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.

‘We can lower prices but we can’t be the cheapest’

UK-based retailer Marks and Spencer Group Plc. (M&S), which has a venture in India with Reliance Retail Ltd, plans to roll out larger company-run stores by the end of the year. Currently, M&S operates more than a dozen apparel stores through a franchisee. Last month, Marks and Spencer Reliance India Pvt. Ltd received approval from the Foreign Investment Promotion Board, or FIPB, to invest about £30 million (Rs250 crore) that the joint venture intends to spend in opening 50 stores in the next five years. Mark Ashman, chief executive-designate of the India venture, spoke with Mint. Edited excerpts:

Space matters: Mark Ashman says M&S is opening bigger stores to rival competitors’ and to demonstrate the full range of the M&S brand

Why have a joint venture in India instead of operating through a franchisee?

We identified that franchising in India, given the scale of opportunity, was not the right route to really become a significant retail player, and therefore, we would need a partner. We had (a) couple of options. One was we could have found a partner who took a financial interest so that we could trade here. Or, we could find a partner who could bring something to the party. We spoke to a number of people and came with a shortlist.

What made you pick Reliance as a partner?

We were looking for three core competencies. One was capability in property; the other was capability in logistics and supply chain. And the third was, in my description, capable of getting things done in India.

It would be fair to say that out of the three serious potential partners we sat down with, two clearly demonstrated these. The third one did have the capabilities but we got the impression that they were not totally convinced about partnering with us. And, at that point it was also clear that Reliance had an ambition and track record in retail. Delivering 500 stores in such a short time is impressive.

What are your plans for store sizes in India?

Customers tell us that they like the M&S brand but we are too expensive. They say they like the M&S brand but the stores are too small. And, except for (Ambience Mall), we can’t even fit in children’s wear. We are also very constrained in terms of the ranges in adult clothing.

So, we have to open larger stores now. Initially, our revenues are going to be probably low for our larger stores and real estate rentals, as you know, are not the cheapest in the world.

I think what we need to find a maximum footage that says that you can’t go smaller than this if you want to show people our range and demonstrate the M&S brand in a similar way as in the UK. You can’t do it on 5,000 sq. ft or 10,000 sq. ft.

So how big will be your stores?

I think we will start with 15,000-20,000 (sq. ft) and it will depend on the location. The stores that we are planning to open in three years might be bigger because the market would have grown. If Shoppers Stop are going to be on 80,000 sq. ft plus, and Pantaloon are going to be on a similar or larger (format), and Debenhams is going to be on 30,000 (sq. ft), I certainly can’t afford to be on 5,000 (sq. ft). 15,000 sq. ft is certainly big enough to get adult clothing, home ware and children’s wear and maybe a cafe.

Are you bringing in food as well?

We would like to bring imported food at a later stage, but we would need to make an application for food to FIPB. We only asked for permission for apparel and home ware.

There is no technical reason why we could not import long-life ambient food. I think that ultimately we could develop a food business but I think initially the bigger win for us is apparel, clothing and home ware. So, if we can open larger stores that can offer a broader range of adult clothing, children’s wear and introduce home ware that would be a big three things for us.

M&S is perceived as a high-end brand in India. How would you change that perception?

I think we have to lower prices. If I look at what the franchisee has done, I don’t think they have ever done a strategic marketing approach to position the brand in India. They would have done tactical marketing to support sales with specific promotions. We obviously would do tactical promotional activities, but we will need to develop a marketing campaign to start to position our brand.

We need to get to a position where a consumer comes in and we get a reputation for good value, quality times price, as we have in the UK. We have never been the cheapest and we can never be the cheapest because of our quality standards. But we can be good value.

So, my opening price point on chinos is always going to be governed by the quality of the fabric that we use. We can lower prices but we cannot be the cheapest. For us in the UK, it’s always been about value and I believe the Indian consumer understands that. I would like to get the entry pricing right and then start looking at the ranges above that.

Do you think you have been late in forming a joint venture?

I don’t think we are too late. I think we lost some time with the franchisee. Do I think we would have come with a joint venture in 2001? Probably not, as India wasn’t ready for us. Though I think potentially it could have started where we are now two years ago. Time will tell us whether we are about right. If the real estate market starts to fall, then now is a good time to come.

But you have a brand equity that gives you a head-start?

The good thing is many Indians have experienced the M&S brand—some good, some maybe not so good. But it definitely has brand recognition, and I think it’s a great place to start with. We are excited about the opportunity of expanding the M&S brand across India in partnership with Reliance.