32 highlights
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Private equity firm TPG Capital looks like the next one to jump on the Reliance Retail investment bandwagon, to the tune of $1 billion, ET Prime reports. Earlier this month, blue chip private equity investment firm KKR invested Rs 5,550 crore ($750 million) in the company at a valuation of Rs 421,000 crore ($56 billion)
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A casual reader of this development might say, well, we’ve seen this coming, haven’t we? First it was Jio Platforms, the holding company for Reliance Industries Ltd’s telecom and digital services businesses, which raised about $20 billion from TPG, Facebook, Google and more, and now it is the turn of the retail arm.
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Two fundamental questions: Why is Reliance diluting its holdings in this business? Are the prospects of its retail unit bright or dim?
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In the past five years, Reliance committed its biggest capital expenditure and most of the money, close to $30 billion, went into building the telecom infrastructure that comprised mobile and fibre networks. The other business that sucked up copious amounts of cash, to the tune of $20 billion, is the backward integration of its petrochemicals business.
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Reliance never spoke of large investment numbers for retail. But, over the years, the company has experimented with the business and the current model, according to old-timers, can be called the third iteration of its retail strategy.
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In the first, starting in 2007, the company owned its real estate and built massive stores across the country to drive what was an Indian version of Walmart.
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In the second, facing competition from wholesalers like Metro and Walmart (which in India only runs wholesale operations), it brought in several expatriate managers to run the business.
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The third and the current iteration, which started around 2014, is when the company began getting traction in retail because it completely changed its operating metrics. It decided to only lease space and limited its costs to rent, energy and manpower, deploying very little cash in expanding its footprint.
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So, unlike the telecom business Jio and the core petrochemicals business, which added substantial debt to its books, Reliance adopted a different strategy of building a large revenue business in retail with low initial investment.
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Even though the business was growing rapidly and the company was opening hundreds of stores a year, it needed just about $2 billion per year to drive the expansion
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To that extent, the retail business doesn’t need any capital right away and it is asset-light compared to, say, building out fibre home broadband networks.
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Reliance Retail accounted only for 4% of the net assets of the consolidated assets of Reliance Industries, but brought in 13.89% of the consolidated profits. In comparison, Reliance Jio, which is wholly owned by Jio Platforms, itself a subsidiary of Reliance Industries, accounted for 37.71% of net consolidated assets and brought 13.95% of profits.
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Compared to Jio Platforms’s drivers of telecom, consumer internet services and enterprise services, Reliance Retail by contrast seems a traditional consumer business model. Then how come Retail’s valuation is now comparable to Jio Platform’s? And what exact value are top-class private equity investors such as Silver Lake, KKR and TPG finding in it?
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In this context, the stake sale is essentially to discover the value of the business, says a Reliance executive1
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Reliance splits its retail business into two parts. The first is “core retail”—selling electronics, fashion and groceries, which contributes 57% of revenues and 86% of EBITDA.
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The second part is “connectivity”—adding up sales from 8,000+ Jio stores that acquire customers for the telecom operator and do recharges, as well as sales from over 500 petrol retail outlets.
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Let’s start with the thorn in the flesh of organized retail, both gargantuan and small: e-commerce.
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In general e-commerce, as we have said before, consumer electronics dominate sales by gross merchandise value, or GMV. Offline, Reliance dominates the “modern trade” channel of consumer electronics through its Reliance Digital and Jio stores.
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Reliance already counts sales of its 4G phones from Jio stores under this business segment. Reliance will also use its stores and warehouses to serve as hyperlocal hubs and regional networks, respectively, for deliveries to end-consumers.
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It already does something akin to “GMV inflation” when it sells customers its Jio 4G phones at a discount. For a phone retailing at about Rs 3,000, the customer pays a third upfront. Reliance Industries’s own non-bank lending subsidiary pays out the full amount to Retail, which recognizes the revenue immediately. The lender in turn gets into a financing arrangement with the customer, who may be blissfully unaware of the matter. From their perspective, they only agree to periodic mobile recharges they are supposed to do to retain the subsidized phone and service.2
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Reliance also has a similar play in the fashion and lifestyle category.
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Once again it competes with Amazon Fashion, Flipkart Fashion and Myntra (owned by Flipkart) online and the likes of Aditya Birla Fashion and Retail Ltd offline. Reliance Trends, like Reliance Digital in electronics, bears the flag for fashion, operating 1,400+ stores along with a fairly popular online presence through Ajio.
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Flipkart’s valuation is around $25 billion after the latest investment from its parent company, Walmart. Reliance Retail is already valued at $57 billion. In some ways it is counter-intuitive, an offline behemoth being valued higher than a technology-driven commerce company with similar turnover (when comparing Reliance’s core retail business)
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The significant difference between the two is of course due to the Jio Platforms connection, but can also be attributed to the key category of grocery, where horizontal e-commerce has struggled penetrating so far.
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After the acquisition of Big Bazaar, Reliance Retail accounts for half of organized grocery retail in India. While the revenues were less than $5 billion in 2019-20, its presence across nearly 200 cities in the country is what is potentially setting it up for future dominance.
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Reliance’s big bet is on its smaller SMART Point format to expand its presence into tier-II, III and smaller towns by opening over 2,000 stores in the next few years. The stores will provide an omnichannel experience, serving both in-person customers as well as local online orders through the JioMart app. JioMart already claims it has touched 400,000 orders in a day, which is higher than both vertical online grocery leaders—BigBasket and Grofers.
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Reliance will shut down its cash & carry business, converting them into a warehouse network, to cater exclusively to the supply side. In its FY20 annual report, Reliance claims, “The inherent strength of the Company’s grocery business model arises from its farm-to-fork grocery value chain.” The recently passed three farm bills are unsurprisingly, filip for the same claimed ambitions.
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Reliance has expertise in throwing money and manpower at a problem but it bears repeating that it is not a technology company. Despite claims of high order numbers, the JioMart app is broken and the overall experience harks back to the initial years of e-commerce in terms of delivery delays and more, which is a significant gap with the market leaders.
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The term “omnichannel” or “offline-to-online” has been bandied about since the hypergrowth years (circa 2014) of Indian e-commerce. But it always took a back seat in search for easy GMV by the likes of Flipkart
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There is also the question of how long Reliance can avoid making significant investments in the business, especially when it comes to the grocery category.
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With single-digit EBITDA margins even prior to COVID-19’s impact, and in businesses where margins stubbornly remain in a state of inertia, investors are betting on growth and Reliance’s ability to directly influence the major touchpoints of the Indian retail market: it is the $800 billion addressable consumer market and Reliance’s preeminence in its footprint (retail stores, wholesale), ecosystem (Reliance Jio, JioMart) and navigating intertwined, complex regulatory webs that attracts them.
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What is clear is that if Jio Platforms is where Indians consume cheap data and free services, Reliance Retail is how they will pay.
Footnotes
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Could this be an essential reason? Seems more like raising capital from the “light” retail business to fund the capital requirement heavy telecom business ↩
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But then how does the lender recover the amount lent to Retail arm? Does the customer pay off the amount in the form of an EMI (hidden or otherwise)? ↩