Reliance Retail mulls opening stores across more cities5 min read . Updated: 21 Sep 2010, 09:56 PM IST
Reliance Retail mulls opening stores across more cities
Mumbai: Identifying scale as an immediate priority, Reliance Retail Ltd (RRL), a subsidiary of billionaire Mukesh Ambani’s Reliance Industries Ltd (RIL), intends to renew a rapid expansion drive to compete with mom-and-pop outlets and street markets, besides rival store chains.
“There is an opportunity for 2,000-5,000 stores. (The) opportunity is there. Scaling to do it fast and to replicate as we scale is the big challenge," said Reliance Retail president Bijou Kurien, also chief executive of the lifestyle business segment.
“In our business, every day, every store, every transaction is a challenge," he said.
“The consumer spend does not significantly differ in a metro and a non-metro city," Kurien said.
Raising the stakes in a $400 billion (Rs 18.28 trillion) retail market, in which modern retail accounts for a mere 3% share, Reliance Retail will also start home deliveries of groceries, following the example of multinational retail chains such as Tesco Plc.
The entry into smaller towns will also see the retailer take a leaf out of the book of neighbourhood groceries, known as kirana stores.
“Home delivery will be an important part of our strategy," said Kurien, who considers kirana retailers to be worthy competitors because they offer such services to consumers that most modern retailers do not.
“As we keep going down the strata, our hypermarkets will keep getting smaller," he said, pointing out that an average kirana store is 175 sq. ft in size.
Reliance Retail’s new push comes after months of putting expansion on hold. Following the September 2008 crash of Lehman Brothers Holdings Inc. that led to a global credit crunch, triggered a recession in the US, Europe and Japan and caused Indian economic growth to slow, the company imposed a six-month freeze on expansion.
“In next two-three years we can expect most modern retailers to expand to these (smaller) cities. There is purchasing happening there," said Arvind Singhal, chairman, Technopak Advisors Pvt. Ltd, which specializes in retail consulting.
Currently, it has 660 stores in less than 100 cities, the most among its peers. India’s largest retailer by sales, Pantaloons Retail India Ltd, is in 74 cities while Aditya Birla Retail Ltd and Spencer’s Retail Ltd, a subsidiary of RPG Enterprises, are yet to reach the 50-city mark. Specialty retailers such as Reebok India Co., Bata India Ltd and Raymond Ltd are present in over 200 towns nationwide.
“The slowdown had kind of hit us, but now we have resumed expanding," Kurien said.
The food and groceries business accounts for 65% of Reliance Retail’s overall business, while non-food business or specialty retail accounts for the rest with 300 stores. The specialty business has 18 formats of which 50% are break-even plus. Analysts say Reliance Retails’s new plans are backed by RIL’s reputation for its ability to scale up rapidly.
“They get into any business with an ambition to be bigger than any player present," said Ramesh Srinivas, an executive director at KPMG Advisory Services in Bangalore. Srinivas expects the retail business to follow the path typical of other RIL ventures such as petroleum retail outlets and Reliance Communications Ltd, now a part of Reliance-Anil Dhirubhai Ambani Group, both of which ramped up rapidly soon after launching.
“Retail, like its core businesses, is definitely a business where they can scale significantly and quickly," Srinivas said.
Kurien concedes that the difference between telecom and retail is that “with penetration, telecom created a market, whereas retail just gives the consumer extra choice".
The scaling-up plan will also connect Reliance Retail with its suppliers to cut costs on the sourcing front. While it currently buys most of its inventory from farms, fields, vegetable mandis (wholesale markets) and suppliers, the company’s contract farming plan, which is on hold, will be activated once the required scale is reached.
Indeed, a quick turnaround is also essential for the company, which has been making losses, even though those have declined. In fiscal 2010, the combined losses of 17 RRL subsidiaries, each of which generated ₹ 40 crore and above in revenue, fell by around 43% from the previous fiscal to just under ₹ 244 crore.
Revenue for the same set of companies grew 7% in fiscal 2010 to about ₹ 5,310 crore.
“Profitability is now clearly in sight," says Kurien, adding that the value format “is more stable and sustainable now".
The value format is already a part of Reliance Retail’s overall strategy to drive scale.
It has started exploiting efficiencies of scale by introducing price points as low as ₹ 99 in its apparel brands Network and DNMX at prices starting ₹ 69 to compete with street market prices.
“These price points are possible as we work with scale and prices can be a driver of scale," says Kurien, who believes that the real market and competition is on the streets, where consumers spend their money.
Reliance Retail is looking to spend its money to get those shoppers; at the end of fiscal 2010, RIL had ₹ 5,200 crore invested in Reliance Retail, according to its annual accounts. The capital infusion came from subscription to partially paid-up shares which, analysts say, allows RRL to raise up to another ₹ 4,270 crore without seeking board permission.
The move to expand into new, smaller cities is a business necessity, as property prices in large cities have risen sharply.
“Real estate has been a letdown as commercial projects and malls not being completed on time led to retailers unable to find space. Even rentals have started increasing in the last six months," says Singhal of Technopak Advisors.
Kurien admits to a supply crunch on the developed properties front till 2011. The retailer is looking at increasing the number of self-owned properties, especially in larger formats. Currently, about 50% of Reliance Hyper are self-owned while the rest are leased. In the non-food retail business, 30% of properties are owned and the rest leased.
“Typically, rentals account for 4% of operational cost," says Thomas Verghese, chief executive officer, Aditya Birla Retail, who has studied both the models of owned and leased retail property in India, and is yet to decide on which model is more profitable.
“I am perplexed about which model will work," he said.