Preparing for Walmart
Mumbai - Five years after making a grand foray into retail,
Mukesh Ambani's Reliance Industries is nowhere close to the scale he had hoped
his company, India's largest listed group, would achieve in a fragmented and
With retail giants Walmart Stores and Carrefour circling
India in anticipation of a rule change that would allow foreign investment in
supermarkets, Asia's richest man is scrambling to capitalise on his early mover
Over the past few months, Reliance has accelerated store
openings, brought in a management team from Walmart China and launched
wholesale operations that serve the small mom-and-pop players dominating the
$450bn Indian retail sector.
It has also rolled out its first large-format hypermarket
outlets selling everything from food to furniture.
"In retail they are still a long way off," said
Michiel van Voorst, portfolio manager for Asia-Pacific equities at Robeco Hong
Kong, which is considering buying into the stock it sold off three years ago,
tempted by its 22% decline in 2011.
"The business will still require a lot of investments,
and there is no synergy to any of other activities of the company," said
van Voorst, whose firm manages $2bn in Asia.
Reliance battles the same problems that have thwarted faster
growth for organised retail in Asia's third-largest economy, including
expensive real estate and opposition from politically powerful small
shop-owners, farmers and middlemen.
At the launch of the retail arm in 2006, the energy-focused
conglomerate set out to build a $20bn-revenue business by 2011.
For fiscal 2011 ended March 31, however, retail sales were
just 56.77 billion rupees ($1.1bn), according to two analysts' estimates, an
increase of 27% but a tiny share of the group's total haul of $53bn.
Net loss in the business is estimated to have doubled to
4.46 billion rupees. The company acknowledges its retail business is
loss-making but declined to verify those figures.
Reliance is the country's second-largest retailer by sales
behind Future Group's Pantaloon Retail, but its overall market share is small
in a country where more than 90 percent of the industry is made up of
After launching operations in November 2006, it grew to
about 1 000 stores within three years, but soon found it did not have the
systems and infrastructure to support that expansion.
Staff attrition, poor locations, supply-chain issues and
infrastructure problems prompted it to shut nearly 50 stores within two years
of the launch. Since then, the company has standardised its operations and
increased centralisation of its supply chain.
"During the 2008 slowdown, we thought we were insulated
but we have learnt a lot from what we did," Bijou Kurien, chief executive
of Reliance Retail's lifestyle arm, told Reuters.
Reliance's supermarket push hit major hurdles in 2007 and
2008, when it was chased out of the states of West Bengal, Jharkhand and Uttar
Pradesh, India's most populous region, after protests by small-shop owners and
Reliance still does not have supermarkets in Uttar Pradesh,
which was supposed to generate 15% of its retail revenue by 2011. It also lacks
a major store presence in eastern India.
The standalone "kirana" shops, or neighborhood
mom-and-pop stores, and street-side vendors where most Indians buy groceries
are popular because they are convenient and give credit.
They also operate with little overheads, forcing chains to
compete on razor-thin margins.
Still, some of Reliance's local rivals including Pantaloons
and Shopper's Stop have managed to make a profit, helped by a compact network
"The idea is to expand and make money in every store
that we set up, and that would be the way in which we scale the business,"
New faces, big boxes
To jumpstart its retail business, Reliance recently brought
in Walmart China's former chief operating officer Rob Cissell to head its
supermarkets, along with his ex-colleague Shawn Gray, making up the retailer's
third management team since 2006.
Its original management was replaced in 2009 with a team of
expatriates led by Gwyn Sundhagul from Tesco Lotus in Thailand. He now works in
another Reliance business.
"We are now going into a phase of execution," a
senior executive at Reliance Retail said on condition of anonymity as he is not
authorised to speak to the media.
"Our hypermarket initiative is now being driven by
someone who has done this earlier in China, which is a similar market."
The changes at the top coincide with an expansion push that
saw it open 60 stores in the last quarter, including its first two
hypermarkets, which opened last month. That brought its overall store count to
about 1 050.
The large-format stores are between 60 000 and 100 000
square feet and by next year will be supported by distribution centers in
Delhi, Bangalore and Pune.
"The quality and efficiencies are much higher. The
margin mix improves considerably. Small stores bring you visibility, but you
need the big boxes for balance," the executive said.
Reliance also last month opened its first cash-and-carry, or
wholesale, store in Ahmedabad, entering a format which Walmart already tried
with six such outlets in India through a joint venture with the parent of
telecoms firm Bharti Airtel.
"We have also realised that 'kirana' stores will
continue to coexist, so why not supply to them? It is an opportunity and we
will not leave any opportunity," the Reliance official said.
Supermarkets account for 65% of Reliance's retail business,
while specialty shops including local tie-up with global brands like Marks
& Spencer, and Diesel make up the rest.
"Their big gap is how to stabilise and run the
operations. They have to stick to one plan and move, and that is their biggest
challenge," said Pinakiranjan Mishra, head for consumer products and
retail at advisory firm Ernst & Young.
"If you change the model every one-and-a-half, two
years and if you change the team, everything has to be reset," he said.
The advantage Reliance holds over its Indian rivals is its
While local chains, many of them loss-making and
cash-constrained, look to hook up with the global players keen to enter India
once rules allow, Reliance has the wherewithal and the intention to go it
"The area which is of concern for other retailers is
finding capital. That is not so much a challenge for us," said Kurien.
Reliance, which owns the world's biggest oil refinery,
boasted $12.6bn of cash at the end of September.
Reliance also has the advantage of time, as a politically
weakened leadership in New Delhi drags its feet on allowing foreign investment
into multi-brand retail, which is opposed by sections of the ruling Congress
party as well as the main opposition Bharatiya Janata Party.
Walmart and others are expected to take years to build scale
in a challenging Indian market.
"There will certainly be competition, possibly price
wars," said Anish Sarkar, head of consulting at Capgemini India.
"But the battle for the next few years will not be for
market share but for expanding the market itself."
But not everyone is convinced that retail is the best use of
Reliance's formidable resources.
"I can understand if they want to invest in organised
retail, but they should be investing in that outside of the main company, from
separate capital," Robeco's van Voorst said.
"Otherwise there is concern that capital that yielded
high returns is now deployed in assets that are not yielding much value,"
With growth in its core energy business below expectations
over the past year, Reliance has been keen to diversify and has ventured into
areas such as telecoms and financial services.
Reliance is hopeful that the new management would exceed the
20% same-store sales growth that it is on track for this fiscal year, gradually
giving the business higher visibility.
"We have big plans for this business," Kurien
said. "We want to be the largest retail company in the country, as no one
really remembers who came second."