The Great Retail War: Ambani Vs Others
India's second richest men, Mukesh Ambani has officially announced the company's foray into FMCG segment.
During the 45th annual general meeting of Reliance Industries, Isha Ambani formally announced the entry of Reliance into the FMCG industry. Mukesh Ambani-led firm will now compete directly with the likes of Adani Group-owned Adani Wilmar, Hindustan Unilever Limited, and ITC, among others.
Whatever Mukesh Ambani does, he does it with a bang. Take a case of Reliance’s Jio, for instance. Who had ever thought that a new company like Jio could disrupt the telecom industry? Jio’s predatory pricing strategies with free voice and data pack took the telecom industry by storm, forcing the incumbents like Airtel to slash their tariffs to retain the customer base. Jio made history by reaching a 100 million customer base in just 6 months of operation, a record for any new company.
So, if we had to take a cue from what Mukesh Ambani did with the telecom industry, FMCG players whether big or small need to brace themselves for the disruptions that will be created by Reliance’s entry into the FMCG industry.
In this episode, we will discuss:
Why Reliance is making its foray into the FMCG space?
How Mukesh Ambani is planning to disrupt the FMCG industry?
So, what actually does FMCG means? Consumer goods are mainly categorized into 3 main categories i.e durable goods, non-durable goods, and services. Durable goods are goods that cannot be completely consumed in one use and have a shelf life of 3 years or more. Cars, jewelry, home appliances, and consumer electronics, for instance, are durable goods. By contrast, non-durable goods, which are also called fast-moving consumer goods, are consumed immediately and have a shelf life of less than one year. Goods such as cold drinks, beers, biscuits, and cosmetic items, among other falls under non-durable or fast-moving consumer goods. Further, fast-moving consumer goods can be categorized into 3 main segments and they are household and personal care, health care, and food and beverages.
The FMCG market in India reached $110 billion in 2020 and at a CAGR of 14.9 percent, the FMCG market is expected to reach a massive $220 billion by 2025. As of now, the FMCG market is dominated by big firms such as Hindustan Unilever Limited, Reckitt, P&G, and Nestle and domestic firms such as Adani Wilmar, ITC, Dabur, and Marico. And, if there is money there will be Ambani.
As per the report of the India Brand Equity Foundation, the urban segment accounted for 55 percent of total FMCG sales in 2020, and the rest came from the rural segment. FMCG products account for 50 percent of the total rural spending.
It is said that the FMCG market will be driven more by rural areas than urban areas in the coming years. For the last few years spending for FMCG products has grown at a faster pace in rural markets compared to the urban market. In Q4 of 2020, the rural market saw an increment of 14.6 percent in total FMCG spending. During the same quarter, tier I and metro cities reported a growth of 2.7 percent and 0.8. percent.
Oil-to-telecom conglomerate is already a huge player in the retail industry. It makes sense for the company, which operates more than 15,000 retail stores across India, to enter the FMCG industry. Reliance retail operates stores such as Reliance Fresh which sells grocery items, Reliance digital which focuses on consumer electronics and Reliance Jewels for jewelry items, among many other such stores. In addition to physical stores, it also owns and operates online platforms such as AJIO, an e-commerce website for apparel, and JioMart, an e-commerce platform that focuses on groceries, fashion, home essentials, and lifestyle products.
In the fiscal year 2022, the company had a revenue of around 2 lakh crores. For the same year, the company had a net profit of around 7,000 crores, which was 3 times the combined profit of the other 5 big retailers – Dmart Chain, Tata-owned Trent, Shoppers Stop, Spencer’s Retail, and V-Mart Retail.
By now, you may question that since Reliance is already in the retail sector and have some private label brands, what does it actually means when the company announced that is planning to become one of the biggest players in the FMCG industry?
To answer this question, we have to understand the current business model of Reliance Retail. Currently, the company’s major business comes from the selling and distribution of other companies products. By saying that it wants to enter the FMCG segment, it simply means that now the company will also own some of the brands in the FMCG space that it sells from its stores. And besides, its own network of stores, the company will also onboard Kirana stores across India to sell those products.
The FMCG arm of Reliance is aiming to meet a target of Rs 50,000 crores revenue in 5 years, and that is what Hindustan Unilever made in the year 2022. And Hence, it is inevitable for Reliance Retail to come up with its own brand of FMCG products and to expand its distribution network beyond its own stores with a close focus on the rural market.
Another big question here is how will Reliance Retail make a move in the FMCG industry. To compete against the likes of Hindustan Unilever Limited, which has a portfolio of 50 plus brands, Reliance Retail should have at least 50 brands across the FMCG segments.
The FMCG market division in India looks like this – The household and personal care segment has a concentration of 50 percent; health care has 31 percent and Food and Beverage segment has 19 percent.
Basically, there are 2 options for Reliance Retail to enter the FMCG industry. First, to come up with their own private label brands, and second, to buy or establish a joint venture with already established national or regional brands. To reach the ambitious revenue target of Rs 50,000 crore in 5 years, Reliance shall use a mix of both strategies.
The company has already introduced some private label brands across all the segments of the FMCG space. If you are a regular buyer at Reliance store, you may have seen a noodle brand called Snac Tac, the packaging of which resembles that of Maggi. And surprisingly, you will find Snac Tac sharing shelf space along with Maggi. The other brands in the food segments include Desi Kitchen, Good Life, and Yeah! Cola, Healthy Life, Aw So Yum, Aarambh, and Kaffe.
In personal and home care segments, Reliance has brands such as Petals, Glimmer, Get Real, Mother Care, Puric, My Home, Enzo, Samvaad, Snug, and Shieldz.
While the company will continue to develop and promote its private label brands, it will take years for the company to have a high level of brand awareness and brand recalls like those of Industry leaders who have brands serving the Indian market for more than a decade.
In order to offset the low brand awareness and brand recall of its private label brands, the company is planning to purchase or form a joint venture with regional and national brands with some operating for more than 100 years. The recent purchases include Campa Cola brands from Pure Drink Group, and Sosyo from Surat-based Hajoori, which has been in operation since 1923.
The company is also expected to enter a joint venture with AJE India, the maker of carbonated drinks brand Big Cola. Other notable brands, the company is eyeing to include in its portfolio are Aakash Namkeen, a maker of namkeen and packaged sweets, and popular spice makers such as MDH and Aachi Masala of Tamil Nadu. The company also bought a controlling stake in the makeup and personal care brand, Insight Cosmetics.
Reliance’s ambition to become the major player in the retail and FMCG segment is further bolstered by its strong presence in the premium brand category. In this segment, it already has 60 international brands including Jimmy Choo, Michael Kors, Tiffany & Co., Steve Madden, Armani Exchange, Superdry, and Hugo Boss, among many others.
Overall, the aim is to build a portfolio of 50 plus brands in the FMCG segment.
Now you may think why a company like Reliance with deep pockets is on a buying spree rather than building its own brands. No matter how many brands you have, success in the FMCG space is determined by the strength of the distribution network.
As of now, Reliance Retail biggest strength is its offline network of more than 15,000 stores and millions of small stores connected to its JioMart. In just two years of operation, JioMart was able to onboard 20 lakh merchants in its network and is planning to add additional 80 lakh merchants in the coming 5 years.
In addition to its own distribution network, the purchase of national and regional brands will not only help the company to have brands with high awareness and brand recall, it will also bring in the manufacturing facilities, expertise, and distribution channel. Purchase of the MDH brand, for instance, will bring its network of more than 1,000 stockists and thousands of dealers. The acquisition of Insight Cosmetics will give the company access to its network of 12,000 stores across 20 states. Had the company started from scratch to build its own brands and distribution networks, it would take years to accomplish that feat.
Despite the growth in super stores, hyper stores, and e-commerce, local Kirana stores still account for 80 percent of total FMCG sales. So, if Reliance is to disrupt the FMCG industry, it cannot do so by only relying on its own network of stores. It needs to go beyond and onboard local Kirana stores across the country. In this regard, the company aims to cover the entire country serving over 7,500 towns, and 5 lakh villages in the next five years.
The company is also stepping up its e-commerce game to capitalize on the growing eCommerce sales. It is estimated that by 2025, the total online users in India are expected to reach 1 billion. With cheap data, online sales is bound to increase. Reliance is well positioned in that end also. Reliance has partnered with WhatsApp, allowing users to browse the groceries’ catalog, add to the cart, and make an online payment for the purchase.
The company has poured millions of dollars into online startups. In January 2022, Reliance invested $200 million in Dunzo for a 25.8 percent stake. For someone who is not aware of Dunzo, it is a hyper-local delivery service that provides services such as grocery shopping, laundry pickups to last-minute gifting options. The company also acquired a controlling stake in online pharma company Netmeds for $83.2 million. It also operates a curated online fashion store called ajio.com.
The company is poised to provide an omnichannel experience to its customers from both online and offline stores. With its own in-house initiatives and purchase of several regional and national level brands, Reliance retail is on a mission to develop a strong distribution network, an indispensable resource to crack the FMCG segment.
With the distribution network now taken care of, we can expect an intense price war between Reliance Retail and other FMCG players because that is what exactly happened when Mukesh Ambani launched Jio.
Jio’s introductory offer of free voice and data pack gave its competitors one of the worst nightmares. They worried so much that they even filed a petition to the Indian government and Telecommunication Regulatory Authority of India to stop Jio from continuing its free offers.
In retail too, Reliance will try to replicate Jio’s success with an aggressive pricing strategy.
Let’s take a look at how Reliance is promoting its private label brands.
The private label brands of Reliance share shelf space along with other national and global brands. The company’s in-house noodle brand, Snac Tac, sits along with Maggi. There is a lot of similarities between both brands from packaging to color branding. However, Snac Tac costs 18 percent less than Maggi.
Similarly, Yeah! cola, another private label brand from Reliance, sits along with Coca-Cola and PepsiCo’s products. Like Snac Tac, there is a huge resemblance in the packaging but it comes at half the price.
If the Reuters report is to be believed, Reliance is offering a profit margin of a minimum of 20 percent to Kirana stores, compared to 10-12 percent offered on similar products by global brands.
You may wonder, how Reliance is able to offer the same quality products at a lower price. The magic of low price comes from how Reliance produces and distributes its private label brands. Unlike other national and global brands, which have set up their own manufacturing facilities, Reliance uses third-party manufacturers to produce its private label brands. And by using third-party manufacturers, Reliance is saving millions of investments that would otherwise have gone in the setup of those facilities.
The cost saving also comes from the shorter distribution network. The distribution network for FMCG products consists of multiple layers of distributors, wholesalers and retailers. And, each layer add a markup to the price to make a profit—eventually the unit price increases as the product move down the distribution network.
In Reliance’s case, the company directly distributes its private label brands from its own network of stores and fulfillment centers. Doing so eliminates that extra markup each player would have added as the products move down the network. Local Kirana stores and shops can directly place orders in JioMart at a discounted price and resell them at the MRP, which increases their margin.
With Reliance’s entry into the FMCG segment, both national and global brands will be on high alert for every move the company makes. Since many other competing brands depend on JioMart and its physical stores to sell their products, Reliance can impact its competitor sales if it decides to give its private label brand more shelf space.
No matter what happens to the FMCG space and other players, end consumers are likely to benefit from the retail war. The benefits will be realized in the form of low-price and high-quality products similar to what we enjoyed after the launch of Jio.
For now, we have to wait for whether Reliance can create a Jio moment in the FMCG space.