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Reliance Retail is Set To Disrupt India's Retail Distribution Supply Chain

Editor, TRANSFIN.
Dec 9, 2021 6:40 AM 6 min read
Editorial

Reliance Industries is no stranger to disruption.

Jio turned Indian telecom upside-down with its dirt-cheap data rates and was arguably the most effective catalyst for India's digital revolution.

The conglomerate has similar plans for the renewable sector, as it cuts back on its oil investments, bids adieu to Saudi Aramco, and signs hefty deals with solar energy firms to embrace a green future.

RIL’s Retail Ascent

Likewise, the company is already the kingpin of the retail sector. Reliance Retail, launched in 2006, maintains a ubiquitous presence through its 11,000+ stores and $22bn+ in sales. And over the past year, it has accelerated its operations with the intention of dominating online grocery, winning the super-app race, and fending off competition from Amazon, Flipkart, Tata and various new-age startups.

To that end, Reliance Retail has been on a robust shopping spree of late. It inked a $3.4bn deal to purchase Future Group's retail assets (though currently embroiled in an Amazon-sparked legal quagmire). In October, RIL struck an agreement with 7-Eleven to operate its franchise in India. This came on the heels of the acquisition of Just Dial, a firm that is likely to aid RIL in B2C commerce.

Reliance Retail’s rapid and relentless ascent has had two main repercussions. One, concerns about the possible monopolising of the retail sector. And two, the upending of the traditional retail distribution chain.

 

India's Retail Distribution Chain 101

Let's take a typical FMCG product - say, a packet of turmeric powder - as an example.

Manufacturers procure dry turmeric from farmers and process it into fine powders in their plants. This is then packed, sealed and then given to distributors, who are in charge of localised order capture and delivery.

Distributors have a wide network of salespeople and agents, who connect them to wholesalers and retailers. The latter (i.e., kirana stores) are usually frequented by salespeople, who inquire about demand and product requirements and fulfil the same within a couple of days. And from the retailer, the turmeric powder reaches the consumer - i.e., you and me.

Reliance Retail is Set To Disrupt India's Retail Distribution Supply ChainDistributors can have arrangements with more than one manufacturer (like HUL, Nestle, ITC, Reckitt Benckiser, Unilever, Colgate-Palmolive etc.) and oversee a base of a few thousand retailers in a given area. The margins earned by household goods salespeople is usually around 3-5% on product prices.

This distribution network has developed over the years into a fairly well-oiled machine. Today, India has about 450,000 distributors, who in turn rely on many more salespeople to connect with kirana stores across the country. And these mom-and-pop stores are a $700bn sector, accounting for about 80% of the country’s retail market, which remains overwhelmingly unorganised. 

 

Mr. Ambani Will See You Now

JioMart Partner - RIL’s retail ordering app for merchants - fundamentally upends the traditional retail distribution model.

Instead of relying on distributors, kirana stores can now simply place their order requirements on the JioMart Partner platform and have them delivered within 24 hours + at cheaper rates. They can also avail training services, credit facilities and free product samples.

It’s a simple digitisation and streamlining of the entire supply chain - but with far-reaching consequences.

 

With Great Disruption Comes Great Discontent

Reliance Retail’s ascent poses an existential threat to the hundreds of thousands of salespeople employed by the traditional distribution chain.

FYI: Jefferies estimates kirana stores’ procurement from RIL will "steadily increase...at the cost of traditional distributors" from $200m in FY21 to a whopping $10.4bn by 2025. 

Indian salespeople have reportedly seen their sales drop 20-25% over the last year alone as kirana stores increasingly opted for JioMart Partner. Many have been laid off, and many more fear they may be next.

Their frustration is being expressed in many ways. The All India Consumer Products Distributors Federation, which has 400,000 members, has written to consumer companies demanding a level playing field, saying they must get products at the same prices as Reliance.

In some places, like in Maharashtra and Tamil Nadu, workers’ angst has even erupted into physical confrontations with JioMart delivery personnel, with “guerrilla tactics” being adopted to chase down Reliance vehicles and blockading shipments.

 

From the (Retail) Horse’s Mouth

Who’s to blame here? That’s a complicated question.

A fair argument can be made that RIL’s deep-discounting practices - the same ones that forced a practical duopoly on the telecom sector - endanger countless livelihoods and are anti-competitive. But you might find this view less universal than you may assume.

To look at this from the perspective of local shopkeepers, they are benefiting from the reduced price tags (at least for now). Most kirana stores are akin to nondescript and run-down shanties, with goods piled on wooden shelves or hanging loosely from the ceiling. The profits earned by the people who run these stores are directly proportional to the price they pay to distributors (or, increasingly, Reliance). If given the choice between a familiar face that charges more and a digital one that charges less, they’d naturally opt for the latter.

Case in point: A recent Reuters report found that a two-tube combo of Colgate MaxFresh toothpaste cost ₹115 on the JioMart Partner app while distributors charge ₹145 for the same. ₹30 might not seem like much for us, but that’s a critical difference for small-sized shopkeepers. (Especially so considering they would be placing bulk orders.

Meanwhile, manufacturers have a lot to be unhappy about too. On one hand, they have infuriated distributors accusing them of favouring RIL. And on the other hand, they can’t afford to sideline Reliance, what with its elephantine purchasing power and unparalleled retail network.

They are faced with a maddeningly win-lose situation in favour of Reliance for two main reasons.

One, consolidation of the distribution chain asymmetrically in the hands of one player reduces manufacturers' bargaining power vis-a-vis wholesale prices.

And two, it means little-known private brands now have a better shot at consumer visibility. To illustrate the latter point: think of Maggi and Snac tac noodles. The former is an omnipresent brand thanks to Nestlé's omnipresent distribution network. Meanwhile, Snac tac noodles are relatively unknown. You'd mainly find Snac tac products at your local Reliance Fresh supermarket. But by upping its distribution game, RIL can increase Snac tac's visibility in kirana stores nationwide, giving Maggi more competition. (And, yes, Snac tac is a private label owned by Reliance.) 

Coming to Reliance itself, can it afford to ignore the growing discontent with its deep-discounting practices? The anticipated near-term rewards suggest it may do just that.

Ironically, though, RIL has always been eager for its retail operations to be seen as inclusive and empowering for small-sized retailers. To use Mr. Ambani’s words, the company’s "new commerce" would have it expanding its retail footprint while including kirana stores in the process - something opposite to the likes of Amazon, which faces numerous allegations of favouring big and affiliated sellers.

In fact, in 2018 Mr. Ambani had said he envisioned connecting 30 million small merchants to the Reliance network. Already, the company has 300,000 merchant partners in 150 cities, a number poised to jump exponentially in the coming years. Intentionally or not, this process could also aid in digitising and formalising the Indian retail sector. Unless RIL resorts to increasing its prices after five years (which is what is happening with Jio’s data rates!), it’s advantage kirana stores.

As for distributors, perhaps there may be light at the end of the tunnel? Only two-three years ago, kirana stores were up in arms as their businesses confronted obsolescence due to the rise of e-grocery platforms like BigBasket, Grofers, Amazon and Flipkart. Today, as the tech startups have embraced hyperlocal deliveries and expanded into tier-2 and tier-3 towns, they incidentally rely on kirana stores to augment their operations.

Maybe distributors will similarly find a place in the Ambani-esque retail supply chain of the future. But considering the way logistical operations work - i.e., less is more, to save on costs - that seems a little far-fetched. An irreversible upheaval of the Indian retail supply chain seems to be on the cards.

To quote a source in the abovementioned Reuters report:

Any game that Reliance gets into, you have to be careful.

FIN.
 

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