Reliance Retail is not about Retail - it’s about Sourcing

If Reliance Retail was all about retail then why would Reliance sell goods as wholesalers to petty retailers who would then compete with its own retail outlets for retail sales? Yes, apart from selling agricultural outputs through its retail chain “Reliance Fresh”, Reliance is also selling goods to retailers at wholesale rate through its subsidiary Ranger Farm Pvt. Ltd.

Every time Reliance enters into a new business people wonder what competence they have for the particular field to be successful. Same questions on core competence were raised when Reliance entered Infocomm business. That time Anil Ambani replied:

“….Our core-competence is Global sized project management, ability to manage the environment and ability to raise cheap finance …bus…..After Jamnagar, Infocomm is like Viagra for our project implementation team ” – Anil Ambani

Since then Reliance has proved its critics wrong and Reliance Infocomm (Now Reliance Communication) has been one of its biggest success stories and is one of the top ten by market capitalization on the Indian stock exchange.

Critics commented that unlike other Reliance businesses Telecom is a customer facing, competitive business and Reliance has no experience in such customer facing business. What people didn’t realized then that Reliance was not entering the Telecom business it was entering the Infocomm business. Reliance’s core-competence is mega infrastructure creation and in Infocomm business too it was doing just that, unlike its competitors. While other telecom operators were fighting for licenses Reliance was silently building 80,000 kms of world class optic fiber backbone infrastructure which it later planned to leverage for its telecom and other information and telecommunication business. The basic strategy was clear – Make huge capital expenditure in efficient and time bound manner, minimize operating expenditure, add to that economy of scale and vertical integration. Result low per unit operating cost at high volumes of operation.

Reliance is doing the same in its retail business. Reliance retail is not about retail it’s about sourcing. And unlike other retail companies Reliance focus is on agricultural products retail – fruits and vegetables. Ofcourse it would operate in all forms of retail but the focus clearly is ‘Fresh’.

“There is more arbitrage opportunity in Agriculture than in Software”

– Mukesh Ambani (Money Life Magazine)

Reliance has started its retail offensive with launch of Reliance Fresh in Hyderabad. It was followed by launch in Jaipur. Soon it would be launching Fresh stores in NCR and Chennai.

If in Infocomm it was optic fiber infrastructure they were betting on, in Retail it’s the logistics infrastructure they are betting on. India has a major problem with its logistics infrastructure. And in problem lies opportunity. It might sound cliché buts it’s very true – let’s discuss how.

All competitors of Reliance in retail business would be facing the same logistics problems which Reliance would be facing. The problem list includes:

1. Outdated agricultural techniques
2. Presence of too many intermediaries
3. Absence of economy of scale
4. Lack of roads to transport goods
5. Unorganized trucking business
6. Inefficient railway system – PSU style operations
7. Lack of cold storage infrastructure
8. Lack of proper warehouses
9. Other form of transportation relatively unexplored
10. Absence of good ports
11. Absence of cargo airports
12. Inefficient & restrictive tax system

Now lets us look at some of the core competences Reliance has:

1. Project implementation skills
2. Finance power
3. Capability to ‘Manage the environment’
4. Vertical integration

Other key advantages it has
1. Scale of operations
2. Confidence in group capabilities
3. Out of box thinking / visionary leadership

If we match the problems with Reliance’s core-competence and its other key advantages we get the following result

Problems - Skills of use (Control)
1. Outdated agricultural techniques - Scale of operation, finance, project implementation (Medium) 2. Presence of too many intermediaries - Vertical integration, Managing the environment (High)
3. Absence of economies of scale - Scale of operations (High)
4. Lack of good roads to transport goods - Project implementation, Finance (Low)
5. Unorganized trucking business - Project implementation, Finance (Medium)
6. Inefficient railway system - Project implemtation, Finance, Managing the environment (Medium)
7. Lack of cold storage infrastructure - Project implementation, Finance, Scale of operation (High)
8. Lack of proper warehouses - Project implementation, Finance, Scale of operation (High)
9. Other modes unexplored - Visionary leadership, Scale of operations (High)
10. Absence of good ports - Project implementation, Finance, Scale of operation (High)
11. Absence of cargo airports - Project implementation, Finance, Scale of operation (High)
12. Inefficient & restrictive tax and laws - Managing the environment, scale of operations (Medium)

This shows that Reliance has a sustainable competitive advantage over its competitors. Very few competitors can match Reliance on most of the skills.

It might make us feel that Reliance has unfair advantage over others. But if you think that way you are a pessimist / communist. There is a positive way to look at this. Till date whenever Reliance entered any sector it lead to rapid economic growth in that particular sector and one or two associated sector. But this time many sectors are going to be effected by this initiative. It will revolutionize many sectors like – agriculture, road, rail, sea transportation, aviation, warehousing etc. It opens sea of opportunity for all of us to start our own businesses associated with these sectors. And that’s why Newsweek recently mentioned that Mukesh Ambani might just spark the next Asian boom. People who have guts would get into associated businesses and prosper, rest would cry foul at Reliance’s growth.