Friday, March 21, 2014

Reliance wins handsdown

The first store for Reliance came up in Hyderabad. It was a grocery retail format and many skeptics wrote off the idea, citing intense competition in this segment. Gross Margins are low, two-digits and net margins, if any are a mere 4-6%. So, how would the company ever make money? Further, there were already established players in this segment, especially in the South (of India) such as Foodworld, Spencers, Food Bazaar, Nilgiris, FabMall, Trinetra (now together More), Fresh @ from Heritage Foods – the list could go on! But patience and perseverance has helped the company in the long term. According to a report in the most respected Hindustan Times newspaper, the company would become the largest Retailer in India by Sales in 2013-2014. The company is expected to close the year with $2 Billion in Sales, approx. INR 12,000 Crores. And it made a meagre INR 78 Crores last year and has made INR 278 Crores in 2013-14. That’s not bad at all. The company has been able to achieve scale over the past 7 years and its many Chief Executives of respective businesses have built the business brick by brick, sweating and toiling between Board Rooms and Store fronts.

Take a quick look at how the numbers stack up;

Reliance Retail

It’s a commendable achievement for Reliance Retail to achieve this position. Those who know me well would now agree what I have been saying ever since Reliance joined the fray in the Retail sector. I predicted right in the beginning that they are here for the long term. With a cash pile of INR 90,000 Crores and managing the largest Oil refinery in the world, Reliance has real deep pockets. And its Chairman Mukesh Ambani is not someone to open and shut businesses. Its not in their blood. Dirubhai Ambani, the patron founder of the group tht every household in India should have a Reliance product in some form or the other. The group created a furore in 2002 when the Reliance Mobile network was launched with an exciting Rs. 501/- package making it the most affordable mobile phone of its times. Similarly, they forayed into various other businesses and turned around all of them, albeit patiently.

One of the biggest reasons why Reliance has been able to reach where they are is also because of steadfast focus in the formats that they have opened and operated. They just have one Hypermarket, One Digital Electronics Format, three formats in Fashion, one in Jewelry and half a dozen international brand tie-ups. Makes it easy to focus on scaling up each vertical constantly. Reliance operates small supermarkets which compete with Kiran Stores and other organized players such as Spencers, Foodworld, Food Bazaar, etc. Reliance hyper directly competes with Metro AG, Best Price (Bharti Retail), Hypercity (K Raheja Group), Total (Jubilant  Retail), Big Bazaar (Future Group) nd other local wholesale markets and APMC operated mandis. In the fashion segment, Reliance Trends is positioned against Lifestyle (Dubai based Landmark Group), Shoppers Stop (India’s largest Department store Chain) and Pantaloon (now owned by Aditya Birla Group). Reliance Footprints has a unique positioning and doesn’t have major names for competition except Metro and Mochi who have a pan-India presence. Reliance Jewels competes with the local jewelry stores in each micro market. Reliance Brands such as Diesel, Quicksilver, etc. compete with their international competitive brands.

This is just the beginning. Look how Reliance is going to grow leaps and bounds in times to come. I am still sure that they wouldn’t have a JV with the global biggies such as Wal-Mart, Carrefour, etc. They would rather grow organically in times to come.

The game gets more interesting.

Thursday, March 13, 2014

Food Retail is tuff…

Restaurant business is damn exciting. While people don’t shop for clothes and mobiles every weekend, most people drop over for a good meal frequently and a great meal, once in a while. Great Meal, I mean is a bit indulgent. It could be a Michelin rated restaurant. It could be one among the top 10 restaurants in the country. It could be a celebrity chef’s eating place. Ofcourse, the Five-Stars. The list is long. However, the food business is also one of the tuffest to be in. In fact, it is also one of the retail formats where the churn is very high. For every 6 successful restaurants, three of them fail. And the reasons for failure are aplenty, Customer Service (or the lack of it) being one of the main reasons why restaurants cannot keep up in the short to medium term. Also, investors are not too keen to fund ventures that do not show the ability to scale. 2-3 outlets is not scaling up. It should be in double digits. Most of the restaurant owners are entrepreneurs, many having chosen the route to entrepreneurship after stints in corporate life. They invest their life time savings to open a restaurant (also includes Pubs / Nighclubs / Others) and usually find the going tuff within 18-24 months of opening. That’s when the business matures and needs further investment in marketing and PR – the machinery that keeps restaurants going. I was at a restaurant called “Tangerine” in the upmarket Alwarpet locality in Chennai. The last I had been there was about a decade back. The food was excellent, just how I remember it had tasted during my last visit. However, the place was a bit worn down. The kitchen, which has limited space and equipment cannot cook more than two dishes at a time, which increases the waiting time for guests. The staff fare not all that excited, since they don’t get regular footfalls all over the week.

Lashakahari

The business is all the more difficult if they operate in niche categories. In a city like Chennai, there is a strong thrust on Veg-only restaurants. Yes, you heard that right. In fact, India is the only country in the world which has so many veg-only restaurants and that too, all across the country. I visited one last month. It is called La Shakahari. La, being a french word and Shakahari being vegetarian in Hindi language. The restaurant is located inside a residential area and I was almost being challenged by the Google Map in my phone to find the place despite its best efforts. But once we entered, we realized what a great place it was. They had a set-menu as well as A la Carte. The set-menu offerred more items for what we would have paid otherwise while ordering them individually.

One of the biggest challenges that Restaurateurs face is the inability to scale-up. Most times, it’s the lack of capital. At times, it’s the lack of intent and interest to grow. A potential investor would indeed be able to show inclination to projects which are tried and tested. However, many entrepreneurs just don’t expand. Another option to scale up is the Franchising route. However, the risk is you would lose consistency in the long term and many of them would probably serve food that tastes different.  For fear of not diluting their exclusive menu and taste that it offers, these restaurants remain standalone ventures and thus allow others to crop up in other parts of the city.

Of all retail formats, the F&B format is one of the toughest to operate. Many of them shut shop within 24 months of opening. If they withstand any further, then they strive to stay for a long time in their lifecycle. It also depends on the choice of real estate – Rent is almost 20% of Sales in Malls and about 12-15% at High Street locations. And that’s why you don’t find many of them in Malls not doing well or being priced exorbitantly. At the end of the day, the success of a restaurant is actually many factors playing in.