Reliance Retail eyes consumer-focused retail businesses, plans to focus on last-mile delivery

Reliance Retail is eying the huge potential in consumer-focused retail businesses in India. It believes this is an opportune time for the company to realise its retail ambition considering the evolving retail landscape (especially after the change in e-commerce regulation effected from February 2019).

The company is convinced that India’s retail sector offers an immense opportunity (Around $650 billion market size with just 10 percent organised share) and that organised players have so far barely scratched the surface. In this backdrop, the entry of deep-pocketed Reliance Retail may well stiffen competition and compress margins across the board.

While most retailers are trying to bank on an omnichannel strategy, Reliance Retail is working on a unique Offline to Online (O2O) model. The model’s USP is pinned on creating a retail ecosystem that would be integrated with Jio’s ecosystem (by offering Jio enabled POS). To be precise, Reliance Retail plans to tap into a myriad of neighbourhood mom-and-pop stores. Such stores would carry out the last-mile delivery, which would help save on logistics costs. These stores will benefit from Reliance Retail’s procurement might, which would help them improve margins. Throw in the potential to exploit data analytics and it is not hard to imagine that Reliance may have struck a jackpot.

Representational image. Reuters

How is Reliance playing its retail cards?

Reliance Retail is aiming big in the grocery and fashion and lifestyle verticals. Within grocery, Reliance Retail has established three sub-formats to lure a spectrum of customers. Within fashion and lifestyle, it is traversing price points—from value to luxury/premium retailing. In a short span, it has achieved a 71 percent private label share in its value retailing format (Trends), a rare feat (Shoppers Stop at ~12 percent, Pantaloons at ~61 percent and Future Lifestyle’s Central at ~40 percent). From the balance sheet and cash flow perspectives, Reliance has enviable credentials in acing the game.

Reliance’s changing tack

More than 25 percent of Reliance’s revenue in FY19 came from businesses other than core oil and gas. This tectonic shift in revenue pie is an outcome of the company’s unwavering strategic focus, scale up opportunity considering industry size, deployment of technological vectors, and increase in capital employed.

Valuation vis-a-vis peers

The oil and gas team values Reliance’s retail venture (ex-Jio and Petroleum Retail) at 2.5x 12-month forward EV/sales. This seems reasonable considering Avenue Supermarts and Future Retail are trading at 3.1x and 1.0x FY20 EV/sales, respectively.

(Disclosure - Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd)