Beating HUL, Nestle, Britannia, Dabur: How Mukesh Ambani's Reliance Retail is sending shivers down FMCG giants

When Rohan Chaddha took charge of his family’s grocery store located in Delhi’s Kalkaji in 2012, the business was heavily dependent on their relationships with neighbouring households. A decade later, the Chaddhas’ small shop has transformed into an expanded walk-through format store. The number of employees, too, has gone up from two to 11, with the earlier racks of cluttered inventory giving way to neatly stacked shelves of branded products. And the thick stock-keeping record books that used to occupy a corner of the shelves have moved on to a digital space. Daily challenges like keeping a check on inventory, placing orders, following up with distributors and replenishing stock-keeping units are now just clicks on a laptop. “Earlier, it required at least one full-time employee apart from my constant supervision,” says Chaddha. “Now, with the automated inventory management system, it does not even require any interventions.”

So much so that Chaddha, now in his early forties, can afford to spend his days parked at his desk, keeping an eye on the feeds from the CCTV cameras around the store. Chaddha’s digitalisation journey—as also of thousands of other small retailers like him—took wing when he tied up with Reliance Retail Limited (RRL), the retail venture of Reliance Industries, to turn his store into a local delivery hub for customer orders on JioMart—RRL’s e-commerce platform. The seamless integration between RRL’s PoS machines and the JioMart app ensures a steady flow of orders from surrounding localities, boosting Chaddha’s revenues. “The model that Reliance is building by partnering with local kiranas is phenomenal. In India, there are millions of such kiranas selling every item that consumers need. So, instead of trying to replace them with branded stores, RIL is utilising these existing outlets through tie-ups. This is like taking the [branded] store format to the nooks and corners of the country,” says Deven Choksey, Promoter of KRChoksey Group.

This connect that RRL has created is helping it turbocharge its growth. India’s largest modern retail chain operator—with under a dozen different branded chains under its fold coupled with thousands of retail partners—is like no other. From kiranas to the large-format Reliance Fresh and Smart Bazaar to Reliance Digital and Trends, RRL has built a powerful presence across the retail space, including a network of over 17,000 branded outlets across categories. But beneath this network of glitzy large-format stores—which sell everything from daily staples to lingerie—lies an intricate web of moving parts straddling retail, distribution and a wide supply chain network. And the tale doesn’t just stop there, as its roots go deeper into RIL’s other businesses in the form of telecom, microfinance and other offerings.

RRL’s focus on expanding its presence in the general trade segment—encompassing the traditional distribution channel of wholesalers, distributors and retailers—is a relatively new exercise. However, its pace of growth is unprecedented. While the retail giant had ventured into e-commerce only in early-2020 with the launch of JioMart, thus far it has on-boarded nearly 3 million kirana merchants. “We add about 150,000 partners a month and are on course to [reach] one crore [10 million] merchants as we expand our presence to cover the entire country, and serve over 7,500 towns and over 500,000 villages in the next five years,” said Isha Ambani, Executive Director of Reliance Retail Ventures Ltd (RRVL), during parent company RIL’s annual general meeting in August 2022. RRVL is the parent company of RRL.

In Q3FY23, Reliance Retail reported net revenues of Rs 60,096 crore, up 19 per cent year-on-year (see ‘Making of a Behemoth’). While its consumer electronics business, Reliance Digital, registered 45 per cent growth YoY, it was the grocery business that drove its top line the most. “Grocery was the business that really led the growth… 65 per cent on YoY basis. The business delivered well-rounded growth across fruits and vegetables, staples, packaged foods and home & personal care categories,” said Gaurav Jain, Head of Strategy and Business Development at RRL, in a post-earnings call.

A report by Swiss investment bank UBS credits RRL’s recent success to its aggressive bid to establish itself in the general trade segment. “Grocery new commerce revenue growth was driven by merchant on- boarding and strengthened supply chain (added 11 new fulfilment centres),” the report noted, adding that current store count and area are up 20 per cent and 51 per cent YoY, respectively, as 789 stores (6 million sq. ft) were added during the quarter, and warehousing and fulfilment area was up 95 per cent YoY to 33.6 million sq. ft (see ‘Growing Up’).

While RRL is already a leading player in modern retail and digital platforms, the company has set a target of increasing its reach in areas that remain under-served. “In this endeavour, our strategy is to integrate with millions of small merchants… the aim is to bring them to become an integral part of the widest distribution portfolio across the country so that they can provide the same choices to their customer that are available in big cities,” said RIL Chairman Mukesh Ambani at the same AGM.

Additionally, RRL is working to strengthen its supply chain so that it can service the vast Indian geography in the “most efficient manner”. That will allow the company to pass on the benefits of reduced costs to its customers. Given the nature and spread of the local market, last-mile connectivity is the greatest challenge any major player faces. However, by setting up a distribution network—by tying up with existing small to medium outlets that number over 10 million—RRL has come up with a unique proposition for them.

While consumer goods leaders—from Hindustan Unilever (HUL) and Nestlé to Dabur and Britannia—are dependent on the traditional distribution channels to get their products to consumers, Reliance aims to hit multiple targets with one shot. In India, the traditional network of distributors, wholesalers and local grocery retailers, clubbed as the general trade segment, accounts for roughly 85 per cent of FMCG sales in India, while modern retail and e-commerce account for the rest. In the general trade model, most producers of daily essentials sell their products to distributors and wholesalers, who in turn sell them to local kirana stores, from where households buy them.

However, Reliance’s distribution model has disrupted this paradigm, as it supplies products directly to the retailers and cuts out the layers of distributors and wholesalers. This translates into greater margins for itself and a more efficient supply chain for the retailers. And for the manufacturer, bypassing the intermediaries saves 2.5-8 per cent in margins that earlier used to end up with the distributors and wholesalers, say traders. “There is an extraordinary amount of planning and thinking that has gone into it. The last-mile connectivity is so crucial that most big companies fail without an institutional setup,” says Choksey.

At the same time, the idea of directly reaching the consumer is not exclusive to Reliance. HUL, India’s largest FMCG player, had also tried its hand at the game two decades ago. Conceptualised in 2001 as an experimental direct-to-consumer (D2C) channel, HUL (then Hindustan Lever Ltd) had launched Sangam Direct—a non-store, home delivery retail business—only to sell it off six years later. Since then, many FMCG players such as Nestlé, ITC and HUL, too, have sought to develop a D2C business that avoids the traditional distribution route. Apart from cutting down costs by reducing the margins outgo, directly serving the customers or the local retailer also means greater access to first-hand consumer data, which is crucial in developing products that customers want.

V.L. Rajesh, an ITC veteran—who till 2016 used to head the FMCG giant’s foods business as chief executive—says the primary reason why FMCG majors are largely dependent on the network of distributors and wholesalers is their market knowledge. The local distributors, apart from maintaining long-standing business relationships and goodwill with the retailers, bring enormous knowledge of local consumption patterns, which is crucial for the sustained growth of any manufacturer. Additionally, these locally run businesses provide market credits to the millions of small and medium retailers, who mostly purchase branded goods on credit. “If a corporation wishes to do business directly with the retailers, it has to subsume all these costs and offer each of these facilities to them. In return, it gets greater control over sales. The PoS machines at the retail counters offer greater access to consumer data and buying patterns. But to succeed with such a model, efficiency would be the key,” Rajesh explains.

It is in this space—of providing market credit to its retail customers—that RIL has chalked out a plan to service them through Jio Financial Services (JFS), says Choksey. Incorporated in November 2016—months after the launch of its telecom service Reliance Jio—the NBFC provides financial services primarily through digital channels. Operated through a smartphone or a JioPhone, its services can be availed even on 2G networks, helping the company overcome the connectivity barrier that merchants in many remote markets face. Reliance has also roped in K.V. Kamath—a stalwart of the modern Indian banking system—to lead JFS as its Chairman.

With its vast network of retail stores and over 400 million customers using Reliance Jio’s telecom services, coupled with over 200 million customers frequenting its branded retail outlets, JFS is already at the forefront of becoming one of the largest financial services companies in the country, say analysts at Macquarie Capital Securities. “JFS could be the fifth-largest financial services firm in India. RIL already has an NBFC licence, which it can leverage to kick-start consumer/merchant lending in a big way. JFS can be a real threat to fintech business models as well as NBFCs. JFS not only can offer attractive rates in merchant lending and digital unsecured lending markets, but also be reasonably competitive in the secured lending market eventually,” their research notes (see ‘Background Strength’).

According to Choksey, RIL’s plan envisions an efficient, last-mile connected network of stores and kiranas, which in turn would be provided with every aspect of support in terms of logistics, products, financials, billing and accounting, among others. “It is very significant how they are developing this hub-and-spoke model on the back of their online Jio framework. Reliance has built an ecosystem that is unparalleled,” he says.

No wonder, then, that RIL had aggressively bid for the country’s largest wholesaler, Metro Cash and Carry India, the local subsidiary of German wholesale giant Metro AG. The deal—which recently received approval from India’s competition watchdog CCI—is expected to support Reliance’s new commerce strategy and expand its presence in the metro and Tier I cities with large-format multi-category stores, a research report prepared by a team of analysts led by Mayank Maheshwari at Morgan Stanley notes. “With a presence in 8 of the 10 large cities, the acquisition should be a bolt-on to RIL’s ambition to grow its last-mile reach by leveraging the relationship with kirana stores,” the report adds. Metro, bought by RIL for Rs 2,850 crore, has 31 large-format stores in 21 cities with around 3 million B2B customers, including 1 million who buy frequently; half of its stores are located in south India.

According to Maheshwari’s research, RIL’s recent moves in the M&A space have been well orchestrated and are aimed towards filling the gaps in its operations. “Its past acquisitions of Justdial, Dunzo and the recent launch of FMCG brand ‘Independence’, have been steps towards getting more integrated in its retail offering, building on its 3 million kirana merchant partners... where RIL has more room to raise its penetration versus peers. We currently assume $4 billion (over Rs 32,000 crore) annual investments in retail,” their research notes.

Reliance’s rise in the FMCG space, especially foods, is giving traditional biggies the shivers. Reliance Consumer Products Ltd (RCPL), a wholly owned subsidiary of RRVL, announced a strategic partnership on January 31 with Maliban Biscuit Manufactories, the largest biscuits manufacturer in Sri Lanka that exports to 35 countries. The move came days after the Ambanis had launched their FMCG offensive with umbrella brand Independence, which is expected to offer a wide variety of consumer staples ranging from wheat flour to edible oil. “With this strategic partnership between RCPL and Maliban, we will not only be strengthening our FMCG portfolio through a great brand, but also be able to offer excellent value proposition through quality products to our Indian consumers,” said Isha Ambani, the de-facto head of Reliance’s retail and consumer goods business. It was one of the many acquisitions and partnerships that RRVL has stitched up in recent times.

For instance, a week before the Maliban tie-up, RRVL had picked up a 50 per cent stake in Gujarat-based Sosyo Hajoori Beverages that sells over 100 flavours of soft drinks under nearly a dozen brands such as Kashmira, Lemee, Ginlim, etc. It also purchased Campa Cola, a domestic cola brand from the 1970s, and roped in T. Krishnakumar, former president of Coca-Cola India and South West Asia, to head its entire beverages portfolio. Popularly known as KK, the cola industry veteran was instrumental in strengthening Coca-Cola’s bottling and distribution operations. According to Abneesh Roy, Executive Director at Nuvama Institutional Equities, Reliance has deployed a dual strategy of firstly acquiring dormant but legacy brands like Campa Cola, which not only have long-term potential but also have great recall value; and secondly, fully or partially acquiring or tying up with existing regional players like Sosyo and Maliban, or supply chain providers, to get access to distribution, brand and manufacturing capabilities and operate in the same space.

Reliance’s list of acquisitions runs long. In the December quarter, it acquired a number of companies, such as V Retail—which sells footwear under the Centro brand—along with Sosyo and Lotus Chocolates. Per Morgan Stanley’s analysis, the group has invested $1.1 billion (over Rs 9,000 crore) since 2018 in acquiring companies and brands in the retail space. Currently, its portfolio of owned and partner brands number well over six dozen and they are spread across categories like fashion and apparel, grocery, consumer electronics and appliances, gems and jewellery, and home furnishing, among others.

According to experts, Reliance’s go-to-market strategy is simple: operate on economies of scale to keep costs in check; cut intermediaries to reduce distribution expenses and improve access to consumer shopping patterns; and offer products at a lower price than the competition. On the face of it, the group has already managed to turn some of it in its favour. Sample this: in the recently concluded December quarter, the retail giant’s Ebitda (earnings before interest, taxes, depreciation and amortisation) margin stood at 7.7 per cent—70 basis points higher than the year-ago period. And its profit after tax grew 6 per cent to Rs 2,400 crore.

While most other retail majors operate at Ebitda margins of 1.5-2.5 per cent, Reliance’s margin is already much higher than the industry average, points out Choksey. “By integrating the vast extent of its operations up to the last mile, Reliance has implemented some kind of ‘just in time’ model that reduces the stocks at the outlets, both owned and merchant partners’ and, thus, brings down working capital requirements and improves profit margins,” he says, adding that the wide range of private labels RIL has means higher profits for them, compared to third-party brands.

While leading firms in the consumer goods market are attempting to develop a super app that can give access to all their products and services to potential consumers, Reliance has managed to establish MyJio as a super app for most of its offerings. Initially designed for its telecom customers, the app now allows anyone to shop across its grocery, pharma, telecom, fibre, streaming, news and media, digital banking, edtech, cloud storage and UPI payments offerings (see ‘Preferred Destination’). To back it all up, it has tied up with Meta (Facebook) to allow consumers to order through WhatsApp. According to Jain, JioMart on WhatsApp continues to do well. “The active customer base is growing by 37 per cent month on month. Order value and number of orders continue to grow; orders have now grown 9x since launch. So, this platform is helping us really democratise WhatsApp’s reach to new customers who are otherwise not able to shop on digital platforms,” he said.

ITC’s former top executive Rajesh, who now advises a large private equity firm, says RRL’s thrust on building warehousing capacity points towards its big plans for the future. “An efficient supply chain helps capture demand in the market and may offer some advantages. But the key [to success] is whether consumers accept the new products and brands and how much pull one can create for them. So, a lot is riding on factors like their products strategy, the level of innovation they can bring in and their investments in brand building,” he says.

Bottom line: Reliance Retail is already very big. And it is aiming to grow even bigger, much bigger.

@arndutt