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Fresh and Small

RELIANCE

Fresh and Small

Reliance’s first retail foray has taken the unconventional pure foods and small store route

M.ANANDA AND SUNITHA NATTI

ALL FOR CUSTOMER INTIMACY: Gunender Kapur, president and CEO (foods), Reliance
Retail

For a Reliance venture that has attracted so much hype, this was a spectacularly low-key debut — a 2,280-sq. ft
neighbourhood convenience store branded ‘Reliance Fresh’, tucked away in a rather quiet location in Banjara Hills,
Hyderabad, far away from the city’s high streets. That was how Reliance Retail chose to kick off Mukesh Ambani’s Rs
25,000-crore plan to build ‘a retail network that is unprecedented in scope’.

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But the sedate start camouflages the pace at which Reliance Retail hopes to grow and the eventual scale and
profitability that it hopes to achieve. Eleven stores were up and running by the end of last week and 100 more will spring
up before the end of the year. The plan is to have 3,000 Reliance Fresh outlets soon. (Several other formats in
categories including apparel, electronics, etc., will follow soon.)

Sources say that Reliance believes each Reliance Fresh outlet could earn annual revenues of Rs 3 crore. That’s a sale
per sq. ft of roughly Rs 12,500. Industry sources say this is in line with what other chains have achieved in the past.
For instance, at its peak FoodWorld had managed a Rs 300-crore turnover on its 80 stores. The average size of a store
was about 3,000 sq. ft — or sales of Rs 12,500 per sq. ft.

If Reliance Fresh can match that, the 3,000-outlet chain could be in line to clock revenues of about Rs 9,000 crore.

There is another reason why this low-profile launch warrants big time attention. Reliance Fresh offers key insights — both
operational and financial — into how Ambani plans to build his retail business.

First, Reliance has demonstrated that it will not hesitate to try out untested formats. (Whether it works or not is a
different issue.) Reliance Fresh is very different from what modern retail has offered in India so far. Second, unlike
global retailers who operate on thin margins, Reliance Retail is looking at a fairly high-margin business model.

In its current pilot form, Reliance Fresh is a unique format. It has deliberately stopped short of being a full-fledged
supermarket (a tried and tested model in India). Rather, it has limited itself to a food and grocery convenience store.

Reliance Fresh, in its first pilot store in Hyderabad, stocks plenty of fresh merchandise — fruits, vegetables, a juice bar,
and even a large counter for puja flowers. In fact, over 60 per cent of the floor space has been dedicated to fresh fruits
and vegetables, the rest to other food products like staples, spices, bakery, etc. But there is not a single soap bar or a
toothpaste tube or detergent or shampoo or any other home and personal care product on its shelves.

Rivals FoodWorld, Nilgiris and even the Reliance-run Sahakari Bhandar are full-fledged supermarkets that offer
everything from staples and soaps to cosmetics and vegetables. Others such as Big Bazaar and Spencer’s, both big-
box hypermarkets, and Subhiksha, a discount store, invariably stock a mixture of food and non-food products, largely
in a 50:50 mix. But Reliance Fresh is different. “We intend to have 100 per cent food items in these Fresh outlets,” says
K.S. Venugopal, chief executive (customer operations), Reliance Retail.

This is an interesting format, but it may miss out on the opportunity to capture a greater share of the customer’s wallet.
For customers, too, this could be irksome, as they would have to visit another store to pick up essentials. Reliance
could easily fix this problem by adding a few small counters for some basic non-food products. Reliance Retail officials
make it clear that the current format is only a pilot phase and they are open to such changes.

However, this exaggerated focus on foods makes a few things apparent. First, Reliance Retail is going after the very
core of the great Indian retail opportunity. Food accounts for over two-thirds of the $200-billion Indian retail market.
Yet, it has seen less than 1 per cent penetration by modern retail so far.

Second, Reliance wants to build a high-profitability business and food is, perhaps, the best place to start. That is
because the Indian food supply chain is grossly inefficient. There are several intermediaries, each of whom adds his
own profit margin to the cost. Besides, there is huge wastage in transit. This offers potential for savings and profits.

Reliance Retail plans to build its own supply chain. “We will always buy from the farmer, almost never from the mandi,”
says a group official. For example, the leafy vegetables, brinjals, tomatoes and green chillies in the Banjara Hills outlet
were sourced directly from farmers in Vantimamdi, Chevella and nearby mandals in Ranga Reddy district of Andhra
Pradesh. Already, a few hundred farmers have been hooked on to the Reliance Retail supply chain. In the next five
years, that number will grow to millions. Even contract farming — by assisting farmers to procure high-quality seeds,
fertilisers and other essential raw materials — is on the cards. By going to the farmer directly, Reliance Retail hopes to
dis-intermediate the supply chain and eliminate waste. This means fresher products at lower cost.

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Globally, supply chains are fairly mature and efficient. This gives the retailer little opportunity to improve profit margins.
But in India, any retailer who builds an efficient supply chain stands to gain. “With efficient sourcing, we can release
margins into the system. This can be shared by customers and shareholders,” says Gunender Kapur, president and
CEO (foods), Reliance Retail.

Reliance Fresh’s shelves provide another indication that the group is looking for higher margins. Most of the staples are
under its own private label brand — ‘Reliance Select’. There is a 500g channa dal pack priced at Rs 28, a 500g urad dal
pack for Rs 39, all under Reliance’s own brand. Excepting a few packets of Nestle’s Maggi, or MTR’s masalas or Pepsi’s
Lays chips, there is very little shelf space given to the big brand owners in the country. Reason: private labels offer far
better profit margin to the retailer than branded products of FMCG companies.

Finally, the pure foods convenience store model of Reliance Fresh requires far less space than a full-fledged super-
market. Most of these outlets will need only 2,000-5,000 sq. ft. A supermarket may need as much as 8,000-10,000 sq.
ft.

Smaller stores have two advantages. They bring down the cost of real estate (and increase profits). It is easier to find
space for small convenience stores in a quiet neighbourhood than for supermarkets in high streets.

Two, you can set up more of them and, therefore, saturate the city with hundreds of small stores. This makes the
Reliance Fresh brand easily accessible to consumers. “Each of our store aims at catchments of only about 2,000
households in a 2-3 sq. km. radius,” says Jai Bendre, head of marketing (foods).

This model is engineered to clock a faster turnover of inventory — Reliance expects consumers to visit the store at least
twice a week for their top-up groceries. Each store will have an investment of Rs 50 lakh to Rs 60 lakh. Industry
sources expect Reliance Fresh to turn this capital over six times — again that indicates a revenue potential of Rs 3 crore
per store.

Here’s the interesting part. Even at EBIDTA margins of 6 per cent, each store could earn a return of Rs 18 lakh. That
translates into a return of 30-36 per cent on the Rs 50 lakh-60 lakh invested in each store. This, then, is the Reliance
Fresh mantra — proximity of stores and frequency of visits enable greater customer intimacy. The revenues and profits
will, hopefully, follow.

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