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Rediff News  All News  » Business » How Reliance Retail plans to strike it big

How Reliance Retail plans to strike it big

July 23, 2013 10:20 IST

Image: A woman selects onions in the fresh foods section of a Reliance Fresh supermarket in Mumbai.
Photographs: Danish Siddiqui/Reuters Abhineet Kumar in Mumbai

At Reliance Industries’ annual general meeting in June 2012, when Mukesh Ambani laid out an ambitious turnover target of Rs 40,000-50,000 crore (Rs 400-500 billion) for Reliance Retail in the next three to four years, he wasn’t looking at bullion trading.

Often retailers take recourse to this route on the way to bigger revenues.

Reliance Retail has instead identified the cash-and-carry business as its growth driver. This not only provides large volume, but also promises higher return on capital, a key benchmark to judge the sustainability of any business.

A year hence, the company has already made progress.

In 2011-12, when the target was set, Reliance Retail had an annual turnover of Rs 7,600 crore (Rs 76 billion) and operational losses of Rs 34.2 crore (Rs 342 million).

By 2012-13, the turnover had risen 42 per cent to Rs 10,800 crore (Rs 108 billion) and the company had reported an operational profit of Rs 78 crore (Rs 780 million), its first in seven years of existence.

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How Reliance Retail plans to strike it big

Image: People shop in the chilled foods section of a Reliance Fresh supermarket in Mumbai.
Photographs: Danish Siddiqui/Reuters

The game-changer was its first cash-and-carry store, Reliance Market, which opened in Ahmedabad in September 2011.

By the end of 2012-13, Reliance Market, which caters to kirana shops, caterers, hotels and other business establishments, had acquired a sizeable customer base of 125,000, including 24,000 kirana shops.

Propelled by its success, six new stores have been opened in the last three months in Bengaluru, Mumbai, Anand, Faridabad, Chennai and Guntur.

As a result, the company’s turnover increased 53 per cent to Rs 3,474 crore (Rs 34.74 billion) in the June quarter of 2012-13.

It also posted an operational profit of Rs 70 crore (Rs 700 million).

Reliance Retail is the first Indian retailer to enter the cash-and-carry business, currently dominated by multinationals such as WalMart, Metro and Carrefour, whose expansion in the multi-brand format has been hobbled by policy hurdles.

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How Reliance Retail plans to strike it big

Photographs: Rediff Archives

While Reliance Retail does not want to provide any numbers for store expansion, going by its growth plans it is likely to have 12 to15 stores by the end of the current financial year.

The cash-and-carry business is highly efficient, as it has fewer requirements for stock-keeping units, which in turn means better supplier management and greater sourcing power.

A bigger draw is the higher RoC.

“Retail is a business that is best judged on return on capital instead of the (profit) margins, which could be as low as two to three per cent,” says Arvind K Singhal, chairman of consultancy firm Technopak Advisors.

In the cash-and-carry business, the inventory turnover could be 40 to 50 times in a year, which in turn pushes up the RoC.

The company in various strategic phases, internally referred to as Reliance Retail 1.0, 2.0 and 3.0, has established businesses under value, digital, lifestyle, jewellery and brands formats and has become the second-largest retailer in the country after the Kishore Biyani-promoted Pantaloon Retail reported  net sales of Rs 19,780 crore (Rs 197.8 billion) for the 18 months ending December 31.

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How Reliance Retail plans to strike it big

Image: Customers shop at a retail store.
Photographs: Vivek Prakash/Reuters

Because the company is going through a business re-organisation, it will again report an 18-month financial year.

On an annualised basis, this comes to Rs 13,187 crore (Rs 131.87 billion), at an annual growth rate of 10.2 per cent.

Analysts’ estimate 15 per cent of this or about Rs 1,980 crore (Rs 19.8 billion), came from the apparel and fashion business that has been recently sold to Aditya Birla Nuvo. The company has since been rechristened Future Retail.  

At the end of Reliance Retail 3.0 in 2012-13, about 56 per cent of its revenue of Rs 10,800 crore (Rs 108 billion) came from its value and other segment that operates the grocery chains, Reliance Fresh, Reliance Super and Reliance Hyper, under Chief Executive Officer Rob Cissell.

This represented a 33 per cent jump in revenue of Rs 6,100 crore (Rs 61 billion) in the year, while the number of stores grew marginally by 10 to 760.

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How Reliance Retail plans to strike it big

Image: Prices for various vegetables are displayed as people shop in the fresh foods section of a supermarket.
Photographs: Danish Siddiqui/Reuters

Under Reliance Retail 4.0, as part of plans for business expansion, the cash-and-carry store, Reliance Market, is soon expected to become a separate vertical.

In addition to betting on Reliance Market, the company is also looking at expanding its digital segment.

About Rs 5,500 crore (Rs 55 billion) is expected to be spent in the next three years primarily to drive growth in the two formats.

In 2012-13, the electronic retail businesses under Reliance Digital and Reliance Digital Express accounted for 20 per cent of the revenue at Rs 2,100 crore (Rs 21 billion).

The digital vertical, led by CEO Brian Bade, is expected to be the second-largest growth contributor after value and other segment this year.

It had 139 stores at the end of 2012-13.

Among its other verticals, the contribution of fashion and lifestyle business, with 448 stores in operation, was 15 per cent at Rs 1,600 crore (Rs 16 billion).

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How Reliance Retail plans to strike it big

Image: Customers shop inside a retail store.
Photographs: Ajay Verma/Reuters

Having established its reach, CEO Akhilesh Prasad is now focusing on tweaking the product portfolio to provide aspirational categories in order to boost same store growth.

“Every 2 to 3 years, we have had to review growth parameters and get ready, but whenever we entered into a new phase we could anticipate what would happen and anticipate what should be our next move,” says a senior executive of Reliance Retail.

The company’s other two formats -- jewellery and brands -- contributed seven and two per cent to the revenue in 2012-13, respectively.

Reliance Jewels was unable to log the desired numbers in terms of achieving scale, recording revenue of just Rs 800 crore (Rs 8 billion) in the year.

Comparatively, Tata Group company Titan Industries reported revenue of Rs 10,213 crore (Rs 102.13 billion) in 2012-13, with the share of jewellery and watches being Rs 8,108 crore (Rs 81.08 billion) and Rs 1,675 crore (Rs 16.75 billion), respectively.

To drive growth, Reliance has shifted the headquarters of its jewels arm from Bengaluru to Mumbai and roped in Sunil Nayak from Landmark in Dubai to oversee things.

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How Reliance Retail plans to strike it big

Image: A woman pushes a trolley as she exits the meats section of a Reliance Fresh supermarket in Mumbai.
Photographs: Danish Siddiqui/Reuters

With a portfolio of 40 international brands across luxury and high-street lifestyle via various licensing agreements, the brands business of Reliance Retail contributed about Rs 200 crore (Rs 2 billion) to the revenue.

While the brands and the jewellery business is important to the company, its contribution in taking Reliance Retail’s turnover to the target of Rs 50,000 crore (Rs 500 billion), however, will be minimal.

Clearly, increasing RoC is among the top priorities for Reliance Industries, which has drawn flak for sitting on Rs 50,456 crore (Rs 504.56 billion) in cash and bank balances and another Rs 28,869 crore (Rs 288.69 billion) in current investments (on the consolidated balance sheet) at the end of 2012-13.

This dragged the company’s RoC to 12.51 per cent in 2012-13 from 13.72 per cent in 2011-12.

To counter this, the company has announced Rs 150,000-crore (Rs 1,500-billion) capital expenditure in the next three years.

Reliance Retail’s expansion in cash-and-carry is a part of this larger plan.

Source: source