RETAIL
14 Jul 2012
Digging Deep To Stay Fresh
Reliance Retail is fine-tuning its three value formats and plans to invest heavily in them
Nevin John
Arjun
Bodke's life has become both better as well as more difficult since he
became a supplier for Reliance Fresh three years ago. The 50-year-old
farmer from Varhedarna village in Nashik, Maharashtra, grows
cauliflower, cabbage and sugarcane in his three-and-a-half acre farm —
and supplies the first two to Reliance. The company has helped Bodke
with technical expertise to improve yield and quality. It also pays him
better — typically 15 per cent more than mandis — and credits the money
immediately to his account. The tough part is that the company's quality
standards are stringent, and it refuses to buy any vegetable that is
even slightly damaged.
On the summer morning that we visit Bodke,
he is picking cabbage along with his six family members. By noon, they
have picked 4,000-odd cabbages, which are treated as tenderly as
newborns. They are softly arranged on the tractor's trailer, before
being taken on a 10-minute drive to the collection centre.
Here
Bodke meets Pramod Nikam, the chief buyer at the collection centre,
whose team inspects each cabbage, before they are put into foldable
crates. Nikam tallies the number of cabbages and gives Bodke a payment
slip that confirms that the money for the produce has been transferred
into his account. Nikam asks Bodke if he can supply cauliflower the next
day. The farmer nods — his crop is ready.
By evening, Nikam's
team has bought vegetables from dozens of farmers in the region, and
loaded them on to refrigerated trucks. The trucks will travel at night
so that racks in Reliance Fresh outlets in Hyderabad, Bangalore,
Ahmedabad, Indore and Mumbai are replenished before the stores open in
the morning.
 |
| (BW Pics By Bivash Banerjee and Subhabrata Das) |
Reliance
Fresh stores, 650 in number, form the biggest chunk of the ‘value
format' business of Reliance Retail. Also under the format are Reliance
Super, Reliance Mart, Delight and Autozone. Together, the value
format accounted for Rs 3,928 crore of Reliance Retail's total sales of
Rs 7,600 crore in 2011-12, according to the company's executives.
(Reliance Retail also has 18 ‘speciality format' brands, many in joint
venture with global brands, such as Marks & Spencer and Office
Depot. These account for the rest of the revenue.) Last year, Reliance
Fresh alone clocked revenues of Rs 3,860 crore — or about half of
Reliance Retail's sales, according to CMIE data.
Almost six years
ago, when Mukesh Ambani got into the retail business, he planned on a
mammoth scale, as he does for every other business. And though in the
first few years, Reliance Retail had its fair share of problems, Ambani
never lost faith. According to sources, he pumped in over Rs 12,000
crore, though the business is yet to make any money. And he is prepared
to spend a lot more. Currently, as many of his rivals in the retail
business are struggling with debt and other problems, he is pushing
harder than ever. In a meeting with shareholders last month, Ambani
unveiled aggressive plans to invest in the business, saying that he
expected revenues from retail to go up five or six times to Rs
40,000-50,000 crore over the next four or five years. And though the
retail foray is still losing money, the company expects it to become
profitable by next year.
Even if it takes a few more years to
become profitable, Ambani can afford to keep investing — after all, his
oil and gas and petrochemicals- focused business threw up Rs 32,590
crore of cash profit last year, while the group's cash reserves stood at
Rs 70,000 crore.
Finding Value Reliance
Retail stands apart from its peers on various counts. First, it is
experimenting with more formats than others. Even Kishore Biyani, the
pioneer of organised retail in India who has experimented with over a
dozen formats, does not have the range and variety of stores that
Reliance has — three value formats including cash and carry, and 18
speciality formats. More importantly, no other organised retailer in
India has probably focused as heavily on the fruits and vegetables
(F&V) segment as Reliance has.
Traditionally, organised
retailers have downplayed the F&V segment because of problems of
uniform supply, spoilage (as high as 35-40 per cent) and often political
opposition. Thus, while Ernst & Young (E&Y) estimates that $280
billion of the total $450 billion retail market in India is made up of
the F&V segment, in organised retail just about $3 billion of the
total $28 billion comes from food and grocery.
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Finally,
the biggest difference between Reliance Retail and many of its peers is
the money that is going to be invested. Biyani is currently India's
biggest retailer with revenues of about Rs 12,000 crore (under Pantaloon
Retail) and nearly 550 stores under Big Bazaar, Food Bazaar and KB's
Fair Price, but his investment and expansion plans have slowed down
because of debt burden. The other players with enough money — including
Aditya Birla Group's More, RPG's Spencer's and Bharti's Easyday — are
treading cautiously because of the overall economic slowdown. But
Reliance wants to invest aggressively and become the biggest player.
Already, in a short span of five years, it has become the second biggest
player in organised retail.
Size MattersThe
hypermarket at Phoenix Market City in Kurla, Mumbai, has a grocery
section with special emphasis on F&V. Store manager Umesh
Radhakrishnan says that F&V is more in demand. "Here, the prices are
lower than the market because of direct sourcing." He says
12,000-14,000 people visit the store on weekends even though it opened
just three months ago. On weekdays, it gets 5,000-7,000 visitors.
The
gargantuan hypermarket format of 50,000 sq. ft or more is what Robert
Cissell, the new CEO for value formats at Reliance, favours. When
Reliance Retail had started, its then CEO Raghu Pillai — poached from
Future Group — had focused on the neighbourhood store concept with
Reliance Fresh, stores of 3,000 sq. ft or so in size. But Cissell feels
bigger stores offer more opportunity and better margins.
More
importantly, the hypermarket format allows him to offer more
specialities for customers than normal stores do. For instance, the
Kurla hypermart is carefully designed with clear shopping areas for
different segments, compared to the Reliance Fresh store at Kharghar,
Navi Mumbai. The Kurla store has attractions beyond F&V — food
court, car zone, wine shop and a fresh-cut chicken and fish corner, etc.
 |
ONE-ON-ONE: Speciality formats face competition from single-brand and standalone speciality stores
(BW Pic By Tribhuwan Sharma) |
Cissell
is the man credited with turning around Walmart China. Ambani lured him
away by offering him carte blanche in value formats. Cissell believes
that while hypermarkets are the way to go in the metros and bigger
cities, the smaller supermarkets (12,000-18,000 sq. ft) will do well in
smaller places. "In large formats, the margins are better, footfalls are
high and shelf-space is large," he says, adding that all retailers have
realised this. Big Bazaar is giving lesser importance to the smaller
Food Bazaar format, and More is closing down many of its smaller stores
even as it opens bigger ones.
When Reliance opened its first
store in 2006, Big Bazaar and Spencer's led in the groceries, food and
beverage segment. Reliance poached executives from P&G, Hindustan
Unilever and the existing retailers and built its original retail
A-team. Even though it was losing money, by investing it overtook
Spencer's, though it is still behind Biyani in overall sales.
The
Reliance business model focused on building a strong supply chain that
would source directly from farms and also mandis, and sell cheaply to
compete with neighbourhood stores. But it ran into political resistance
almost immediately. On 23 August 2007, the then UP chief minister,
Mayawati, ordered the closure of 10 new Reliance Fresh stores claiming
they threatened the livelihood of kirana stores and others in the
unorganised sector. It faced opposition in Kolkata, Jharkhand and
Odisha. BJP leader Uma Bharati, who was then with the Bhartiya Janshakti
Party, led a protest in Bhopal that attacked a Reliance Fresh shop.
Party workers also ransacked a Reliance Fresh store in Indore.
In
states where it faced exceptional resistance to its value format,
Reliance decided to stick to the speciality formats. (In UP, the new
government is apparently re-examining the case for allowing Reliance to
operate in the grocery and F&V segment, says a Reliance Retail
executive.)
For the first two years, Reliance Retail struggled
with other problems as well. It was new to dealing with retail
customers, though it had forayed into the telecom business earlier
(which later went to younger brother Anil Ambani), and Reliance
Industries continued to be a primarily industrial products company.
Back To BasicsThe
retail business model has not yet been perfected. Reliance was spending
a lot without commensurate gains. It had opened many stores but was not
leading in any segment. Then the slowdown hit, and things worsened. But
it also opened a window of opportunity. The company shut unviable
stores and focused on new ones.
During the global economic
recession in 2008-09, Indian retail's most aggressive player, Biyani,
found himself overleveraged and needed to go slow on expansion. Others
adopted a cautious approach. Reliance, meanwhile, with its hoard of
cash, worked on fine-tuning its business model, building a robust supply
chain backed by technology, and closing some smaller formats while
building new and bigger stores.
| RETAIL FOCUS |
Excerpts from Mukesh Ambani's AGM speeches:
27 JUN 2006, 32nd AGM: "Reliance Retail would... entail an equity investment to the extent of Rs 10,000 crore."
12 JUN 2008: "The Reliance Fresh format... has grown to nearly 600 stores...."
17 NOV 2009: "The
Reliance Retail initiative serves over 5 million loyal customers in 86
cities and 14 states... through nearly 1,000 stores."
18 JUN 2010: "Over the next 5 years, I can realistically foresee this business (retail) growing ten-fold from current levels."
3 JUN 2011:
"Reliance Retail is today the largest food retailer in India. Every
week, 2.5 million customers shop in our stores. This would increase
multi-fold..."
7 JUN 2012:
"Reliance Retail will be one of our important growth engines in the
next few years and will have amongst the highest growth rates and
earnings potential."
|
Its
top team in retail also underwent changes, with Cissell coming in as
CEO of the value format, and many expats from Tesco and other global
giants joining him. One executive says that if the first couple of years
were "personality-centric" in terms of management, it has become
"systems-centric" over time. The new team also focused on simplifying
and centralising operations, and consolidating backend systems of the
super- and hypermarkets.
Today, Reliance Retail executives reel
off impressive figures — direct sourcing from 1,000 villages; daily
F&V procurement from 15,000 farmers; F&V sourcing annually
touching 3 million quintal... Though Reliance prefers to buy only from
farmers, it buys from mandis as well to make up for the shortfall.
(Bharti has similar arrangements, and other organised retailers are also
working on similar lines.)
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Mohit Bahl,
partner, transaction services, KPMG, says inventory planning and quality
assurance are important factors in F&V segment, where the margins
are high. "Reliance has an efficient supply chain and backend system.
Operational efficiency is high. Working relations with brands have
improved," he adds.
The company says it has invested heavily in
IT systems so that information such as what is being sold, how much is
the demand on any given day, are easily available. Cissell says the
management now knows, for instance, what is sold most on a Diwali day or
on an Easter Sunday. If high demand for Basmati rice creates shortage,
they can check through the network for rice prices at different markets
in different states, and take a decision accordingly.
Customer At CoreNot
just the backend, but frontend operations, too, have been improved.
Kharghar, a node of Navi Mumbai on the Mumbai-Pune highway, shows no
signs of a slowing economy. Real estate prices continue to skyrocket,
and high-end cars ride bumper-to-bumper on many roads.
Retail
chains were quick to notice the city's purchasing power. Big Bazaar and D
Mart are operating with their hypermarkets, while More and Reliance
have smaller stores. Local chains like Daily Bazaar exist as well.
Specialty formats and single-brand retailing are also in the ring.
| ‘In 5 Years, We Will Have More Space And Will Open 300 Hypermarkets' |
 |
| (BW Pic By Subhabrata Das) |
In
2010, Reliance Industries hired Gwyn Sundhagul, former head of the
Thailand arm of British retailer Tesco, as CEO for its retail business.
In early 2011, Sundhagul moved to the parent company, and Robert Cissell, former COO of Walmart China, took the reins of RIL's value formats. In an interview with BW's Nevin John, Cissell talks of RIL's plans to go big
with hypermarkets. Excerpts:
The China Experience:
The challenges for retailing in India and China are same. Walmart (in
China) went direct to the farmers, consolidated and moved the produce
through the supply chain to its stores. RIL has the same value chain. In
India and China, the spoilage is 35-40 per cent as markets are far
away. So we (in Reliance) set the collection centres locally and move
the produce to processing centres and to the stores.
Supply Chain: In
India, the supply chain is underdeveloped because organised retail
market is still young. About 6 years back, Mukesh Ambani and Manoj Modi
(in charge of retail and telecom business) built the foundation for
RIL's retailing. Our efficient supply chain is our competitive
advantage. We are now moving 50,000 tonne of produce across India, and
ramping up. We have around 700 stores in 18 states; still only
scratching the surface. We use truck fleets, rail wagons and aircraft
for transportation. In the last season, we airlifted strawberry and
high-value soft fruits. Also, we source from mandis, because sometimes
the produce is not of sufficient scale.
Shift In Emphasis:
(Reliance) Fresh stores are neighbourhood small-size supermarkets. But
hypermarket holds everything from apparel to electronics to vegetables.
We will probably open 35 hypermarkets this year. In five years, we will
have five or six times more space and open 300 hypermarkets.
Growth:
We have been driving like-for-like sales significantly ahead of the
market. Our marketshare for January grew to 15.8 per cent, against 13.4
per cent last year. That is not by adding any space, but by purely
driving business. By June, all Fresh stores will be remodeled, improving
the service and introducing 20-40 per cent more range in products. In
Fresh stores, more than 10 per cent of the shopping happens before 11 in
the morning — fresh vegetables. Our margins are better because our big
bet in supply chain paid off.
Break-Even:
Retail is in loss because we opened 700 stores. Retail needs huge
upfront investment; it pays back only when it achieves scale. Globally,
hypermarkets move into profit in 4-5 years. The chain today is only
2-3-years-old. Recession hit in 2008, which delayed breakeven. But our
business is moving towards it. The industry like-for-like is 10 per
cent; we are at 27 per cent. We are budgeting for 40 per cent
like-for-like growth this year. This is not a pipe dream, but a result
of a lot of action. |
Despite
the affluence, customers in Kharghar still shop for bargains. Savitri
Ammal, a Kharghar resident, says shopping at Big Bazaar and D Mart feels
like a family outing. "There doesn't have to be an agenda or a shopping
list to go there. More is also semi-hyper in terms of its size. But
Reliance Fresh is crammed. Only if I need to buy vegetables and fruits
will I go there; onion and potato are always Rs 2-5 cheaper at Fresh,"
she says.
In fact, Fresh's niche in F&V has forced Big
Bazaar to relabel its similar section as Farm Fresh. D Mart has named
the segment Fruits & Vegetables. But Reliance Fresh is still ahead,
say industry experts.
At the hypermart, venturing into food
retail has helped it increase footfalls, but competition is stiff. At
Kharghar, D Mart attracts more people thanks to lower prices, even
though it does not have loyalty cards (like Reliance) or a suitable
location. Big Bazaar has a model that engages a customer from the
beginning to end, and it comes up with offers from time to time.
Reliance's
hypermarket competes with the Big Bazaar format — catering to the value
seekers as well as the affluent class. Radhakrishnan, the manager at
Kurla, points towards a section of bicycles. "Every weekend we sell
about 5-6 imported bicycles. We never thought they would sell that much
here," he adds. Similarly, selling raw fish and chicken, too, was an
experiment that succeeded as shoppers could buy poultry and fish in
hygienic surroundings.
A look around Reliance's hypermarket and
supermarket shows that the bigger format is more suitable. Also, the
company's expertise in forming alliances with international players for
specialty formats benefits the hypermarket format. But for the smaller
format, Reliance's strength as of now is limited to F&V.
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In
the F&V segment, Reliance's thinking is close to UK-retail giant
Tesco's founder Jack Cohen's business motto — "pile it high and sell it
cheap". Not that it has managed to emulate the Tesco example in all
areas. One place where it still lags is the growing business of online
sales.
Tesco tried online shopping as far back as 1984 at
Gateshead in England. Other global retailers followed suit. Even though
online retail has picked up in India, Reliance is yet to offer the
service. Big Bazaar has futurebazaar.com, but not for grocery. One place
where almost all retailers in India followed Tesco's example was the
loyalty card programme. Reliance Retail boasts of 9 million customers
with its loyalty cards. But analysts say that most customers have
multiple loyalty cards, and having a loyalty card does not mean the
customer only shops there.
An analyst with Boston Consulting
Group says, "Retail is in a nascent stage in India. It will take years
for a successful retail model to evolve." Initially, retailers relied on
the neighbourhood mom-and-pop store model, the niche of unorganised
players. All players, including Reliance, failed at the individual store
level. Inventory and supply chain management was tough; unorganised
players offered more brands; and the organised players could not match
their credit and home delivery facilities.
Now experimentation
is mostly with location. Like others, Reliance is also opening stores at
new locations and closing down the unviable ones. More has closed down
27 supermarkets in Mumbai due to heavy rentals. More has about 500
supermarkets. Since financial viability of a particular shop is
unpredictable, Reliance mostly leases shop space. D Mart has a different
model — it owns the property.
"The
method of working in retail is almost the same globally. Only the
service is different geographically," says a KPMG analyst. After 40
years of operations, Walmart closed down unprofitable units. It
struggled to export its brand as it rigidly tried to reproduce its model
overseas. In China, Walmart finally realised that consumers preferred
to select their own live fish and seafood. So its stores began
displaying the meat uncovered and installed fish tanks, leading to
higher sales. Similarly, Reliance is now focusing on F&V, while also
experimenting with bakery, meat shop, ready-to-eat and wine shop.
The Final WordExpansion
plans and the required funds may be in place. But do shareholders
support this? According to its 2011-12 annual report, RIL invested Rs
5,027 crore fresh capital in Reliance Retail in fiscal 2012. The last
time it had put capital into the business was in 2009-10, when it
invested about Rs 1,220 crore in partially paid-up shares. The company
is yet to get the thumbs up from institutional investors and market
analysts. This may be why Ambani appointed different CEOs for different
formats.
Then there is the impending entry of global retail
giants in India. This is another reason why Cissell's focus is more on
the sustainable growth of large-size value format. Although the central
government had to roll back its decision to allow FDI in retail
because of political opposition, analysts feel that it is only a matter
of time before FDI rules are further relaxed. Meanwhile, even under the
existing rules, Bharti has already opened 17 cash-and-carry stores since
2009. The $140-billion revenues Carrefore has eight cash-and-carry
stores. Though Tesco put its India plans on hold, it will restart once
the economy resurges.
Arvind Singhal, chairman of Technopak
Advisors, however, says that entry of global players will not affect
Reliance, as the growth in India's economy will allow the retail market
to expand and accommodate more players. Today, the Indian retail market
is worth about $550 billion, and is expected to grow to $800 billion in
five years. Reliance Retail, which is below $2 billion, can easily grow
as they have a capital advantage, says Singhal.
 |
| In
Rs crore; standalone results; some assets have been transferred between
subsidiaries leading to rise and decline in their sales Source: CMIE
Prowess |
The other
challenge that Reliance faces is growth of single-brand stores and
speciality stores such as Vijay Sales, Max and Mega Mart. This is a
major reason why Reliance Retail's business is split equally between
value formats and speciality formats. Political protests against grocery
retailing is another reason. About three years back, value business was
65 per cent of the overall retail business. A company executive says,
"We expect to maintain a 50:50 contribution from specialty and value
retailing."
There are other issues to tackle as well — cost of
real estate, multiple taxation and hassles in interstate transfer of
food and agri products. Also, Reliance does not have volume in retail
yet, as it has in its other businesses. Its plan to spend tonnes of cash
may, however, solve this issue. Format-wise, the current structure is
like this: Reliance Fresh will compete with local vendors, and the super
and hyper formats with organised players in a specific locality.
The
capital-intensive retail sector has had its victims — Subhiksha and
Vishal Retail went under as they were unable to service the debt they
had taken on to finance aggressive expansion plans. Big Bazaar is
looking at inducting strategic partners and financial investors across
formats as it tries hard to pare its nearly Rs 8,000 crore debt. Retail
Retail, which had got off to a stuttering start, however, does not lack
cash, and can withstand even a tough economy. Indeed, its deep pockets
could see it finish off weaker competitors.
Overall, say experts,
even though Reliance Retail is getting its act right, it is still too
early to pronounce a judgement. Ambani is talking about Rs 1 lakh crore
investment in the group companies over the next five years. How much of
this will go to value retailing?
There is plenty of potential in
retail — from exploiting tier-2 and -3 locations to creating a strong
online platform. All eyes are on Reliance Retail to see how fast it
moves on these fronts.
nevin(dot)john(at)abp(dot)in
(This story was published in Businessworld Issue Dated 23-07-2012)
