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Reliance Retail bets on grocery
While the company’s current valuation of close to Rs 5 lakh crore may appear expensive to some investors, industry experts said its private grocery labels will start delivering higher margins soon.
After raising more than Rs 47,000 crore through stake sales to global investors, Reliance Retail Ventures Ltd (RRVL) is expanding its private grocery labels and pushing into smaller towns.
While the company’s current valuation of close to Rs 5 lakh crore may appear expensive to some investors, industry experts said its private grocery labels will start delivering higher margins soon.
Reliance Retail is already India’s largest retailer, both in terms of store count and revenue ($22 billion in FY20), and caters to 80% of households’ consumption needs such as apparel, footwear, jewellery, consumer electronics and telecom.
“We expect core retail revenue to grow 2X/2.4X over FY20-25, with grocery at the centre of the growth narrative, accounting for over 50% of incremental revenue,” JPMorgan said in a December 1 note, adding that its online venture, JioMart, has a high chance of capturing a meaningful share in the Indian e-commerce market as online grocery is expected to be the primary driver of long-term growth. According to Euromonitor, the $400-billion grocery segment was the biggest category in retail in 2019 with online penetration at just 0.4%. Given that grocery is 60% of the retail market and considering the low penetration, it remains the most promising category for retailers.
RIL, which began retailing groceries in 2006, now sells a range of goods at its 11,931 stores across store formats in 7,000 cities and towns.
However, unlike most of the organised peers who have a higher presence in metro or tier-I cities, RIL has focused more on smaller towns and cities, gaining a first-mover advantage in many places with limited organised retail.
“RIL’s presence beyond metro cities has paid off well. At a time when consumer demand in India has been hit hard, these are the towns, which are helping RIL clock higher revenue in its retail businesses,” an analyst with a domestic brokerage said on condition of anonymity.
RIL’s Ebitda margin for FY20 in grocery stood at 6.5% versus 8.6% for D-Mart, though the operating model differs—Reliance takes most of its store space on lease, while D-Mart owns them, implying lower rentals.
