RIL looks to re-enter cash-&-carry
June 06, 2011 11:16 IST
Three years after its experimentation with cash-and-carry retail fizzled out, Reliance Industries Ltd plans a strong comeback.
At its annual general meeting today, Chairman Mukesh Ambani said Reliance Retail would soon relaunch this format, so far dominated by companies such as US major Walmart in joint venture with Bharti Enterprises, German giant Metro and French heavyweight Carrefour.
RIL had earlier decided not to pursue the cash-and-carry model due to a number of reasons, including a growing unrest towards organised retail.
Although RIL has not elaborated on its new plan, industry representatives indicated the first outlet could come up in Ahmedabad. The team that Reliance had put together for its cash and carry format earlier has moved on to other chains.
Cash-and-carry represents an opportunity worth $140 billion of the $350-billion annual retail business in the country.
This format refers to goods sold at wholesale outlets or warehouses. Its customers are retailers, professional users, caterers, institutional buyers and other businesses, who need special licences to buy from these outlets. There's no restriction on foreign direct investment in the cash-and-carry format.
However, for front-end multi-brand retailing, foreign players are not allowed. In single-brand retail, FDI is capped at 51 per cent.
With its re-entry into the cash-and-carry segment, Reliance Retail aims to bargain harder with producers and vendors and, in turn, improve margins of its chains, pointed out a company executive.
According to RIL's annual report for the financial year 2010-11, the retail units of the company such as Reliance Fresh, Reliance Hypermart, Reliance Digital Retail, among others, posted losses in excess of Rs. 350 crore. RIL did not invest new funds in the retail arms during the last financial year.
"It is a volume play. When a cash-and-carry venture buys 5,000 pieces from a manufacturer, 1,000 can go to the Reliance Fresh, which was earlier ordering the same from the same manufacturer at higher costs. Now it can leverage on higher volumes and get better margins," the RIL executive said.
He added that "having B2C (business to consumer) and B2B (business to business)
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makes sense". "The more we expand the more we will gain from cash and carry. We can also develop and sell brands in those stores," he said.
International majors which operate cash-and-carry outlets in India, did not comment on the development. Walmart was not available for comment, as its senior officials are travelling for a shareholders' meeting in the US.
When contacted, a Metro Cash & Carry spokesperson said: "We do not comment on the activities/strategies of other companies."
Carrefour did not comment either.
As far as competition goes, Bharti Walmart, which had opened the first cash-and-carry store in India in 2009, operates six outlets and plans to open 20 more in two years.
Metro Cash & Carry, which opened its first outlet in 2003, has six stores and is looking at a total of 50 in another five years. Carrefour began its cash-and-carry operation in India late-2010, and has not unraveled its expansion plans yet.
Gwyn Sundhagul, former chief marketing officer and director of Tesco Lotus, is CEO of value formats such as Reliance Super and Reliance Hyper. Sundhagul is from Thailand.
An analyst said RIL's re-entry into the cash-and-carry format was a positive for the industry.
"Organised retail is the need of the hour, and organised players are required in the supply chain side," he pointed out.
He, however, argued that cash-and-carry business was extremely cutting edge in terms of margins. In terms of timing, he said RIL was perhaps ready to start cash-and-carry right now as it is operating limited formats, as against too many earlier.
Naimish Dave, director at Strategy Consultants, a global consulting firm, said, "My feeling is that it is one more cash-and-carry player in the market. Cash-and-carry is a level playing field. Being an Indian player does not bring any major advantage." If RIL has deep pockets, most others have that too, he said.
Devangshu Dutta, chief executive of Third Eyesight, a retail consultancy, said: "All the cash-and-carry players such as Walmart and Metro have decided to expand in a particular way. RIL's (re-)entry into this segment will not change the cash-and-carry space."
Aditya Birla Retail CEO Thomas Varghese said: "Cash-and-carry is not a profitable business. It's a low margin and high sales business."
Three years after its experimentation with cash-and-carry retail fizzled out, Reliance Industries Ltd plans a strong comeback.