Reliance Retail supply chain initiatives

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

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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 Matters
The 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 Basics
The 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.

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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 Core
Not 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 Word
Expansion 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)