‘The opportunity for organised retail to grow is significant'

R. RAVIKUMAR VINAY KAMATH | Updated on February 02, 2011

The Hamleys store at Express Avenue, Chennai. Photo : Bijoy Ghosh   -  Bijoy Ghosh

And how does that translate?

It translates into the fact that people now buy products that are positioned between fashion and function. They prefer premium soaps to regular soaps in grocery, rare fruit and vegetables … all these are indicators of how consumer demand is going slightly upmarket. Also, our experience with brands such as Diesel has given us confidence that a category of customers is once again coming into the market. You can mirror this with what is happening in the luxury cars segment … top-end car sales are growing at a faster pace. What we are seeing is the return to spending.

However, we also have to remember that we have to move ahead with caution thanks to the lessons we have learnt in the past. Even though consumer spend has returned, you should anticipate that if there is a crisis, consumers will immediately stop spending the way they did in the past. Earlier, they stopped spending not because they lost their jobs, but because they weren't so confident about the future. Also, in India, inflation levels seem to have crept up, especially in the food category. This will obviously increase the percentage of income that goes into food. The consumer spend on food is back at its earlier level of 32-35 per cent in the metros and about 60 per cent in rural.

Are expansions back on track for retailers such as you?

At the retail level I am beginning to see that retailers who had held back expansions are slowly resuming … at least larger chains such as Shoppers Stop, Lifestyle and the Future group…

And, what's your gameplan for Reliance Retail?

We are also expanding. We currently have more than 1,000 stores across formats (all Reliance formats). (Reliance) Lifestyle alone has roughly 160 stores. The speciality side of our business is also expanding considerably … be it apparel, furnishing or footwear. I think the slowdown has been limited to the value format stores — hypermarkets, supermarkets and grocery stores (Reliance Fresh). We stopped growing them for a while … to understand what makes sense and what does not. We relocated some, reconfigured some of our processes and resized some in order to make them more viable.

High real estate costs also affected retail plans a couple of years ago. How has the scenario changed after the slowdown?

On the real estate front, many projects have been held back in the last two years. Many mall developers ran out of money and their ability to source funds from overseas and even domestically came down. Now, we see some of those projects are being resumed and some new projects are also coming into the market. So, my sense is that you will see a spurt of availability again in 2011-12 and again in 2013-14. But in 2012-13, I think you might have a little shortfall. During the period 2008-10, some mall developers even converted their projects into residential or commercial as most retailers cancelled their bookings or reduced their store sizes.

Did you also stop expansion during the period?

No, actually, we continued to expand our speciality format stores. We only slowed down on the value format. Overall, this year, we have more than doubled the number of outlets we had last year. We will double the number next year and again in the year after. In fact, the large part of the expansion happened in 2008 and 2009, which was an advantage as we managed to get properties at much lower prices. Generally, rentals are a pretty high component of the total operating expenses in the retail business. It is the single largest component, only after which come people and other operating costs.

How many properties do you own?

A fair number of them … 30 per cent.

So, will retail begin to contribute more to Reliance Industries' revenues?

In fact, our Chairman (Mukesh Ambani) in the AGM was very clear about the commitment that Reliance Industries has to retail and indicated the plan to achieve Rs 45,000 crore in sales from the company's retail business in five years' time. Last year, Reliance Retail's turnover was Rs 4,500 crore, which is around 2 per cent of RIL's turnover. Of the total Indian retail market of Rs 20 lakh crore, we are still a small player. So, the opportunity for organised retail to grow and for Reliance Retail to grow is significant. As we grow, we will scale, and as we scale, we will become profitable.

Are rentals on the high street going back to earlier levels?

We have seen a reduction of between 25 and 40 per cent in rentals in malls during the period 2009-10. Rentals on high streets were lower by 15-20 per cent. Now if we look at it, rentals in high streets are going back to where they were. But, mall rentals have not started moving up yet. My sense is that once the hiring starts increasing, mall rentals will start moving up coupled with the fact that there could be a shortfall in 2012-13… because availability of space would not have kept pace with the aspirations of all retailers at that point in time.

A lot of people had retail aspirations. But I think the experience of Subhiksha, Vishal and some of the others has tempered the aspirations of those who did not have serious plans. There were many who wanted to get into retail for the purpose of valuation and I think they have burnt their fingers, whereas those who have got into retail for the purpose of building a long-term business, saw that as a temporary blip in their longer-term plan. Also, because of a few bad episodes, what is also happening is that private equity availability is also getting a lot tighter. At least retail models are put through stringent tests before anyone takes a call.

What's the way forward for Reliance Retail … will it choose the franchise route?

No. All our stores are currently owned or run and managed by us. That's the philosophy we have and that will continue to be our philosophy going forward too.

Published on February 02, 2011

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