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Reliance Retail struggles to beat slowdown blues

By Raghavendra Kamath and Nevin John in Mumbai
February 26, 2009 12:17 IST
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It's not often that Reliance Industries Chairman Mukesh Ambani plays second fiddle in the space he operates in. The man loves scales of gigantic proportions, which was more than evident when he announced the group's foray into retail two years ago.

Speaking to his shareholders in 2006, Ambani talked about an investment of Rs 25,000 crore (Rs 250 billion) in the retail space in the ensuing years and a presence in 1,500 cities and towns with a network of neighbourhood stores, supermarkets, speciality stores and hypermarkets.

While the actual investment figures so far aren't known, Reliance Retail, the company that is spearheading the retail plans, has added 2 million square feet of retail space in the last one year. This is way behind the 5 million square feet added by Kishore Biyani's Future Group in the same period. 

Reliance Retail has added 485 stores in the last one year, taking the total count to 950 and the footprint is now spread across 77 cities (58 in the last one year) across India. While his critics say Ambani may have lost the plot as the progress of his retail plans are nowhere near what he had sought to achieve, others feel the Reliance chief is just being pragmatic given the not-so-conducive environment for expansion in retail.

The environment is tough indeed for retailers. Listen to Nikhil Vora, managing director of IDFC SSKI Securities: "Every square foot of retail space calls for Rs 2,000-2,500 of capital, while the most profitable retailer generates Rs 1,000-1,200 of cash profits at the store level, and Rs 300 at the net level. So, at best, internal accruals can support just 15 per cent of space addition.

"Given this, the fact that the books of rapidly-growing retailers are highly leveraged and that the current environment is making access to external capital difficult, retail growth has hit a roadblock. Though there are capitalised players like Reliance, Tatas and Bharti operating in the space, retailing cannot exist in the absence of a retail environment -- the competition also has to be funded."

Also, the fact is that Reliance Retail's grandiose plans hit a roadblock when it faced political backlash in states such as Uttar Pradesh and Orissa towards the end of 2007. The company faced the heat in West Bengal and Kerala too. So the plans to set up 2,000 stores by 2008 and 5,000 by 2010 has taken a knock.

The company is also trying hard to beat the recession. That explains its decision to close 30 of its unprofitable stores and reducing the manpower by at least 1,000. Also on cards are renegotiating rentals for its 900 properties to cut down such costs by a third.

The company has also unified its sourcing function for value formats after achieving a critical mass, a company spokesperson says. The value formats include neighbourhood format Reliance Fresh, supermarket chain Reliance Super, hypermarket format Reliance Mart and Reliance Wellness, a beauty and wellness format.

The company currently draws 35 per cent of its revenues from private labels. In speciality formats like Reliance Trends and Reliance Footprints, the ratio of private labels to others is almost 50:50.

The spokesperson says Reliance Retail is on the growth track and continues to expand its value as well as specialty formats. "The company is a long term player with a robust business model. Having achieved a critical mass in our value formats, we will continue to strengthen it further by increasing our footprint in Tier II and III cities. We will continue to expand our specialty formats during the year and bring them to a significant size," he said.

The company operates under various value formats such as Super, Mart, Wellness and Delite, along with exclusive formats for jewellery, footwear, apparel, electronics and digital, among others.
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Raghavendra Kamath and Nevin John in Mumbai
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