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Digging Deeper | Reliance Retail: Forging a new path

On this edition of Digging Deeper, we look at the success of Reliance Retail, and what plans the company has for the future.

July 25, 2019 / 01:37 PM IST

Harish Puppala | Rakesh Sharma

Reliance Retail has been making headlines for a few months, and it took many by surprise when it announced that it had reached Rs 1 lakh crore in revenue in FY19. That made it the first Indian retail company to achieve that milestone. The retail-arm of Mukesh Ambani’s Reliance Industries reported a total income of Rs 1,30,556 crores for 2018-19, an 89% rise compared to FY18’s Rs 69,198 crore. That took Reliance Retail into the list of top 100 global retailers. Reliance claimed its retail arm “crossed the milestone of 100 million register customers and 150 million footfalls, establishing its position as the most preferred retailer in India.” It also became the 6th fastest growing retailer globally, according to Deloitte. One Moneycontrol report claimed that in FY21, the retail vertical could make up around 50-60% of RIL’s current market cap.

On this edition of Digging Deeper, we look at the success of Reliance Retail, and what plans the company has for the future.

A new company for a new age

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Reliance Retail was founded in 2006 by Mukesh Ambani-owned Reliance Industries Limited. At a time when RIL’s erstwhile flagship segments (petrochemicals, refining, oil and gas) are facing headwinds typical to commodity businesses, the focus has shifted to domestic consumer businesses like retail and telecommunications. And that shift seems to be paying off.  According to a 6 February JP Morgan note to clients, RIL’s consumer businesses across retail, Jio and e-commerce were valued at $58 billion.

Consider this: the company operated approximately 10,500 retail stores in 6,600 cities and towns covering an area of more than 22 million square feet as of 31st March, 2019. Those are, at the risk of sounding repetitive, pretty impressive numbers. Back in January,  the company operated 127 grocery stores in 73 cities; 609 retail fashion stores; 343 electronic stores and 5,705 Jio points across the country. Online sales accounted for 10% of sales across stores. Reliance Retail is doing so well that there was even talk back in February of the company being listed on the stock exchange.

Compare that to the Future Group, the second biggest retail enterprise in the country, which operates around 2,200 outlets with about Rs 35,000 crore of annual consolidated revenues, and you see that Reliance Retail has been growing by leaps and bounds.

One analyst at a foreign brokerage told Mint, “What works for Reliance Retail is its presence across formats. In grocery, revenues have been (growing) faster than DMart’s. In apparel too, they have grown faster than any other player. If you just look at core retail, that number is higher than the sum of all the other listed stocks covered—DMart, Future Retail, etc. A year back, this used to be less than half.” 

Reliance Retail has been growing at a faster pace than any other major retail player. It reported a stellar 47.5% growth year-on-year in its top line. This was largely led by 265 new stores during the quarter. Operational efficiencies led to margins improving by 60 basis points YoY.

In core retail (excluding petro retail and Jio stores), the margin was 8.9 percent. In fact, as an Economic Times report stated, while consumer discretionary companies have been showing pressure on their top lines over the past two quarters, Reliance Retail has been an outlier. It declared that its revenue grew by 80% and operating profit by 98% on an annualised basis during the past 13 quarters. In the June 2019 quarter, the operating profit growth was 66%. It has warehousing facilities of approximately 10 million square feet are also available at its disposal, which reduces the need to rely on external players for inventory management.

What really drives this retail business’s growth is that it covers almost the entire value chain of a customer’s shopping needs. (And no I’m not shilling for it, that’s just an objective observation. Let me explain.) Over the years, Reliance Retail has acquired competing businesses and now has 8 main subsidiaries: Reliance Fresh, Reliance Digital, Reliance Lyf, Reliance Jewels, Reliance Trends, Reliance Market & Reliance Market Wholesale Cash-n-Carry, AJIO, and the popular toy company Hamleys. It also has other brands like Reliance Footprint and That’s right, Hamleys belongs to Reliance now, which acquired it in May of this year. The mother company also dabbles in connectivity through Jio while Petro retail is present on the outskirts of many cities and towns. Besides enhancing the brand recall of the company as a whole, this varied mix of products helps in risk diversification, with cross selling opportunities, the ability to serve customers looking for different price points within a product class and a one-stop shop solution that attracts more footfalls, usually leading to an uptick in average transaction size per customer.

The Hamleys acquisition also hints at an interesting development. Although Reliance Retail  was an exclusive franchise for Hamleys for a while, the acquisition underscores the management’s intent to explore markets beyond India. There is also the possibility that Retail’s other brands, especially private labels, could find a place on the shelves of foreign retailers some day.

According to a Moneycontrol report, we comparing RR to some of the world’s biggest retailers, its standout performance merits attention. Though its revenue, in absolute value, isn’t the largest globally, in terms of the extent of growth it has managed to outpace foreign counterparts by a mile. Moreover, Reliance Retail’s operating margin is second only to Walgreens Boots Alliance and nearly on par with Walmart.

Where does Reliance Retail make its money though? Some reports club Jio and the petro-retail business with Reliance retail. IN that case, Nearly a third of the retail revenue comes from connectivity, which includes sales of recharge coupons of Reliance Jio, the conglomerate’s telecom arm. Another 10% comes from oil retail outlets. Revenue from telecom recharge operations rose by 51% and those from fuel retail increased by 19% year-on-year in the June quarter. The core retail operations including grocery, fashion and consumer electronics, grew by 52% to Rs 21,452 crore in the first quarter. Nearly half of this came from consumer electronics. The core retail margin is higher compared to the connectivity and fuel marketing segments. The overall operating margin before depreciation (or EBITDA margin) in the June quarter was 6%, while that of the core retail business was at 8.9 percent. Overall, while Reliance Retail’s revenue in FY19 was 1.3 lakh crore rupees, it looks set to cross 1.5 lakh crores in the current fiscal based on the annualised first quarter data.

ET estimates that the enterprise value of RIL’s retail venture works out to be over Rs 467 per share. In comparison, the enterprise value of retailers like Future Retail, Avenue Supermarts, Shopper’s Stop, and V-Mart ranges between 1.2 and 4.4 times their sales, with an average of 2.2.

If we separate Jio, then, according to a Business Standard report, Reliance Retail contributed 32% to RIL’s consolidated earnings before interest tax depreciation and amortisation for the quarter. As mentioned earlier, Reliance Retail’s revenue grew nearly 48 per cent year-on-year to Rs 38,196 crore during the quarter, bucking the slowdown trend in the market.

In the previous quarter, Reliance Retail posted a profit before depreciation, interest, and taxes of Rs 1,923 crore, a rise of 14.5% sequentially on 3.1% revenue growth on expanding retail footprint and same store sales growth.

ET reported earlier in July: “Valuations of Reliance Retail, India’s biggest retailer by revenue, crossed Rs 2.5 lakh crore...in the unofficial market, or 75% more than the market capitalisation of seven listed rivals put together. Reliance Retail shares, which started trading in the past two weeks in the unlisted market, are currently trading between Rs 475 and Rs 500 apiece. These shares belong to employees of the company, said brokers.”

The retail arm’s success also made waves globally, if relatively subtly. Reliance Retail jumped 95 places on Deloitte's Global Powers of Retailing 2019 index, to reach the 94th spot as its revenues soared on the back of growth in grocery, consumer electronics, and fashion and lifestyle businesses. While Deloitte ranked 250 firms globally for its annual report based on their retail revenues for financial year 2017, it factored revenue for the year ended March 2018 in the case of Indian companies.

The way forward

So what’s next for Reliance Retail? It’s inevitable, one would think. It plans to take on the two big guys in the ecommerce sector. Yes, Amazon and Walmart-backed Flipkart.

And the company has a couple of interesting ways it wants to go about taking over market share.

A study by Bank of America Merrill Lynch claimed Reliance’s entry into online retailing could help expand the current 15,000 digitised retail stores to over 5 million by the year 2023. How? Kirana stores. Up to 90% of India's $700 billion retail market is unorganised, made up mostly of neighbourhood kirana stores selling groceries and other sundries. Such kirana stores are keen on upgrading their tech and this is driving a wave of modernization, the BoAML claimed.

It said, “This is on the back of growing competition from modern trade and e-commerce...GST implementation has also acted as a catalyst, creating further modernization pressure as GST compliant bills have to be generated." Enter Reliance. The company, with its deep footprint in over 10,000 Reliance Retail outlets across the country, is working to create the world's largest online-to-offline e-commerce platform. Its solution? Installing Jio MPoS (mobile point-of-sale) devices at kirana stores to connect neighbourhood suppliers to its 4G network which can be used by customers to order supplies. They’re also pricing the competition in that segment out of the market. While Jio MPoS is available at a one-time investment of Rs 3,000, competitor SnapBiz reportedly offers the same machine at a one-time cost of Rs 50,000.

Reliance retail started trials in Bengaluru for apparel through Ajio Business, which plans to enrol more than 50,000 vendors in the coming months. This business model will see Reliance Retail betting big on B2B ecommerce with a digital wholesale marketplace not unlike China’s Alibaba. It is looking to service a range of retailers, including those located in remote villages.

Also, these kirana outlets source their products from wholesalers. Modern wholesalers such Germany’s Metro AG, Walmart-owned Best Price, Reliance’s own network of cash-and-carry outlets called Reliance Market and others account for up to 10% of India’s overall wholesale market in some cities. The figure for FMCG products sold through organised wholesalers is lower at 3-4% of the total. Reliance Retail’s platform will bring together large distributors and suppliers as well as small kiranas in a strategy the company has titled New Commerce.

Then there are the many moves Reliance is making to take on the two giant ecommerce companies. Global market research firm Forrester claimed that online retail sales in India will grow at a five-year CAGR of 25.8% to reach $85 billion by 2023, despite the hiccups of demonetization in 2016, GST in 2017 and the governmental changes in eCommerce policy announced last December. That is a lot of money. Satish Meena, senior forecast analyst at Forrester Research, explained, “One of the things that will trouble Amazon and Flipkart is Reliance's history of launching operations via massive discounts. This kind of discounting can disrupt any market, and we expect something similar to happen in the grocery space during Reliance’s launch.”  Forrester’s report also claimed, “Due to the recent changes in eCommerce policy and the restrictions on an inventory-led model for marketplaces with FDI, Reliance Retail is finding a favourable policy environment to launch operations where it can use its existing retail infrastructure to deliver goods to customers.” Reliance even launched the food and grocery app among its employees in April 2019 to prepare for the commercial launch later this year.

Reliance’s success with Jio helps the retail business when it comes to taking on Amazon and Flipkart.  Reliance launched its mobile business at the end of 2015, and by April 2019, it had over 300 million mobile subscribers, making it the third-largest player in a short span of time.

Jio is said to be building on these by investing in related services to create an ecosystem that gives customers access to rich content and payment options. IN total, it is estimated by ET that Reliance has spent 36 billion USD on Jio, including 4G and fiber broadband networks. That essentially provides Reliance Retail a ready ecosystem to work with. Mukesh Ambani had claimed in July 2018 that the platform will use augmented reality, holographs and virtual reality to create an “immersive shopping experience.”

Recently, Reliance acquired Haptik Infotech, a company that provides customer support chat services using AI; Radisys Corp, which works on the Internet of Things and on 5G; Vakt Holdings, which works with blockchain technology; food delivery service Grab a Grub; and Infibeam Avenues, which will help create e-commerce marketplaces. Once pilot projects are completed, the company reportedly plans to move the app onto Reliance's MyJio app making space for a B2C interface so that merchants can then sell supplies from their store directly to customers.

This ready advantage could prove crucial. Reliance Retail is racing to grab a share of an online shopping market that Morgan Stanley estimates will grow to be valued at $200 billion by 2028 from about $30 billion last year. India will have 829 million smartphone users by 2022, according to Cisco Systems, from a projected half a billion this year. That means a potential surge in demand for online services and products from music to food delivery, electronic gadgets and clothes.

That said, as multiple reports have noted, eCommerce competition in India is fierce. Amazon has been the most popular online retailer since it surpassed Flipkart in 2016, although Flipkart is still the single-largest online retailer, with 31.9% market share in 2018 (38.4% if we factor in Myntra and Jabong), closely followed by Amazon at 31 percent.

With a successful disruptor like Reliance looking to settle in for the long haul, we can expect some far reaching changes and, for customers, exciting times ahead.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
Moneycontrol Contributor
first published: Jul 24, 2019 08:47 pm
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