The retail market in India is again in the news but for a wrong reason. The reported failure of Reliance Retails to achieve even 5% of its targetted turn over after operating for over 5 years is a reflection on the tough market environment in the country. Those following the saga of Reliance Retails feel that the future for this group is going to be tougher in coming days with GOI talking about opening this sector for FDI. While opening more than 1000 outlets during the last 5 years by itself is an achievement considering the enormous logistical constraints in the country, it was expected that this industrial giant that dominates the landscape here would be able to at least gain the number one status leaving others way behind. This has not happened and it is difficult to foresee its future at this juncture as there will be a "blood bath" with many native players falling by the way side once FDI is allowed in the retail sector. Here is a commentary on the performance of Reliance Retails based on their track record so far and likely future scenario.
"With retail giants Wal-Mart Stores Inc 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 advantage. Over the past few months, Reliance has accelerated store openings, brought in a management team from Wal-Mart China and launched wholesale operations that serve the small mom-and-pop players dominating the $450 billion 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 percent 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 $2 billion 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 $20 billion-revenue business by 2011. For fiscal 2011 ended March 31, however, retail sales were just 56.77 billion rupees ($1.1 billion), according to two analysts' estimates, an increase of 27 percent, but a tiny share of the group's total haul of $53 billion. 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 mom-and-pop stores. 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 farmers. Reliance still does not have supermarkets in Uttar Pradesh, which was supposed to generate 15 percent of its retail revenue by 2011. It also lacks a major store presence in eastern India. The standalone "kirana" shops, or neighbourhood 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 of stores".
Getting into wholesale market may be an appropriate strategy considering that the existing players like Metro Cash & Carry have done well in this sector, serving as a feeder source for thousands of so called "mom & pop" stores, especially in small towns and villages. One of the biggest problems facing retail food players is the difficulty involved in linking with growers for sourcing good quality food materials and establishing synergy with the processing industry for filling the shelf space. The tendency to compete with established brands through in-house brands can be suicidal till the organized retailing captures at least 20% of the market in the country. What is needed in India is an institutional linkage between the growers and the retailers with the latter providing reliable inputs and assured buy-back arrangement. Agricultural technologists and Food technologists must be an integral part of the retailing organizations to ensure lower prices and better products to the consumers. Food retailing cannot be based purely on "management" skills but also needs technical inputs of experts. Sooner this lesson is learnt better it will be for the country as a whole.
V.H.POTTY
http://vhpotty.blogspot.com/
http://foodtechupdates.blogspot.com
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