Parent’s money muscle powers quick break-even; not all formats profitable yet

Bijou Kurien, President and Chief Executive, Lifestyle Reliance Retail, has been busy re-sizing the Reliance Time Out stores. He is ready to give away the property occupied by the unprofitable Time Out stores in favour of the more profitable formats belonging to Reliance Retail.

“The bottomline of Reliance Retail will come from the specialty formats, while top line growth will be driven by the food and grocery segment,’’ he says.

Reliance Retail crossed revenues of Rs 10,800 crore and achieved a break-even with an EBITA of Rs 78 crore this year. No mean feat, considering that some of the other big retail players are struggling.

For Reliance, it has been a journey that started a few years ago. In 2010, it hired Gwyn Sundhagul, former head of the Thailand arm of British Retailer Tesco as CEO.

He later moved to the parent company in early 2011. In the same year, Brian Bade joined as CEO of Reliance Digital after 15 years with Circuit City, an American retailer of consumer electronics and durables.

Then came Robert Cissel and Shawn Gray, former employees of Walmart China. Cissel is credited with turning around Walmart in China.

“There was a point of time when it had almost 100 expats on its rolls, and the outgo could have gone up to at least Rs 400 crore, with each expat on a salary of at least Rs 3 crore a month,” says an industry insider.

Growth on track

At the last AGM, Chairman Mukesh Ambani declared that the retail business would grow rapidly in the next few years. Expected to notch up 50 per cent revenue growth year-on-year, it was on its way to achieving a target revenue of Rs 40,000-50,000 crore. For this, retail operations would depend on volumes generated in the cash-and-carry and value formats, while the high margin speciality formats (such as Reliance Trends and Reliance Jewels) are expected to drive profitability.

One of the pioneers of modern retail, B. S. Nagesh, Vice-Chairman, Shopper’s Stop, says: “The fact that Reliance Retail has turned EBITA positive is definitely an achievement but it is just the starting point. Going up to a sales turnover of Rs 10,000 crore has generated enough volumes for it to break even. But in this industry, there can never be a single leader or a winner take all. Even Walmart is not the leader in its country.’’

Brokerage firms tracking Reliance Industries are not surprised, attributing the break-even status to the number of years the company has been in the retail business. Bhavesh Chauhan, Analyst, Angel Broking says, “Since it has been funded by a big company like Reliance Industries, it does not come as a surprise that it has turned EBITA positive as it has been in the business for a considerable time now.’’

Profitable segments

The fact that Reliance Retail owns properties for some of its formats such as Trends and Footprint may have also boosted profits. “Some of its Lifestyle formats have been built on properties bought outright and not on leased property; this would have significantly helped in reducing costs. Rentals make retail an asset-heavy model,” says an industry observer.

Even in formats such as cash and carry, while multinationals are hit by high taxes, Reliance would have an advantage and is likely to turn profitable faster. However, while some of its formats may be recording healthy growth rates, not all are likely to be profitable despite the business turning EBITA-positive.

“Cash and carry (Reliance Market) and speciality formats such as fashion (Trends), jewellery and footwear (Footprint) may have gone out of the red but segments such as food and grocery, which is part of the value format, and electronics (Reliance Digital), are certainly struggling,’’ said an industry veteran.

It is also doubtful whether any of its joint ventures, such as Reliance Brands and Marks & Spencer, is entirely out of the red, though that has not stopped these companies from expanding operations. Venu Nair, Managing Director, Marks & Spencer Reliance India, said: “While we cannot give numbers about profitability, we continue to invest heavily in India and have launched nine stores this year with six more planned in the next three months.’’

Categories such as food and grocery within its value formats have always been more challenging, as it is difficult to create any differentiation from the local kirana stores. Today, almost 40 per cent of Reliance Retail’s sales come from this segment (about Rs 4,000 crore), in which it has floated companies such as Reliance Fresh, Reliance Dairy and Reliance Food Processing.

Money power

Arvind Singhal, Chairman, Technopak, observes: “Food, as a segment, may be marginally losing money right now, but the retail business will grow on the back of this category as it is the largest consumption category in India, unlike footwear, jewellery or apparel.”

Asitava Sen, Senior Director and Head, Food and Agribusiness Research and Advisory, Rabobank Group, says Reliance Retail has managed to break-even due to its financial flexibility with no significant debt interest cost. Being backed by cash-rich Reliance Industries it could pump in money through internal accruals. Considering food and grocery have never enjoyed good margins, Reliance Retail has managed a good balance between its food and non-food formats which have led to higher gross margins in non-food categories such as apparel, footwear and jewellery.

Abneesh Roy, Associate Director, Edelweiss Capital, said: “Clearly, money power matters in the retail business. Most retailers are in debt because they lacked focus and went on an expansion spree. Reliance also made some mistakes but tweaked the model and management.”

Considering Mukesh Ambani had declared an investment of Rs 25,000 crore since he entered the business in 2006, there is no stopping him from pumping in as much money as required till he becomes a successful retailer.

(With inputs from Bindu Menon in Delhi.)

(This article was published on July 31, 2013)
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