Forgettable Year For Reliance Retail, Quick Commerce Foray Necessary, Says Jefferies

Reliance Retail was under pressure in 2024 due to tepid demand and rising competition, and may need to focus on foraying into the quick commerce business in the period ahead, Jefferies said in a note released on Thursday.

"We think Reliance Retail may need to take its cue from some of the focused retailers and go after sizeable opportunities instead of spreading itself widely, which is the case right now with multiple formats and brands," the global brokerage firm said.

Given Reliance Retail's omni-channel ambition, "there is a case to consider quick commerce foray given the rapid rise of this channel", Jefferies said.

Reliance Retail had, in early 2022, picked up around 26% stake in Dunzo, which was an early entrant in the quick commerce space but has since been marginalised.

Jefferies pointed towards media reports which suggest that Reliance Retail could be hitting the quick commerce segment with a fresh approach. The reports indicate that the company is looking at a 30-minute delivery service unlike 10-15 minutes offered by its peers, the note stated.

The year 2024 has seen a significant pick-up in quick commerce as a retail channel, which is impacting the entire ecosystem, at least in top cities, the brokerage said.

Avenue Supermarts Ltd., which operates retail chain DMart, already blames online grocery formats for impacting its business in metros and, "in this context, there should be a similar impact on Reliance Retail as well", Jefferies said.

According to Jefferies, this calendar year was a "forgettable" period for Reliance Retail. After aggressive store additions in the past two years, the company's management took "hard decisions" in 2024 which led to the closure of 1,185 stores between January and September.

The cut down on existing stores led to a net addition of just 172 stores in the first nine months of the year, the brokerage said.

"In fact, in the latest quarter (July-September), Reliance Retail, probably for the first time, witnessed a net decline of 1.9m sqft (gross decline at 3.8mn sqft), which is 2.4% of closing footprint," the note stated.

There have also been concerted efforts to "calibrate the e-B2B business based on our checks", Jefferies said. As a result, the share of digital and new commerce in the company's business has slipped to 17% in the latest quarter as against 18-19% in the past few quarters, it added.

As a result of the calibration, Reliance Retail reported a "weak revenue growth" of around 4% year-on-year in January-September 2024. The core growth was at just around 2%, Jefferies said.

The core revenue per square feet has also been under pressure despite footfalls growing in double digits. Overall, growth in bill generation has also been modest at 6-9% year-on-year in 2024, as compared to 25-40% in 2023, it added.

The tough macro environment in 2024, which dampened demand and weakened consumer sentiment in the retail sector, also added to the company's woes, according to the note.

For Reliance Industries Ltd., the parent entity of Reliance Retail, Jefferies has kept the target price unchanged at Rs 1,700 per share. The risks include "elevated cash burn in e-commerce", lower refining margins in petrochemical business, and inadequate returns in new energy investments, it stated.