Reliance Retail close to break-even

Reliance Retail Ltd, which runs at least 590 stores across 57 cities in India, has already managed to achieve a near break-even by posting a loss of less than Rs1 crore in its first full year of operations, just 17 months after opening its first store.

Closely held Reliance Retail posted a net loss of Rs0.82 crore on sales of Rs1,486 crore for the fiscal ended 31 March.

The results appear to underscore why Reliance Retail, owned by India’s largest private company by sales, Reliance Industries Ltd, has eagerly embraced an early mover strategy despite bearing the brunt of protests, including vandalism, from small shopkeepers and wholesalers in some of the 13 states where it operates its stores in.

The results for Reliance Retail, which is normally reticent about discussing its financial profile given the continuing backlash against organized retail in India, are tucked away on Page 149 of the 2007-08 annual shareholder report from Reliance Industries, which is controlled by Mukesh Ambani.

Organized retailers such as Reliance Retail were not expected to show a profit in their first several years of operations, partly because of high capital expenditure involved in setting up a chain of stores, especially with spiralling real estate costs of the past two years in India that have led to a doubling of lease rentals in some cities.

Reliance Retail’s first-year results, while not necessarily an automatic indicator of how the still-rapidly expanding business will perform in year two, are nonetheless impressive given the state of profit margins in the retail business, where most Indian companies are still learning and experimenting with branded stores.

Indeed, even for Chennai-based Subhiksha, which opened its first store in 1997 and claims to be India’s largest supermarket brand, net profit margins are only around 2%, said R. Subramanian, founder and managing director of Subhiksha Trading Services Ltd, in an earlier interview with Mint.

But, that hasn’t stopped large industrial groups such as Reliance, Kolkata-based RPG Group and diversified conglomerate Aditya Birla Group, from entering the organized retail market. On deck is a similar venture from the Bharti family, promoters of India’s largest mobile phone company. Part of that stems from the desire to grab customers’ wallets and minds before what is seen as the inevitable saturation of India with branded stores. The Indian retail market is estimated at Rs14.1 trillion and the share of organized retail was around 4% or Rs51,100 crore in 2006, according to India Retail Report 2007 prepared by Technopak Advisors, a management consulting firm.

But, the land rush also stems from large industrial houses such as Reliance having deep pockets and the ability to sustain substantial investments.

Indeed, Reliance Retail’s reported revenues are just around 1% of Reliance Industries’ total sales of Rs1.39 trillion for the fiscal 2008.

Reliance Retail already has 3.5 million sq. ft of trading space and has outlined a total investment of Rs25,000 crore over the next few years, even though protests from small retailers and wholesalers have slowed some of its expansion plans. So far, Reliance Industries has invested nearly Rs4,400 crore in Reliance Retail in the form of equity and preference shares. The equity investment amounts to Rs3,785 crore, giving Reliance Industries a 98.74% stake in the retail venture, according to the annual report.

Not all the performance is rosy. Other retail subsidiaries of Reliance Industries such as Reliance Fresh Ltd (formerly known as Ranger Farms Ltd) and Reliance Dairy Foods Ltd have reported losses for the year ended March. Reliance Fresh has a loss of Rs20 crore on a revenue of Rs357 crore, while Reliance Dairy Foods incurred a loss of Rs3 crore on revenues of Rs66 crore.

The interlinkages between Reliance Retail results and these losses were unclear. Reliance Retail operates under 12 different store formats ranging from convenience store concept to consumer durables concept and automotive speciality formats. It has also entered into two joint ventures —Pearle Europe for optical retailing and Marks and Spencer for apparel retailing.