Reliance Industries: A Closer Examination

chillibreeze writer — Kanchana Rajesh

Reliance is gearing to be a major player in the Indian Retail Revolution. They are aggressively working on a pan-India network of retail outlets in various formats. State-of-the-art technology, a seamless supply chain infrastructure and unmatched customer experience, is what the initiative is all about.

Reliance Retail, the 100% subsidiary of Reliance Industries, entered the retail foray involving a minimum investment of Rs 25,000 crore. They plan to achieve a target of Rs 10-billion revenue by 2010 employing 5,00,000 people. Hinting at an impending IPO, Reliance retail, has renamed “Ranger Farm” to Reliance Fresh Ltd, having hived the name of their most popular format. The company’s name will sound familiar to the investors once the company plans to tap the capital markets by facilitating brand recall.

The first of their format is Reliance Fresh, a convenience store. These stores, range from 2,000 to 5,000 sq feet, provide customers with a variety of fresh fruits, vegetables, staple foods and other products in a world-class ambience. They aggressively partnered farmers by following a farm-to-folk strategy to ensure fresh fruits and vegetables at affordable prices. They chose Hyderabad to test waters, as the city offers real estate at a price that does not quite pinch. They selected the cream crowd from pioneers in organized retailers to head the organization. With such a strong foothold, they ventured and their cash counters clicked Rs 3.5 to Rs 6.5 lakh per day and some outlets at prime locations are averaging Rs 5 lakh per day.

Vegetable vendors and small retail shop-owners are accusing Reliance of directly hitting their business. Reliance Fresh will not compete with local vendors due to political reasons, and their inability to create a robust supply chain. This is different from their original plans. In states like Kerala, West Bengal and Orissa, where they face opposition, they have changed their retail strategy by introducing large supermarkets, where they will not trade in fruits and vegetables. This is a critical factor in assessing the impact of retail giants on the unorganized segment. These Reliance Super stores are large supermarkets with an area of 4,000-10,000 sq ft and will stock grocery, stationary, pharmaceutical products and apparel only.

In the foods business, they have consciously segregated its vegetarian and non-vegetarian items by having a separate brand - Delight for the latter, with a separate distribution centre. This may be a smart move as vegetarians are sensitive to these issues. Seeing huge opportunities, they have introduced own brands like ‘Dairy Pure’ for milk, ghee, (the only other major player being Amul) and ‘Reliance Select’ for other categories like staples. This will optimize margins and streamline supply chain because of bulk procurement.

Reliance Fresh will also retail FMCG, home, consumer durables, IT, pharmaceuticals, and auto accessories, in different formats like hypermarkets, supermarkets and discount stores; however, food will be a major account. Reliance Fresh, Reliance Mart, Reliance Digital, Reliance Trendz (apparel), Reliance Footprint (footwear, handbags, accessories), Reliance Wellness (health), Reliance Jewels, Reliance Timeout (books and gifts) and Reliance Super (mini mart) are various formats that Reliance has introduced.

There are 491 Reliance Fresh stores and this figure is likely to touch 1,400 by the end of next fiscal, currently spanning 2.2-million sq. ft. In addition, Reliance Retail has entered into an alliance with Apple for a chain of Apple Specialty Stores branded as iStore, Bangalore. With Marks and Spencer they are exploring apparel, gourmet food and cafes. Diversifying into various categories gives them an opportunity to tap the growing segments with immediate effect and further minimize potential losses.

After the successful launch of consumer-good super market Reliance Fresh and Consumer Electronic and Digital, Reliance Mart (1,50,000-3,00,00 sq. ft.) is the company's hypermarket format. Around 23 percent of the hypermarket floor space will be allocated to garment brands, while the rest will stock footwear, home goods and other products. Luxury products will cover a floor space of 11 percent. Reliance Retail Limited (RRL) announced a Joint Venture with Pearle Europe for the launch of a chain of optical stores. This will bring a world-class range of private label frames, lenses and sunglasses. The optical industry is on the brink of major growth and has few organized players. Even the Tatas have ventured in this segment.

Reliance has bought properties ranging from Rs 1,000 per sq ft to as high as Rs 22,000 per sq ft or more for their expansion. Reliance now plans the franchisee route for further expansion. Faced with expensive real estate costs and delays in retail space acquisition, the company is co-opting existing small retailers in all formats other than Reliance Fresh and Reliance Hypermarket. This is yet another success formula for giant retailers.

Given their economies of scale and huge resources, excellent business acumen, and governmental support, the ever-strategic Reliance Fresh has become an ambitious and strong force to reckon with. They are able to provide their merchandise at cheaper rates than any other retailer, and have signed real estate deals at breakneck speed for mega projects across India. Reliance and Future Group are the early birds at making a dent in the large profit from the retail sector in India, at excellent real estate rates for properties in prime locations.

The retail sector employs around 40 million people in India. Trade/retailing contributes to 14 percent of the service sector. The fact that about 4 percent of the population is employed in the unorganized retail trade makes it vital to the socio- economic equilibrium in India.

Organized retailing and supply chain integration displace labor in a labor-surplus society. These chains negate a large and growing proportion of added value away from producers to companies. Bulk procurement decreases producer’s margins. By controlling both ends of the chain, the company can buy cheap and sell dear, thus severely undercutting the small retailers and creating a monopolistic situation.

In addition, retail trade also has a sky rocketing effect on the real estate prices. Markets, wholesale sales and retail form one axis of the economy, while productive sectors like agriculture, textile, and industries form the other. Ambitious MNCs are trying to control both the axes of the economy on the pretext of privatization, liberalization, and globalization.

Therefore, Reliance Fresh along with other domestic corporations have a moral standing. Along with the support of the government, they must pave a path for an efficient retail market (no monopoly) in India and help maintain a socio-economic equilibrium. This will remain the biggest challenge for Reliance who leads the way as a corporate citizen. The growth must be through value creation. This will help the Indian retail sector to remain fresh in a hygienic and ethical market.

 

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Kanchana Rajesh writes for Chillibreeze