Deep pockets in fashion for Reliance Brands

Deep pockets come in handy in a downturn, an advantage Reliance Brands, a unit of Mukesh Ambani-controlled Reliance Industries, aims to press as rivals in India's battered retail sector scale back expansion plans to weather a slowing economy.

India is a tough market for retailers, with same-store sales growth slowing to single digits at many chains. Two years ago, sales growth of 25 percent for many fashion retailers open a year or more was not uncommon. Reliance Brands declined to provide such data.
"We are different than companies who are driven by valuations and the next round of funding," said Darshan Mehta, chief executive of Reliance Brands, which sells branded goods in India through joint ventures with foreign companies.
Strict local sourcing rules for wholly-owned retail outlets mean nearly all foreign-branded stores operate in India through joint ventures with local partners like Reliance, or franchises.

Reliance Brands opened its first store in April 2010 and through March operated about 60 stores under 12 brands including Diesel, Brooks Brothers, Thomas Pink, and Kenneth Cole.

It aims to open 40 stores in the year ending in March and plans to sign up more foreign brands, said Mehta, a former stockbroker.

While overall profitability is "few years away," the company's near-term focus is on profitable stores, he said.

"We have a powerful parent and a very patient parent and when you have that you can go ahead and build a robust business...irrespective of the challenges," he said from his office in south Mumbai overlooking the Arabian Sea.

Reliance, an energy-based conglomerate, generated 76 billion rupees in retail sales in the last fiscal year, or 2.2 percent of overall revenue. Ambani has said he hopes to grow the retail business, which includes 1,300 stores, mostly supermarkets, to up to 500 billion rupees over the next three to four years.

While Ambani is patient, his investors have been less so, with some grumbling at a recent shareholders meeting over the push into retail and telecoms, businesses aimed at cashing in on Indian consumer growth, but where profits are years away.

Shares in Reliance are down 27 percent since the start of 2011, in part on falling output at its main gas field.

Growing alone

Ambani's retail conviction is not shared by all his rivals.

DLF Brands, part of the country's largest real estate developer, debt-laden DLF , recently ended its joint venture with Italy's Giorgio Armani, which was unhappy with the lack of scale offered by its partner, according to industry analysts. Armani recently struck a franchise agreement with Genesis Luxury, a rival to Reliance Brands.

India's largest retailer, Future Group, which runs supermarkets and clothing outlets, has scaled back its expansion from 2.5 million to 2 million square feet this fiscal year due to an economy growing at its weakest in nine years. The growth rate was 5.3 percent on an annual basis in the March quarter.

Reliance benefits from rules that once banned full ownership by foreign single-brand retailers. The ban was lifted in January, but a rule that foreign brands must source 30 percent of their goods from local, small and mid-sized vendors has deterred most foreigners from setting up on their own.

Only two overseas retailers - Swedish furniture giant Ikea and Britain's Pavers shoe company - have applied for licences since the rule was changed.

Mehta, dressed in a white Thomas Pink shirt and a 19,000 rupee pair of Diesel jeans, said the change in the law does not make India an easy place for newcomers.

"Retailers who are not affected by the law also look for partners in India. The law doesn't take away the complexity of the market," Mehta said.

Another hurdle is a 15 percent fall in the value of the rupee since its yearly high in February, which drives up import prices.

"The bigger worry is if, going forward, the economy (worsens). That will have a much larger impact than a 500 rupees price hike," Mehta said.

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