Mukesh Ambani is on the prowl again. Now it is the turn of Reliance Retail to claim record-breaking raising of capital. As expected, investors are queuing up to get a slice of the JioMart pie. The share market and the media are in frenzy. In this euphoria, everybody seems to be forgetting that organized retail is an unproven entity in India, even after more than 2 decades of existence.
The organized retail landscape in India is littered with acquisitions. The smaller retail chains being gobbled up by the larger counter-parts.
Future Group acquired HyperCity, Easyday, Nilgiri’s, Heritage and countless other smaller rivals like Big Apple, Sangam Direct, Shoprite, Aadhaar etc. Now, in turn, Reliance has bought Future Group. Amazon has acquired More. Spencer’s, whose on-going existence is anybody’s guess, has acquired Godrej Nature’s Basket. Apart from D Mart, every other organized retail chain is in a state of flux.
The experts and analysts will claim that consolidation brings synergies and economies of scale. The combined back-end and logistics will become more efficient, improving the margins. In reality, none of the acquisitions brought any benefit for Future Group. It was neither able to turn-around any of the loss-making buys nor improve its performance.
Accept it, nobody sells a profitable business, at a throw-away price. The enterprises are sold off, in a hurry, when they are unable to generate the cash-flow for their survival. Would Shri Kannan Departmental Store care about synergies with Reliance Retail and sell off the business at 1/3rd of its turnover? The real reason, he could not bleed any more. So, what do all these acquisitions tell us?
Organized retail in India is a chronic loss-making business. D Mart is more a function of balance-sheet and not P&L. Not a single retail chain in India has a proven profitable model that can be replicated and scaled up. Some stores do make money here and there but taken as a whole, no company is profitable. Yes, there is a lot of window dressing for the benefit of the share-market.
Even Reliance Retail is not profitable. If it is, why is Mukesh Ambani not spinning it off and listing on bourses as a separate entity? Why are the financials of Reliance Retail shrouded in mystery and hidden in the parent’s voluminous but indecipherable reports?
The question for Reliance Retail is – Does it really have a business model to make money? How different would it run a business from Future Group, which had a significantly higher sales/sq ft, healthy sales-mix of fashion, owned some of the biggest sales events in the country, high-decibel marketing; yet did not make money.
This is not to question the wisdom of the world’s brightest PE minds, but a tiny query if organized retail in India is capable enough to pay for itself? If yes, what is the template that nobody has been able to discover in more than 2 decades? Please keep aside the farce of JioMart, it is not even worth it (will detail out the charade of JioMart in a separate article).
The value addition by organized retail
Have you come across a substantial number of farmers benefited by organized retail? What would be the benefit to the Indian MSME sector by organized retail? Have the number of jobs generated by this industry good enough to be any merit? Unfortunately, for any of the metrics, one can think of, organized retail falls short of expectations.
One might assume that maybe the abysmal state of logistics and warehousing in the country could have benefitted by the expansion of stores. Regret to prick the balloon. The supply chain has seen no significant improvement courtesy this sector. Has organized retail helped even a tiny pocket in the country to ride out the price fluctuations arising out of demand/supply mismatch of onion, tomato?
Let’s talk about customers. How have they benefited by organized retail? Has the assortment, availability, freshness, quality, buying experience, customer service, after-sales improved in any perceptible manner vis-a-vis traditional shops? Yes, they get to cherry-pick some bargains basis the once-in-a-while promotions run by organized retailers. But, apart from that, what is the gain?
Why organized retail?
If there is no apparent value addition by organized retail to any of the stake-holders, what and whose purpose does it serve? Is it meant only for raising capital, paying for owners’ ego trip and incompetence and kicking it to the next sucker?
Even a rudimentary question as to why should a customer visit organized retail when a nearby local store with a half-decent owner is serving the customers in a good enough manner remains unanswered. The customer pays for the product, quality, service and not for the pointless application of technology at back-end and front-end, ill-trained staff, HO & ZO over-head costs etc.
Now that only limited players, all with deep pockets, are left behind; can we expect a real change to the objectives and functioning of organized retail in the country? Can it ever learn to be profitable? Equally important, can it ever play a role of any significance for even one of the stake-holders?
Unless organized retail answers these soul-searching questions; Reliance Retail and Mukesh Ambani will surely get the prized PE capital but it will only be the case of more good money following the bad money already going down the drain; with no returns in sight for anyone. Moreover, there is nobody left to hold the baby when the music stops.