Posted by: John Elliott | April 22, 2008

Reliance cuts role in retail partnerships

Reliance Retail, India’s fastest growing retail company, has set up joint ventures with two big names in international retailing. Today it announced a partnership with Office Depot [ODP], one of the largest U.S. office supplies companies, and last week there was a similar deal with Marks & Spencer, the leading British retailer.

In both cases Reliance has, for the first time in its 50-year history, agreed to be a minority partner. It will hold 49% equity stakes, while the foreign companies will be in control with 51%. It has also agreed that both Office Depot and M&S should appoint one of their own executives to head the businesses – another first.

This marks a huge change of attitude for the parent company, Reliance Industries (RIL), which yesterday announced net profits of $3.8 billion for the year ended March 31, 2008, up 28% on the year. Turnover was up 18% at $34.7 billion.

Reliance has always insisted that it does not need foreign business partners to show it how to run companies – it set up 100% Reliance-owned insurance and telecom businesses a few years ago, hiring foreign executives and consultants to provide the expertise.

Mukesh Ambani, RIL’s chairman, heralded the change in a speech at the company’s annual meeting last October, when he said that accepting partnerships with other companies would be one of five “fundamental strategic shifts” in approach. “Reliance envisages an ecosystem of partnerships with global companies that can be hugely value accretive,” he said. (The other shifts included inorganic growth and investing in innovation).

But this does not mean that Reliance will be agreeing to minority stakes in other areas where it is already strong – for example its core businesses of oil exploration and refining, petrochemicals, and textiles. It will also prefer partners to take minority stakes – such as Chevron Corporation’s (CVX) 5% stake in Reliance Petroleum – or a 50-50 split, which it has with Pearle Europe for opticians’ shops.

In retail, it recognizes it needs to acquire expertise quickly – and to secure brands that its competitors might otherwise take.

The 50 stores that M&S plans to open with a $29 million equity joint investment will be significant for the British retailer, which has failed to make a dent in India with 14 franchise arrangement already run by Planet Retail, a smaller Indian company. Similarly, the Reliance deal opens up a largely unexplored market for Office Depot. The joint venture has launched itself by buying eOfficePlanet, one of India’s largest office product suppliers to corporate customers.

The 51% foreign direct investment (FDI) in the M&S joint venture is allowed under India’s restrictive investment rules because it involves only a single brand. The Office Product business will not have retail shops but will operate on a business-to-business basis, supplying contract customers. This is classified as wholesaling, where 100% FDI is allowed.

These joint ventures will be relatively small speciality businesses for Reliance Retail, which already has nearly 600 stores covering a total of 3.5 million square feet and ranging from neighborhood shops to an Apple specialty store and hypermarkets.

So while accepting minority stakes is a major change of approach for Ambani, it will not change the broad shape of the group – though it might help to soften Reliance’s image as one of India’s toughest and most ruthless groups.

 


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