despite the challenges faced in a tough consumer environment, this business achieved a compounded annual revenue growth of 31% in the last five years, Ambani said at Friday’s AGM.
The new expansion would mean an additional 30,000-50,000 people joining the retail workforce of Reliance, said Singhal, while explaining the manpower increase may not be proportional to the expansion as smaller towns will require smaller stores.
What may help Reliance expand into smaller towns is the experience it has already had in these areas as part of the process of setting up the infrastructure for R-Jio across all of India’s 29 states.
Even so, the expansion will be capital-intensive, which may not be viewed positively by investors who have expressed concern over the heavy investments RIL has committed to the telecom business. The overhang of these investments is one reason why the RIL stock underperformed the benchmark indices in 2014. The BSE Sensex gained 31.72% in 2014 while RIL shares rose just 0.5%.
According to independent analyst S.P. Tulsian, new businesses that RIL has entered in the last decade have not yielded anything for shareholders on a net basis. These projects include fuel retailing, shale gas, organised retail and domestic oil exploration and production.
These new projects have also saddled the formerly debt-free RIL with a total net debt of close to ₹ 75,000 crore as at 31 March.
“For instance, Reliance Retail has a capital employed of ₹ 6,200 crore, revenues of ₹ 17,600 crore and an ebit of ₹ 417 crore," said Tulsian, providing an interest burden at the rate of 8%. As RIL is debt-ridden now, it would have yielded negative returns on a net basis.
Online integration
While the brick-and-mortar stores will act as the backbone, the real traction may come from online sales.
The fashion and lifestyle formats of Reliance Retail will roll out e-commerce initiatives before the end of the year, said Ambani at the AGM. This would add to Reliance’s e-commerce initiative in grocery, www.reliancefreshdirect.com, which is currently in a pilot phase.
“The biggest challenge for all e-commerce companies today is supply chain and logistics. And Reliance Retail already has a strong presence in that," said Rohan Dhamija, partner, head, India and South Asia, Analysys Mason, a leading telecommunication and digital media consultancy firm.
This network will be strengthened as the physical retail presence expands.
Meantime, as R-Jio services are launched nationally, RIL can lure customers to its retail network, e-commerce platform and its telecom service with bundled packages and special offerings such as discounts and reward points, said a strategy consultant with a brand and consultancy firm on condition of anonymity.
“RIL is rapidly building its telecom infrastructure and a services layer of apps on top of it. With e-commerce initiative in lifestyle, grocery and digital content, an in-house brick-and-mortar supply chain and logistics, RIL can give a complete end-to-end experience to a subscriber of its telecom network," added Dhamija.
The challenges
In theory, RIL’s plan of integrating its telecom, retail and e-commerce businesses makes clear sense. Reality, though, is not as lucid.
The first stumbling block could be organized retail itself.
Think India. Think Retail, a February report published by property advisor Knight Frank India Pvt. Ltd and lobby group Retailers Association of India estimated that the share of modern trade in retail would slip from 17% in 2013 to 13% in 2019.
Also, most of the organised retail is concentrated in the top eight cities, which accounts for 60% of organised retail, says Mohit Bahl, partner, retail at consultancy KPMG India, while adding that Ambani’s plan “is ambitious and won’t happen in a jiffy".
“It’s a medium- to long-term plan," said Bahl.
Retail sector experts also add that Reliance may need to experiment with new business models like hub-and-spoke and smaller sized stores. In the past, Kishore Biyani had tried expanding KB’s Fairprice now called KB’s and electronic retail chain of eZone to smaller towns with limited success.
A quick expansion of the e-commerce market will also be a big determinant of the success of RIL’s startegy. According to the Knight Frank India report quoted above, e-commerce will account for 11% of the retail market by 2019.
The overall retail market will double from around $500 billion this year to $1 trillion in 2020, according to another report by Boston Consulting Group and Retailers Association of India.
At the same time, RIL will also need to overcome the initial ramp-up and profitability challenges at R-Jio as it tries to create a new market for its 4G services.
“Jio will be a drag on the RIL P&L (profit and loss statement) in its initial phase, as the high depreciation and interest accompanied by initial expenses of launch and ramp-up will be much more than the ebitda generated even if adoption is relatively quick. We expect losses to taper away from FY19E onwards; as the shift from 2G/3G to 4G and creation of a new market altogether is enabled by the high-speed data-access Jio shall provide," said Macquarie Capital Ltd in its report on 12 June.
According to analyst Tulsian, RIL plans to invest more than ₹ 80,000 crore over the next 18 months. Considering the firm’s annual residual cash flow of ₹ 25,000 crore, RIL has to borrow an additional ₹ 50,000 crore to meet its capital expenditure target. This can cause its total net debt to rise to ₹ 1,25,000 crore, which can raise jitters in this debt-averse market, said Tulsian.
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