Reliance Fresh- A Case of Channel Management
The Reliance Industries Limited, the parent company of Reliance Retail has always dreamt big. This case is no different. With an investment of around Rs.25,000 crore, this becomes the single largest investment ever planned in the retail industry in India. Some of the features of this foray, as initially planned, are: • • • • • • Rolling out 500 hypermarkets in phases in more than 700 towns across the country by 2010 Rs. 7,000 crore expected to be invested in supply chain management. Feed the huge retail chain through seven wholesale terminals and numerous Distribution Centres. A targeted 20% return on investment over a span of five years Around 150 warehouse clubs or distribution centers to supply to the small retailers A targeted sales turnover of Rs 90,000 crore (US$ 20 billion) by 2010, almost 10 per cent the size of the current organized retail business in the country
To achieve these, Reliance Retail intended to use various strategies, some of which include: • • • • Lower or parity prices and better product quality for consumers Better prices for farmers and producers through direct sourcing Better value for small retailers through wholesaling and Large scale direct and indirect employment opportunities for youth, both skilled and unskilled
Reliance plans to operate through a variety of store formats, including, • • • • • • • Convenience Stores - Reliance Fresh Specialty Stores - Reliance Digital Hypermarkets - Reliance Mart & Town Centre Cash & Carry format Rural Business Hub Lifestyle Retailing - Reliance Wellness Apparel and Clothing - Reliance Trends
However, achieving all the above is not an easy job, especially in the light of the opposition to organized retail, which has now become a political issue. Currently, Reliance is far behind its intended goal. Other reasons for the same include delay in
setting up of the supply chain, man power requirements, availability of real estate and license issues.
Reliance retail began its operations through opening of 11 pilot ‘Reliance Fresh’ stores in Hyderabad in November 2006. Since then the convenience store chain has grown to more than 350 stores in 18 states. The stores are normally of sizes ranging from 2000 sq, ft. to 5000 sq. ft. Reliance Fresh has adopted a ‘carpet bombing’ strategy, with each store normally within a radius of 1-2 km of each other. Reliance has been opening five to ten Reliance Fresh stores every week, down from the initial plan of opening 30 stores per week. This development comes close on the heels of the company shutting shop in Uttar Pradesh and laying off over 1,000 staff, amid opposition from small traders and the local government. It also faced stiff opposition to the opening of its stores in major states like Kerala, Orissa and West Bengal. In Maharashtra too, protests were held against the entry of multinationals and domestic biggies in organized retail. However, one reason for this ‘go slow’ decision can also be the fact that the stores are taking more time to break even. Currently, the division is being headed by Bhavdeep Singh and operates as a separate division of Reliance Retail. It currently uses the central supply chain and IT infrastructure for its operations. However, the supply chain and IT requirements of Reliance Fresh will be very different from the other retail store formats. Thus, the supply chain of Reliance Fresh will have to be managed separately. It has been recently decided to hive off Reliance Fresh into a separate company, called Ranger Farm, for single point accountability. Ranger Farm will be a wholly-owned subsidiary of Reliance Retail and will function like any other company with its own human resources, supply chain, procurement and marketing teams unlike the current system of using the centralized teams. The stores of Reliance Fresh are either owned by the company or leased areas. All the stores are run by the company. Earlier, some of the stores were franchisee outlets. Mostly, the existing kirana store owners were chosen as franchisees. This was discontinued later in order to have more control over the store operations. Under the new system, the store is managed by a store manager who is an employee of Reliance. A number of salespersons are employed depending on the size of the store and the business expected. The salespersons are mostly young men and women who work part time. Training is provided to each and every employee on company policies, customer care, systems handling and processes.
The Retail Mix of Reliance Fresh
Location Reliance Fresh Stores are located mostly in Tier I and Tier II cities. The chain is set to expand to around 800 cities and towns all over India. National Capital Region (NCR) constitutes around 65-70% in terms of number of functional stores as well as business so far. It has followed a policy of one store per 4000 households, regardless of competition from other organized retail outlets. Being a convenience store, availability of parking space is not a criterion in deciding the location of the store. A busy area near households is selected. Services Reliance Fresh sells Fruits and Vegetables, Groceries and recharges mobiles at the same place, much like the kirana stores. Apart from that, there exists potential for selling Financial and travel related products also. Thus, some innovation could be seen in terms of the services being offered. Reliance Fresh offers free home delivery to its customers above a certain value of purchase and within a range of one to three kilometers. Apart from that, shop on phone service is also being planned. One important feature is the customer feedback system being implemented. There are three ways to address customer concerns, namely, 1. On the Spot complaints – These are normally related to product quality and billing issues and are handled by the salesperson or the manager directly. 2. Customer Feedback Form – This form is available to all customers who would like to voice their concerns. The forms cover the issues that can be solved at the individual store level. 3. Service Desk Feedback – Two to three customers are randomly interviewed and a comprehensive feedback is solicited by the store manager. The feedback form is sent to the Mumbai headquarters for perusal and action by the top management. Assortment Reliance Fresh stores ranging from 2,000 to 5,000 sq feet, provides, customers with a variety of fresh fruits, vegetables, staple foods and other products in a world-class ambience. The assortment varies from store to store depending upon the location of the store and the kind of customers it targets.
Reliance fresh sells most products needed day to day by the households. This includes vegetables, buckets, razors, chocolates, pulses, fruits, etc. Some Reliance fresh stores even sell cosmetics. There are exotic fruits that require refrigeration and dairy products also. Being a convenience store, A major share has been allocated to food products. This is followed by personal care products and then the other items such as kitchenware, miscellaneous items such as toys, pooja items, towels, napkins etc. These stores also sell non vegetarian items, which are placed separately from the other food items. The assortment is decided by a Category Team which constantly reviews the choice of product based on customer feedback. Store Environment All the stores are air-conditioned, with cleanliness being given special importance. The employees are uniformed; t-shirts / jackets are of the standard red color with green cap. There is ample lighting inside the stores and no music. During rush hours, there are announcements in the store about the offers and mark downs. The floor space allocation varies from store to store; there is no hard and fast rule for the same. The basic principles of traffic flow are taken into the account while designing these stores. Being a self service format, Reliance allows customer to browse through the entire gamut of products available. A self service format also promotes higher level of involvement. For example, customer can use the polythene rolls provided freely and weigh their vegetables before taking the bags to the counters. With a no bargaining policy, customers are free from haggling, but get the correct price and weight of item they bought. All the stores have a large Marquee with the store name prominently written on it. However, there is no signage at the entrance that informs the passersby of the product or offers currently available at the store.
Target Segment and Value Proposition
Reliance Fresh is targeting all the people who go grocery shopping. As they have stores in the poorest and richest localities of India they target all kinds of revenues. Also, on a demographic point of view the consumer is a family or a household, which is not characterized by a particular income. Indeed the targeted consumer depends on the city and the location of the store. The environment of the consumer is often an urban or residential area, which explains the fact that most of consumers are families and households and especially housewives.
On a psychological level, the consumer has a high level of involvement in the purchase and comes often to Reliance fresh for destination products. It means that the consumer comes to find products he can only find in Reliance Fresh stores such as fresh vegetables. But Reliance Fresh also provides routine products which are expected to be in all convenience stores. Reliance Fresh differentiates itself from other convenience stores through its value proposition which includes: • Reliance Fresh strategy is based on the fact that it provides huge varieties of fresh vegetables and fruits (over 150 varieties of fruits) of good quality at attractive prices. Their prices are usually set lower than the real market prices and outside markets. A loyalty program, Reliance One, for frequent and loyal customers. Furthermore the loyalty program benefits Reliance Fresh because it helps in tracking customer preferences. Reliance Fresh constantly improves its value offering and tries to satisfy the wishes of the consumer by taking into account customer feedback.
Thus, for the price conscious customer, it offers products at market rates, and sometimes even cheaper. For the high end customer, it offers an AC environment where one can find a considerably wide assortment. Although there have been complaints of fruits and vegetables not being fresh as claimed by Reliance, they are few in number. Based on the above, the value proposition can be worded as below: Reliance Fresh offers its price and quality conscious consumers an enjoyable shopping environment where a wide range of assured quality daily use products are available at affordable prices and at a convenient location near home.
Reliance Fresh follows at-the-market pricing, with the prices of most products being same as the market. This is very much different from the intended proposition of offering below the market prices. Three main reasons can be attributed to this policy, namely, • • • The fruits and vegetables are not directly sourced from the farmers, but through mandis, which reduces the margins available for Reliance. Prices of Fruits and Vegetables are set every morning. It is believed that the local markets quickly adjust their prices so as to make the two almost the same. If a product is fast moving, there is no need to reduce the price.
Thus, the product pricing strategy is dependent upon the competition. The strategy of Reliance has been to sell fruits and vegetables at attractive prices. So those products are
priced slightly low if you take into account the quality of the product. But other products such as branded products follow the market prices. Private labels however are often priced lower than the other brands. The pricing decision takes place at the distribution centers. For the fruits and vegetables, the pricing is decided based on the cost of purchase at the mandis. The pricing of the other products is decided by the company’s sourcing team. One thing noticeable is that the prices are in double decimal digits. For example, a bundle of coriander may cost Rs.4.80 while the market price is Rs.5. This is indicative of an odd even pricing approach. Although not much of a difference, it does conjure an image of selling at a lower price.
In store Brands
In the developed countries, the in-store brands contribute a lot to the revenues of the retail stores. Internationally, private labels contribute around 16% of total retail sales (Sourceindiaretailbuzz.wordpress.com). The reason is pretty simple, private labels offer far better profit margin to the retailer than branded products of FMCG companies. With the cost advantage, there is always an opportunity to attract customers and it is comparatively easier than promoting high-involvement products under private label. Reliance has ventured into the high-volume, low-margin (3-5%) segment of retailing liquid milk through its own brand ‘Dairy Pure’. In addition, Reliance has also concurrently launched its private labels “Reliance Select” and “Reliance Value” with the promise of “High Quality and Tasty Food at Affordable Price to all Indian Consumers.” Although, staple food items like Atta, Rice, Pulses, etc. have initially been put on offer under the private labels, more categories like FMCG and, perhaps, Colas will be added soon. Among the two, select is placed at a slightly higher price point reflecting a higher quality product. Reliance Fresh’s shelves provide another indication that the group is looking for higher margins. Most of the staples are private label brands. There is a 500g channa dal pack priced at Rs 28, a 500g urad dal pack for Rs 39, all under Reliance’s own brand. Excepting a few packets of Nestlé’s Maggi, or MTR’s masalas or Pepsi’s Lays chips, there is very little shelf space given to the big brand owners in the country. While, in FMCG space, they have yet not come up with in-store brands, they intend to do it soon.
The promotion strategy can be broadly classified in two types: 1. In-store promotions – This class contribute most of the promotional strategies of Reliance. Their in-house promotion strategy is further divided in two forms. First is through signboards inside the store, and secondly through announcements. The sign-boards are present throughout the store depicting various running as well as forthcoming schemes of the store. For example, as Diwali approaches, there would be lots of signboards about the discount scheme for Diwali such as Diwali dhamaka. Reliance goes all the way in comparing its prices with the rest of the market through comparison charts of prices of various items, specially staple food items like rice, pulses, masalas, oil etc. These comparisons are mainly with the market prices on daily basis and the prices at which those items are available at the stores. The announcements are pretty frequent in the store during the peak hours of shopping (6 p.m. to 9 p.m.). Announcements are few during other hours. These announcements range from the prices to discount schemes to the information about loyalty programme etc. 2. Outside Promotions – Very few promotions are done outside the stores. However, they come with few print ads at the time of their launch of some different product category or some big discount/promotion scheme. Sometimes, promotions are done on Radio-Mirchi i.e. on the local radio f.m. channel, as well. Customer Loyalty Programme The qualification criteria to get the loyalty card is a cumulative purchase of Rs.1500/- or more. After getting the card, all of the subsequent purchases shall be recorded in the database. For the discount concept, they have used straight line method where any customer gets 1 point on clearing every milestone of Rs.100/- purchase. Here 1 point can be redeemed for Re.1 on next purchase. Also, this card helps the Reliance people in getting information about the priorities of customers across various categories. This information helps them in targeting the customers for various promotional schemes. The customers are also informed about any changes/updates about their preferred products or related products and about special promotional schemes on their desired products.
Supply Chain Management
The supply network consists mainly of Central Processing Centers (CPCs) and Distribution Centers (DCs). While, CPCs process fresh products like fruits & vegetables (F&V) received from collection centers, DCs distribute them along with other directly procured FMCG products to various stores. The distribution centers do the work of assorting the products, bar-coding them, keeping the stock records and also transporting them to the respective stores while keeping the track of demand and supply pattern at that end. Disposal system at the stores takes place in two modes: 1. For F&V items – They track it on daily basis. At the end of the day, they see to it as how much is left out and it is in what condition. They keep the record of these perished items as the percentage of total sales in that particular category. Later, all the perished goods are dumped in the municipal truck on the next day. 2. For non F&V items – As soon as the expiry date is passed, they are been transferred back to the distribution center and are kept under the records of GRDC (Goods returned to Distribution Centers) There are two distribution centers for Reliance Fresh in Indore; one is located at Rau and other at Sagar Road.
The Future Challenge
With huge expansion plans spread all over India, Reliance Fresh is slated to be India’s largest convenience store chain. To compete successfully, however, it will not only have to counter the small kirana store owners but also competing chains such as Subhiksha and Margin Free market. The success will depend greatly upon the supply chain efficiencies that Reliance plans to achieve and the use of customer information to effectively satisfy the needs of the customer. With one year gone, the stage of extensive experimentation is over. Its time put the knowledge gained into practice. At a time when Reliance ought to have been going faster than before, it has actually slowed down. The biggest challenge it currently faces is the political uncertainty facing the Organized Retail Sector. Question 1. Evaluate the Retail Mix of Reliance Fresh? 2. What kinds of problems Reliance Fresh is facing in India? What roles environment has on the channel management function? 3. What channel management decisions will you suggest for making Relaince Fresh a successful model in Indian market?