Cole, one of the 13 Reliance Brands (RBL) joint venture partners, wanted to cut off ties with RBL. It then identified another Indian JV partner — BrandZstorm — to overhaul its business strategy in India. And now, another one of the RBL’s partners, the flashy tracksuit company, Juicy Couture, too is said to have ended the contract.
What was left unsaid behind these breakups was the reason. American fashion house Kenneth Cole is said to be unhappy with Reliance’s plans to grow the brand. Juicy Couture, too, has recently shuttered down two flagship stores in Delhi’s DLF Promenade and Mumbai’s Palladium malls.
Multiple emails sent by ET to both Juicy Couture parent Authentic Brands Group and Reliance remained unanswered. “Kenneth Cole’s prices were 30-40% higher than the US rates and sales had slumped. Reliance was a very distracted JV partner,” says a retailer who didn’t want to be identified.
Retail and fashion industry experts feel this melange of masstige brands (mass meets prestige) is tampering with the ‘halo’ of RBL’s luxury portfolio. Critics are also questioning if RBL, with over 55 businesses to run, might have become unwieldy?
RBL now has about 21-brands portfolio as part of its licensing portfolio and another 34 brands that it operates, either through its 13 joint ventures or long-term master franchise agreements.
For instance, menswear brand Brooks Brothers is a joint venture whereas casual wear Ed Hardy is a master franchise agreement.
“We (Reliance Retail) have become India’s largest retailer; even bigger than the second and third (largest) retailers put together,” says Darshan Mehta, CEO, Reliance Brands Limited, rubbishing his critics adds, “Does this question ever get asked to Unilever? We are a unique story.”
With Mukesh Ambani’s aim of generating half of Reliance’s revenues from consumer facing businesses in the near future, the role of RBL gathers special significance.
The company is aggressively acquiring every luxury business house in India, says the head of a strategic investment advisory firm, who did not want to be identified. “But instead of having 55 brands, they should just have a few eclectic brands,” adds another top consultant in the business.
In FY18, RBL added another four brands to its list of luxury and retail businesses. But over the past four years, across its subsidiary and JV businesses, RBL has seen just about flat revenue growth for most of its companies with the exception of toy company Hamleys. Its standalone balance sheet, which houses brands like Kate Spade, Steve Madden etc., reported strong revenues but a net loss of Rs 4.89 crore and most of its joint ventures have shown flat profits.
Business consultant and former head of the Hamleys India business, Sudhir Pai says, RBL has “patience capital”. “This type of capital is critical to building a successful retail business”. RBL pays about 3% royalty (about Rs 9.31 crore in FY18) to Hamleys of UK for its business but wholly owns the company. And Hamleys has been a grand hit. Currently, it has 60-plus stores and is growing exponentially.
SHOPPING FOR BRANDS
With a couple of brands potentially out of the door, Mehta had been on a tear in 2018, stringing together new strategic partnerships. In November 2018, RBL announced a franchise agreement with Williams-Sonoma to bring the upscale home furnishings retailer Pottery Barn to India. “Instead of having 55 brands, they should just have a few eclectic brands on their portfolio,” adds the consultant.
In July 2018, it acquired 12.5% stake in menswear designer Raghavendra Rathore’s luxury apparel firm Future101 Design for Rs 9.50 crore. This was a month after acquiring Rhea Retail’s Mothercare from DLF Brands for Rs 203.46 crore.
But it came at a cost: Debt on the balance sheet flared up just under 10 folds from Rs 49.04 crore to Rs 407.42 crore in FY18. On its standalone balance sheet, debt grew Rs 100 crore to Rs 485.03 crore in FY18 versus the Rs 395.03 crore the year before.
To be fair, in the luxury space, only a handful of other businesses are any direct threat to Reliance’s vast portfolio. The top-end luxury market is dominated by independent players like LVMH brands’ Louis Vuitton and Fendi; Gucci, Dior and Hermes and the Aditya Birla Group’s super-premium retail concept stores, The Collective, along with RBL.
“The business isn’t being done for the glamour quotient… It is treated like any other institutionalised business (of Reliance),” says Mehta. “A luxury business is for the long haul. Ultimately, if you can’t explain your success, you shouldn’t be in it.”
But most of Reliance Brands’ JV businesses are not growing in revenue and RBL usually owns between 49-51% of the company JV stake.
“Hamleys is a winning horse and they are flogging it. But we haven’t seen their other international brands such as the Thomas Pink, Brooks Brothers or Diesel rolling out (stores) in a similar manner,” says Pai.
Gehan Wanduragala, principal at Kanvic Consulting, adds that generating substantial luxury sales in India is challenging because of high tax bands and import duties coupled with people’s ability to purchase them in nearby markets.
Naturally, the biggest player too, has had to deal with volatility of earnings since Mehta set the company up in 2008. Over the years, there has been some rationalisation, both by default and design. In 2017, around July, in what was seen industry wide as a corporate coup, Mehta, who had been closely eyeing sole competitor Genesis Luxury, bought out L Catterton Asia’s 40% stake in it. In one swoop, RBL landed a majority stake and a portfolio of iconic global couture brands like Burberry, Michael Kors, Coach, Satya Paul and more in its kitty.
In December 2018, Reliance through Genesis, also took over Salvatore Ferragamo’s India business as well.
Sanjay Kapoor, the former CEO of Genesis Luxury, has been re-designated to a new role as head of the Delhi business. He still remains a significant minority shareholder in Genesis Luxury and its subsidiary Genesis Colors. But only the Genesis trade name has been kept alive.
Some of Genesis’ legacy brands that have done well are Armani, Canali and Burberry, claims Kapoor. According to ROC data, accessed through Tofler, the clothing companies posted profits in 2018 but ceramics company Villeroy & Boch incurred a net loss.
“A few of the company’s brand choices are surprising. Menswear brand Brooks Brothers is bleeding heavily,” argues another top retail consultant in the business. “Its corporate deck is a confused story. It could have had just six or seven brands instead of an assemblage of average performing ones.”
The group’s deep pockets help. Each of their brands typically have a five or 10-year vision plan. But for now, only brands like Hamleys, Zegna and Super Dry are pulling them through, argues a former business head at RBL under conditions of anonymity.
“If you ask whether RBL measures every store in terms of its profitability — the answer is yes and given that we run 400+ stores in India, there will always be the (one) odd store that did not live up to the projected KPIs (key performance indicators),” says Mehta. This he emphasises is the “secret sauce” to the sound financial performance across brands.
The market segmentation that the company has doesn’t work well, say some. “You can’t have a Michelin-star restaurant and a QSR tea-shop under the same umbrella, says another consultant. “I can’t even begin to estimate their losses.”
But others like Rajendra Kalkar, president, west for The Phoenix Mills, say their wide portfolio approach is actually working for them since they can woo customers across a spectrum of income categories. “Only they can do justice and cater to all price points this way,” he says. “The era of consolidation has begun and Reliance is taking the lead,” adds Abhay Gupta, head of consultancy, Luxury Connect.
“The company is taking a long-term view,” says Harminder Sahni, founder, Wazir Advisory. “While most of its brands are not making money as the size of the market is still small, there are signs of growth.”
In most cases, the company is spending a large volume of their capital on stock. “Top-lines aren’t growing,” argues Anchal Agarwal, founder of Tofler, a business intelligence firm. “The brand’s JVs are showing poor performance, barring one or two exceptions and questions should be asked why these businesses are flat and have remained small, when they should ideally be growing.” To her, anything upwards of 10% would be a good figure of growth for luxury brands.
A nonplussed Mehta is still betting for the future. In his defence, he says, RBL has never approached a portfolio building strategy and that each of its brand partnerships are measured against key parameters like a good salience; a ready cache of consumers in India; a long-term partnership; commercial viability, etc,.
NO SIZE FITS ALL
The company’s current game-plan, as seen by former employees is simple: to get better pricing and rentals from malls and terms from foreign luxury players.
In malls like Palladium, RBL now leases out about 24 stores of its 110 store line-up. In July 2018, in Ahmedabad, RBL also introduced a multi-brand concept store called ‘White Crow’ to take its premium to luxury brands to smaller metros.
“Most contracts that it draws up are watertight and about 20-years-long. They have a strong lock in,” says a former business head of a Reliance Brands business. But the person, under conditions of anonymity, adds that what is complex about their business is that each brand works differently from the other and that it’s nearly impossible to keep up with the pace of business at the office.
“Its brands must have a strong EBIDTA in the first 15-18 months. The gestational period, however, is different for different brands. Profitability can be challenging in an environment like India and most of their brands have a plan to open only three or four stores,” the person added.
Reliance’s strategy is cutthroat: If businesses don’t work — Timberland, BCBGMaxAzria or Juicy Couture — they are gotten rid of. “Darshan (Mehta) is a shrewd businessman. As far as the company’s dividends are concerned, they will come,” says the former employee who worked directly under Mehta.
And since the time the company has eliminated its biggest competitor, it can now negotiate better terms with stakeholders. “They virtually control an entire floor in malls like DLF Emporio in Delhi. Everyone knows Reliance has money power and now they’re exercising it,” adds a consultant.
Typically, in this business, an operational partner only gets 12-15% profit and turnover on their balance sheet. “This is his strategy too — to get 10-12% or $100-120 million without any risk,” says a competitor who runs a menswear business.
While top-end super luxury brands like Gucci and LVMH brands are performing well because they have a three to six store model — the ones that lie in the middle of the spectrum (like Kenneth Cole) have suffered, say experts. Over the years, other brands like Reiss, Stuart Weitzman, Timberland, Cherokee, BCBGMAXAzria have fallen off the Reliance Industries’ annual reports and had a quiet exit from the country.
But Mehta is optimistic about luxury as a business that will yield money in the future. “India is a two-and-half city market: Delhi, Mumbai and Kolkata. The challenge is in scale. For instance, I have seven Canali menswear stores, can I make them 20? The answer is no,” says Mehta.
Mukesh Ambani is believed to have wooed Mehta away from Arvind Brands after regaling him with stories from his visits to African game parks. Of course, ESOPs offered may have helped, too, say those in the know. But Mehta remembers what he had said about a predatory leopard: “It does not roar or make much noise but just sits quietly and waits. It can wait for a very long time. Then when it suddenly jumps, it almost always kills. Its strike rate is unmatched among the big cats.”
With retail and ecommerce gaining prominence in the Ambani business strategy, the bar has already been set for Mehta to deliver.
What is Reliance Brands Limited (RBL)?
*It is part of publicly-listed Reliance
*Industries Group Reliance Retail Ventures is its holding company
*It has four fellow subsidiaries