How Reliance Aims To Become A One Stop Shop For All Consumer Needs

Mukesh Ambani-led Reliance Industries is on an expansion spree as it continues snapping up everything from fashion design companies to billion-dollar solar technology companies.

Quite obviously, RIL’s management takes its motto – “Growth is Life” very seriously. Established in the 1960s, the company has expanded rapidly within the span of a few decades, leaving behind several much older business houses.

Energy: Fuel and Beyond

RIL has always focused on vertical and horizontal integration across sectors as a means to expand. In the 1960s, Reliance Commercial Corporation traded in textiles, by the 1970s, it was already manufacturing and marketing textiles under the Vimal brand. In the 1980s, the company established itself as one of India’s largest textile chemicals producers. And by the 1990s, it had entered the crude refining business that would fuel its expansion for the next three decades.

Today, the refining business is the cash cow that generates funds to finance other expansions. Apart from being one of the largest petrochemicals suppliers in the world, it also runs 1400 fuel pumps across the country for vehicles and aeroplanes.

Like other oil marketing companies, it plans to expand in the fuel pump space with partnerships with local operators. British Petroleum has bought a 49 per cent stake in the fuel pump venture and the new petrol pumps are expected to operate under the Jio-BP brand.

But its focus in the energy space has shifted beyond petrochemicals to electricity. But rather than focusing on conventional energy sources like thermal power plants, it plans to focus on renewable energy. Reliance New Energy Solar Limited has already invested in companies like Sterling and Wilson Solar, REC, and Ambri Inc.

The new renewable energy investments serve as a hedge against the potentially lower demand for oil in the future. In addition, renewable energy would allow RIL to lower its carbon footprint. In an age where all companies, banks, and investment funds are becoming more environmentally conscious, claims of “net-zero” emissions can allow companies to maintain a lower cost of capital.

Telecommunications: Creating a Super-App

Reliance’s foray into the telecommunication space was quite eventful. It single-handedly managed to drive several telecom players to the brink of bankruptcy with its strategy of giving out free SIM cards and data. The idea propelled it to the number one spot in the telecom space within a small period of time. But unlike other telecom companies, Jio had never solely focused on providing data and calling services.

RIL has been looking to create an entire digital ecosystem that offers entertainment, payment services, news, e-commerce, health services, news subscription, and other use cases within the same app. Jio has already forayed into the entertainment sector with its investments in Balaji Telefilms, Eros, JioSaavn and JioStudios.

To enhance its offerings, Jio has been buying rights to cinema libraries as a means to enhance its offerings. These investments have allowed Jio to bundle several other products together with its data services. With bundling, users do not have to pay for entertainment services separately, creating a strong value proposition for them. The payments arm, JioUPI, is contending with the likes of Google Pay and BharatPe, to become a preferred UPI platform for its users.

In the previous year, Jio had raised $15 billion from marquee investors and has spun off its physical assets network through the Digital Fibre Infrastructure Trust. The financial engineering has allowed RIL to come closer to its “zero net-debt” ambition, while readying dry-powder for future investments.

Retailing Everything from Salt to Medicines

The retail business spans across several segments such as fashion, grocery, electronics, jewellery, convenience stores, pharmacies, furniture, toys, footwear, and other segments. Despite the debilitating effect of the pandemic on the retail sector, Reliance has been expanding its retail operations quite aggressively.

In the fashion space, it has forged partnerships with several global brands like Armani, Muji, Marks & Spencer, Gap, Diesel, Jimmy Choo, Paul Smith, and several others. It recently invested in the companies of fashion designers Manish Malhotra and Ritu Kumar to expand its offerings beyond western brands. The fashion retail business has some degree of backward integration as RIL operates several large textile manufacturing plants.

Reliance Retail plans to open convenience stores under the 7Eleven brand, while its foray into the furniture segment was facilitated through the acquisition of Urban Ladder. In the healthcare segment, it has been growing its physical footprint by establishing NetMeds stores. Jio Health, is another healthcare product that allows users to consult doctors, book lab tests, and manage health records. The acquisition of Hamley’s in 2019, has allowed RIL to foray into the toy retail business.

Apart from the business-to-customer (B2C) segment, Reliance Retail has leveraged its strong distribution network to replace the middleman in the distribution business.

For instance, Hindustan Unilever Limited (HUL) signed a contract where Reliance would be responsible for the direct conveyance of goods from HUL to retail stores. Further, Reliance has on-boarded several thousand small kirana store owners on its business-to-business (B2B) platform.

JioMart, a joint venture between Reliance Retail and Jio Platform, is aiming to become the top e-commerce platform in India. It has a strong focus on grocery, but also retails clothes, lifestyle products, and home essentials in some areas.

The platform offers users free delivery with no minimum order requirements, putting it ahead of competitors that usually charge a delivery fee and have a stipulated minimum order quantity. JioMart’s rapid ramp-up across cities is the result of having a strong existing distribution network, and retail experience across the country.

Diversification or Diworsification

Nevertheless, the question of value creation for investors still remains. In the past, several companies have attempted to diversify rapidly, often ending up with high-debt and sub-optimal results. Tata Group’s acquisition of Jaguar Land Rover and Corus Steel destroyed shareholder wealth.

In Reliance’s case, it faces intense competition from companies like Amazon and Walmart in the retail space. The renewable energy space too, is populated with several large players looking to defend their territory. The Adani Group, which has several large infrastructure businesses, has been matching Reliance at every step.

The heavy investments in different segments, without any immediate economic rewards, have caused Reliance’s return on capital to fall to a sub-optimal seven to eight per cent. Only time will tell if the expansion is value accretive for Reliance’s investors.