Reliance's Retail Formats Are Still Unprofitable

Even as the billionaire Mukesh Ambani-led Reliance Industries Ltd. is aggressively expanding and consolidating its position, several subsidiaries under its sprawling retail arm—spanning luxury retail to micro-delivery services—continue to bleed.

In FY22, Reliance Brands Ltd., the brand licensing arm of India's largest retailer Reliance Retail Ventures Ltd., has posted a net loss of Rs 213.77 crore on a turnover of Rs 1,234.65 crore, according to the company's latest financial statement.

It boasts a portfolio of 47 global brands, including Armani Exchange, Diesel, Burberry, Brooks Brothers, Tiffany & Co., Michael Kors, Hugo Boss, Hamleys, Jimmy Choo and Balenciaga. It has also invested in homegrown Indian designer labels such as Ritu Kumar, Raghavendra Rathore, Abraham and Thakore, Rahul Mishra, Satya Paul, and Manish Malhotra.

Among the unprofitable retail units are Reliance Ritu Kumar Pvt., which owns Ritu Kumar labels, and has posted a net loss of Rs 34.74 crore on a revenue of Rs 250 crore in FY22.

Genesis Colors Ltd.—which owns the fashion label Satya Paul—registered net losses to the tune of Rs 18.34 crore.

Abraham and Thakore Exports Pvt., too, widened its losses to Rs 4.91 crore in FY22, as against Rs 3.43 crore in the year-ago period.

Reliance Retail's wholly owned subsidiary, Amante India Pvt.—which owns the premium lingerie brand by the same name—has also widened its losses to Rs 26 crore in FY22 as against Rs 20 crore in the previous year.

Actoserba Active Wholesale Ltd., which houses the Zivame brand, posted losses to the tune of Rs 34.89 crore on a revenue of Rs 221.85 crore in FY22. "The company’s net worth is negative at Rs 43.36 crore," according to Deloitte, which is the auditor.

But the management is confident of generating operating profits in the "foreseeable" future, given its vision plans in the retail business, aided by the funding (long-term and short-term) extended by the parent and the repayment of the external loans, Deloitte said in its audit report.

RBL operates these brands either through joint ventures or long-term master franchise agreements. It also operates around 21 brands as part of its licensing portfolio. For instance, Diesel and Brooks Brothers are joint ventures, while Balenciaga is a long-term franchise agreement.

The brand licensing arm operates 821 stores and 1,263 shop-in-shops in India.

These acquisitions are crucial for Reliance Retail’s push into the brick-and-mortar and e-commerce space. It is also part of the RIL unit’s larger strategy: To break into the global top 10 retailers segment; it currently ranks 56th, according to global consulting firm Deloitte.

Addressing shareholders at RIL’s 45th annual general meeting on Monday, Chairman Mukesh Ambani said he is optimistic about the future of retail and expects the retail arm to become the largest segment within the group.

Not much, however, is disclosed about the monetisation of the businesses. According to a report by Jefferies, "Transparency remains an issue since RIL provides only high-level information for its retail business, making analysis difficult."

A report by CitiGroup also said that no updates have been provided on the monetisation of the retail business, which its analysts say was "perhaps one key market expectation" during the latest AGM.

Even as the subsidiaries continue to make losses, Reliance Retail has been aggressively expanding its presence through acquisitions and tie-ups with luxury as well as mass brands.

In FY22, it added six brands to its list of retail businesses, including the American fashion brand Gap, Italian luxury lifestyle brand Tod’s, the fresh food and organic coffee chain Pret a Manger, and footwear brand Catwalk. Recently, it also signed up Balenciaga in India.

In FY22, Reliance Retail has invested Rs 30,000 crore overall on capex, acquisitions and strategic partnerships, according to its annual report.

This is as much as the annual sales of the D-Mart chain owner Avenue Supermarts Ltd. and higher than the likes of Tata-owned Trent Ltd., Shoppers Stop, and Aditya Birla Fashion and Retail Ltd. It underscores the fact that Reliance Retail's vast business spread is unlikely to see a direct threat from competitors.

But it has come at a cost.

Reliance Retail's aggressive growth ambition has turned the balance sheet into net debt. As on March 31, 2022, Reliance Retail is carrying a net debt of Rs 6,559 crore. A year ago, it had net cash worth Rs 33,546 crore, according to its financial statement.

In FY21, Reliance Retail had raised about $6 billion through a sale of 10% stake to investors like Silver Lake, KKR, Mubadala, Abu Dhabi Investment Authority, GIC and TPG, among others. The previous year's capital raise has been deployed on capex and mergers and acquisitions in FY22.

A likely increase in related-party transactions may, however, result in investor discomfort, as and when Reliance Retail lists separately, according to a Jefferies report.

"Reliance Retail's capex remains high at around Rs 9,000 per square feet—we are yet to fully understand the reason for this... Its CWIP (capital work in progress) rose 70% YoY to Rs 12,000 crore and it also has another Rs 12,000 crore of intangibles under development which looks high given the nature of the retail business."

CWIP is used to record current costs related to long-term projects before they are ready for use.

Reliance Retail has also made a slew of smaller acquisitions to bolster its footprint, but even those are yet to be profitable.

Case in point is Jaisuryas Retail Ventures Pvt., a regional grocery chain in southern India, that was acquired by Reliance Retail in November 2021. It has posted a net loss of Rs 62 crore and net negative cash flows of Rs 3.3 crore.

The company has an accumulated loss of Rs 62.42 crore and its net worth has reduced by Rs 21.64 crore during the year, according to the financial statement.

It also took over Kalanikethan Silks Pvt. in November 2021. The leading sari and ethnicwear retailer is also running in losses to the tune of Rs 42.23 crore, as on March 31, 2022, although it has narrowed it down from Rs 146 crore in FY21, as per its financial statement.

Jaisuryas' revenue from operations fell 16.6% to Rs 71.89 crore in FY22, while revenue for Kalanikethan Silks grew by 5% during the period.

Online milk and grocery store Milkbasket's filings show that its losses have ballooned to Rs 65.92 crore in FY22 as against Rs 33.17 crore in FY21. Excluding exceptional items and tax, its losses were at Rs 25.8 crore. Revenues also dipped 19% to Rs 421 crore.

Not all of Reliance's choices are bleeding, though.

Genesis Luxury, which has been renamed as Reliance Brands Luxury Fashion Pvt., is a winning horse.

The company houses global couture brands including Burberry, Canali, Armani, Just Cavalli, Paul Smith and Jimmy Choo. It has posted a net profit of Rs 3.88 crore on a turnover of Rs 220.76 crore in FY22 as against a loss of Rs 1.19 crore in FY21.

Its subsidiaries—GLF Lifestyle Brands and Genesis La Mode—also saw profits rise 2.5 times and 3.5 times, respectively, according to financial statements.

The holding company, Reliance Retail Ventures has a network of 15,196 stores selling groceries to high-end fashion and lifestyle items. In FY22, the company posted a net profit of Rs 2,354 crore.

Its subsidiary Reliance Retail Ltd. saw profits rise 7.5% to Rs 4,934.65 crore on higher footfalls from gradual mall reopenings, easing mobility and improved consumer sentiment despite inflation hurting the consumer's wallet.

There are about 45 subsidiaries under Reliance Retail, which includes Reliance Fresh, Reliance Smart, Reliance Digital, AJIO, JioMart, Reliance Trends, Reliance Jewels, Urban Ladder, and Reliance Footprint, among others.

In Q1 FY23, its fashion and lifestyle segment grew by three times, while grocery, consumer electronics and pharma nearly doubled, the company said. Digital coupled with new commerce grew two times year-on-year, contributing to 19% of revenue.

The Boston Consulting Group expects India's retail market to reach $1.1-1.3 trillion by 2025, from $0.7 trillion in 2019. It sees it growing at a compound annual growth rate of 9-11%, driven by socio-demographic and economic factors such as urbanisation, income growth and rise in nuclear families.