Posted by: John Elliott | September 24, 2007

Reliance hits gasoline and worsening retail road blocks

Drive down major highways and you will sometimes see the almost unthinkable sight of the Reliance name on mothballed gasoline stations.

Mothballed petrol pumps on the Delhi-Jaipur highway - pic JE

Mothballed petrol pumps on the Delhi-Jaipur highway - pic JE

As you scan daily newspapers, you regularly see stories of problems that Mukesh Ambani’s Reliance Industries (RIL), one of India’s two largest companies, is having opening its Reliance Fresh supermarkets as traders in various parts of the country use street muscle and political support to block the expansion of a brand that threatens the rich pickings of middlemen, money brokers and local officials.

The latest news (and I’m updating this post to include it) is that Reliance has just dismissed 870 staff and closed its ten Reliance Retail stores in Uttar Pradesh (UP) because of physical attacks that have endangered staff and shoppers.

Mukesh Ambani is of course hugely successful, controlling and actively running one of India’s two biggest groups with a market capitalization that last week topped $100 billion (four times that of General Motors) – and personal wealth of $45 billion, which makes him the world’s fifth richest businessman, just $11 billion behind Microsoft’s Bill Gates.

But life is not as easy as it used to be. Till a few years ago, the Ambanis always won their battles. Now that’s becoming less true.

The slide started in 2005 when, following the death of Dhirubhai Ambani who founded Reliance, the business was split by his two heirs, Mukesh and his younger brother Anil, after a bitter public battle. Since then, Anil Ambani has tended to do worse than Mukesh, who has much better contacts with the current government. Anil failed to win contracts last year to rebuild and manage the Delhi and Mumbai airports that went to other companies, and lost a Special Economic Zone in UP when the state government changed. This month he has lost a direct battle over the price of gas from his elder brother’s off-shore fields.

The mothballed gasoline stations are significant because they show that Mukesh Ambani can no longer be sure that he will win when dealing with the government – especially when he is branching out into areas occupied by strong vested interests.

He launched what was to be a $1.2 billion network of over 5,000 stations four years ago, aiming to have 1,500 open by the end of 2005 and quickly become (as the family always does) a dominant player. But he reckoned without the clout of local politicians, who frequently hold the franchises of public sector gasoline stations, and arrange them for friends, and who do not like private sector competition. Well-established public sector companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum also resented the interloper and two other private sector entrants, the Essar group and Shell.

The problems stem from crude oil prices more than doubling since Reliance launched its planned network. The government kept the public sector outlets’ diesel and gasoline prices below cost (at around $4.5 a gallon) and subsidized public sector oil companies supplying the outlets. The private sector operators could not afford to drop their prices by about $0.10c a gallon to match the public sector, and the government – pressured by the political and public sector lobbies – refused to help. This led Reliance to stop opening new outlets once it had reached 1,300. Of that total, 800 had been allotted to franchisees and 200 or more of these have been mothballed, with the others continuing in business.

It is also significant that Ambani has not been able to quell violent opposition – sometimes inspired by political parties for their own reasons – to his retail plans. This has held up expansion in states such as West Bengal, Madhya Pradesh, Delhi, ORISSA and Kerala as well as causing this week’s closures in UP, though he is branching out into other retail areas with the first of a series of hypermarkets already open and a chain of 115 clothing stores due to start within a few days.

a RelianceFresh store in south Delhi

a RelianceFresh store in south Delhi

The current supermarket boom is India’s most socially significant business event of the decade because it will not only gradually transform shopping habits but will also change the lives of farmers who produce fruit and vegetables. That means gradually sweeping away a strong nexus of bureaucrats and traders who thrive in the current public sector-dominate

d food distribution system, which Reliance is seen as challenging. Ambani is having to trim his targets and delay supermarket openings. So far he has only managed to open about 300 stores, at least 100 short of his hopes, which does not augur well for a target set a year ago of 5,000 within five years.

The virulent animosity between the two brothers has led to them both trying to block the other’s plans. On the disputed gas prices, Mukesh Ambani persuaded the government to back him against Anil. Before the split, Reliance arranged to sell gas from its off-shore Krishna and Godavri field to a power station called Dadri that it was developing in UP for $2.33 per million British thermal unit (mbtu), the price at which it won a tender to supply a government power generating company (NTPC). In the split, the gas field went to Mukesh, while Dadri went to Anil. Mukesh then said he wanted to raise the price to $4.33 mbtu (only marginally higher than comparable prices elsewhere in Asia) because of the sharp increases in oil and gas marked prices. Anil argued that the $2.33 should not be changed and took the issue, which has a spin-off effect on gas prices, to the government – which has just ruled in Mukesh’s favor, trimming his price slightly from $4.33 to $4.20.

So the Ambani name has lost some of its clout and animosity between the brothers is making the situation worse. But the other lesson of this story is that there are still major areas where public sector-based interests, like the gasoline station operators and the food distribution traders, are trying to cling to the benefits of India’s old protected economy – even if it means taking on the previously unassailable Reliance.

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Responses

  1. The arguments about the ‘poor’ vendors is completely misleading. In Bangalore, it was found that most vendors are on the rolls of the local mafia (including local politicos, cops, government officials and ruffians) – they are to pay exorbitant rates of interests to ply their trade everyday : For the Rs.300 they invest everyday for their wares (vegetables/fruits etc), they pay 10-12% interest to the mafia (Rs.25/-) and hence the system is completely inefficient and cruel to everybody except those who are profiteering. Corporatization of this process will bring a semblance of dignity to the lives of farmers and intermediaries. Did you know that 40% of the crop from the farmer gets wasted in this food chain. So what we are having today is possibly the worst system : It can only get better if bigger players come in. The traders who are hurt today have a monopoly situation today in the controlled market (APMC : Agricultural Producers Marketing Commission or something similar) where trade can occur and typically enjoy 150 – 200% profit margins. Thats why all this noise by them.

  2. On my way home every night,on one short stretch of a road – 500 meters in Bangalore, the following grocery chains, Reliance Fresh-new, Spencers-new, Food World-new, Fab World, Nilgiri’s, and many local small shops. None appear to have many customers. If you build they may not come.

  3. Millions of street vendors, small shop owners, push cart sellers and intermediate agents survive on daily vending vegetables at door steps and neighborhood small shops. Typically these people, buy vegetables and fruits for say about Rs.200/= (US$ 5) in the wholesale market in the morning and sell it for Rs.300/= (US $ 6.5) and make a daily earning of Rs.100/= (US $ 2.5). Vegetable vending is simple business for these mostly illiterate people, most of them are women.

    If Corporate like Reliance come in to playing this obvious they are going to take away the livelihood of these poor. These people do not even know anything else to survive. They may say that they can find different jobs. But remember, for many years the poor, rural and the socially backwards never learnt any new trade. They are mostly family businesses run for generations.

    If Government and Private sector wants to do anything in these areas, first let them devise a mechanism and system to redeploy and employ these people by retraining or by absorbing in to new businesses. Without that the growth will be lopsided. We would be unnecessarily creating another class of poor. In India we do not even have social security cover.

    Most of the wealth made by these Billionaires in stock market, does not really translate in to any benefit to these classes of people. The change is necessary, but what are these people doing to make that transition less painful. As educated and intelligent people, it is the responsibility of these corporate and Government leaders to look at the larger interests and consequences. No doubt, India being a democracy in certain states, the poor with their voting power is able to fight this and those in power may understand their real problem. May be, they may have vested interest too.

    But the fact remains, that there is another side to this kind of development. The story is not very different in the case of SEZ development, which when studied in detail, looks like a big real-estate scam. Why not those companies acquiring the poor farmers land provide the original owners with some equity stocks in those companies, instead of just a very low compensation?

  4. The issues in Reliance Retail are short-term in nature. This has been happening against all retail chains, so it is not a Reliance specific issue. Once the politicians have been pacified and the farmers (who stand to gain from retail) lobby, this agitation by the existing traders’ lobby will come to an end. As for Reliance’s gasoline outlets, the issues are due to stupid government policies. At some point of time, the current gasoline policies will change and then it would be good for Reliance, who would have experience of running outlets – they can scale quickly (that is their forte).


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