Shoprite: Expansion into a Foreign Market - Case Study Example

Shoprite: Joint Venture with Reliance Introduction Shoprite, the largest retail chain in Africa, intends to increase its international footprint. After thoroughly scouting for a partner to fuel its expansion plans in India, Shoprite has narrowed down on the Reliance Group. The present paper describes the business profile of the Reliance Group, its main subsidiaries and key businesses. The paper elaborates the entry strategy that should be adopted by Shoprite to enter India. It also examines the key political and legal aspects that have to be kept in mind while doing business in India. Finally, the paper describes the commitment required in key functional areas for the Shoprite Reliance joint venture to be successful in India. The Reliance Group The Reliance Group is the largest private sector enterprise in India (RIL, 2014). Founded by Late Shri Dhirubhai H. Ambani as a textile company in the late 1970s, the Reliance Group has grown into a massive conglomerate. The company has successfully adopted the corporate level strategy of diversification. At present, the Reliance Group has businesses spread across various industries ranging from oil exploration to telecom. The Group implemented the strategy of backward vertical integration as it ventured into polyester, fiber intermediates, plastics, and petrochemicals. Major Group companies include Reliance Industrial Infrastructure Limited and Reliance Industries Limited.   About Reliance Industries Limited (RIL) Reliance Industries Limited (RIL) is a Fortune Global 500 company (RIL, 2014). The behemoth accounts for close to 14 percent of India’s total exports. The conglomerate generated annual revenue of more than $68 billion during the fiscal year ended March 31, 2013. It earned net profit of $3.8 billion during the same period. The financial strength of the company can be gauged from the fact it accounts for 6.9 percent of the total indirect tax revenue of the Government of India (RIL, 2014). RIL’s mission is to ‘create value for all stakeholders, grow through innovation and lead in good governance practices.’ The company believes in sustainable development and strives to foster rural prosperity (RIL, 2014). RIL’s operations can be broadly categorized into petroleum refining and marketing business, petrochemical business, oil and gas exploration & production business, textiles and retail. The flagship company of the Reliance Group conducts its business through numerous subsidiaries and associates. Some of the prominent subsidiaries of RIL are Reliance Strategic Investments Limited, Retail Concepts and Services (India) Limited, Reliance Retail Insurance Broking Limited, Reliance Dairy Foods Limited, Reliance Wellness Limited, Reliance Trends Limited, Reliance F&B Services Limited, and Reliance Retail Limited. Reliance Retail Limited (RRL) Reliance Retail Limited (RRL) was founded in 2006 with the objective of leading RIL’s foray into organized retail. At present, RRL operates as a subsidiary of RIL. Akin to its parent, RRL has adopted the strategy of backward vertical integration and has built its own supply chain from farmers to end consumers. The company follows the philosophy of inclusive growth and has been responsible for the prosperity of farmers, vendors and business partners. RIL establishes, maintains, and operates business centers, hyper markets, departmental stores, super markets, specialty stores, and convenience stores across the country. The main product categories of the retail chain include foods, groceries, apparel, home improvement products, consumer durables as well as farm implements. RRL derives a large chunk of its revenue from its subsidiary Reliance Fresh which sells fresh vegetables, fruits and other daily consumables at reasonable prices. RRL has more than 1500 retail stores in the ‘value’ and ‘specialty’ format in India. The grocery business is the largest contributor to the company’s revenue. The retail chain is expected to turn profitable by the turn of the current calendar year. India is one of the fifth largest retail markets in the world. However operating in the complex retail sector is not easy. The country’s retail market landscape is dominated by small karyana stores (mom-and-pop) stores that enjoy high customer loyalty. These neighborhood stores offer credit as well as provide free home delivery for items which cost as little as $1. While the size of the organized retail sector is estimated to be $450 billion, RRL’s share is a miniscule $2 billion. RRL has incurred losses for 7 consecutive years since inception but its unflinching resolve to offer value to its customers has finally borne fruit (Bose, 2014). The retail chain has inked numerous agreements with other companies to fuel its growth plan. Reliance Brands, a wholly-owned subsidiary of Reliance Retail, has signed an exclusive franchise arrangement with UK-based toy store Hamleys. The company has licensing arrangements with leading international brands including Steve Madden; a leading designer and retailer of fashionable footwear and accessories and Quiksilver; a prominent outdoor sports lifestyle company. Likewise, iStore by Reliance Digital has provided one-stop-access for all Apple Inc’s market offerings to Indian consumers. Reliance’s existing partnership and licensing arrangements demonstrate the company’s willingness to shake hands with foreign entities for businesses expansion (Datta & Shrivastava, 2010). Reliance Retail caters to the needs of more than 2.5 million customers every week across India. The chain has an immensely popular loyalty program "Reliance One" that has a subscriber base of more than 6.75 million customers. It is recommended that Shoprite enters into a joint venture with RRL. While Shoprite has rich experience in the retail sector, RRL is key player in the Indian retail marketplace. The alliance will help both companies achieve their growth plans. Entry Mode Shoprite operates retail stores and intends to expand its business in India. The company will set up physical brick-and-mortar stores in international markets as well. Therefore, direct and indirect exporting as an entry mode in India is not practicable. Setting up a wholly owned subsidiary in India is an option that can be explored. However, as per the rules framed by the government of India, companies desirous of entering multi-brand retail in the country cannot set up wholly owned subsidiaries. Large multinational retail chains like Walmart have entered India by inking strategic pacts with domestic companies. Shopite should follow suit. In September 2012, the Indian government permitted 51 per cent FDI in the multi-brand retail subject to certain conditions (Modi et al., 2012). The latest strictures have left it to the discretion of the state level government to decide whether it wants to permit foreign companies to operate in the organized retail sector in their state or thwart the entry of these multinational retail chains. It follows that Shoprite will have to compulsorily enter into an agreement with a domestic company if it intends to foray in the Indian market. Shoprite will have to make an application in Form FC-IL expressing its intention to forge an alliance with Reliance. This application will be screened by the relevant government agencies like the Foreign Investment Promotion Board (FIPB), Competition Commission of India (CCI), Department of Economic Affairs, and Ministry of Finance. The CCI has recently approved Tesco’s purchase of a 50 per cent stake in Trent Hypermarket (Tata Group firm). It is expected that Shorpite will also get the go-ahead if it adheres to requirements and completes the requisite formalities. As per the current regulations, Shoprite can own a maximum of 51 percent stake in the Reliance joint venture. Minimize Foreign Exchange Risks India is a vast country with many small and medium-sized enterprises (SMEs) engaged in the business of supplying raw material to big companies. The SMEs form the backbone of the supply chain in the retail sector in India. Shoprite and Reliance should avoid buying raw material from their existing empanelled international suppliers. The newly formed joint venture should procure all its raw material from regional sources. Procurement from local Indian sources will help the company avoid foreign exchange dealings and the risks associated with currency fluctuations. Likewise, the joint venture should refrain from taking a foreign loan. The money should be raised from the domestic capital markets, if required. Politics and Laws Reliance is a well recognized and trusted name in the Indian market. The company is in the good books of the government because it discharges its corporate social responsibility (CSR) in letter and spirit. Reliance is committed to preserving the environment and helping the community at large. The company’s spend on social activities invariably exceeds the regulatory requirements. Reliance is viewed as an ethical company in India. Associating with a responsible corporate citizen will lend a lot of credibility to Shoprite. The government will have a positive attitude towards Shoprite’s business because of its alliance with an Indian partner of repute. India’s newly elected Prime Minster Shri Narendra Modi has been credited with developing infrastructure, attracting FDI and ameliorating the conditions of the people of Gujarat where he served as the chief minister. In his new role, Mr Modi is likely to create a propitious regulatory framework for the corporate houses which will be of tremendous help to the Shorpite Reliance joint venture. The new company must adhere to the law of the land and conduct its business with honesty and integrity. Being on the right side of law will enable the new company to deal with the Indian political and legal system with confidence. Functional Area Commitments The Indian retail sector is in its infancy. However, it is very competitive since many local and international players have jumped into the fray to cash in on the lucrative opportunity put forth by the organized retail sector in the country. The Reliance Shoprite joint venture will have to exhibit professionalism and will have to make key commitments in the functional areas of finance, operations, marketing, and human resources to succeed in the business. Finance Reliance and Shoprite must pool capital in equal proportion. The joint venture should refrain from funding its capital requirements from outside sources. Both the joint venture partners boast of strong financial condition. Contributing capital towards the new entity will bind them together and increase their commitment towards the proposed retail business. By adopting this strategy, there will be no cash outflow by way of interest. This will help the joint venture to use its profits for further expansion. Operations The joint venture will operate small-sized stores in India. These stores will be located in the vicinity of residential areas so as to lend the convenience factor to the consumers. This operations strategy will enable the Reliance Shoprite alliance to compete with the local karyana (mom-and-pop) more effectively. It will also help the new company to penetrate in the Indian market and target the semi-urban and rural consumers, something that existing organized retail companies in India have not been able to do so. In terms of day-to-day business, Shoprite should use its experience and expertise to handle the back-end operations while Reliance should take charge of front-end activities. Marketing The new company will have to advertise aggressively to spread the awareness amongst the Indian consumers. The retail chain will however stand to gain more if it rolls out lucrative sales promotion schemes for consumers as well as the channel partners. The Indian consumers are bargain hunters and sales promotion schemes like ‘buy 1, get 2, 20% extra, scratch coupon with every purchase, or a chance to win a television set’, will create a magnetic pull on them. The Reliance Shoprite retail chain should organize events such as games, painting competition, and music concerts to attract people to its stores. This will not only increase footfall in the stores but will also boost sales. Human Resources The new retail chain should hire Indian staff for its front end activities. These employees will be able to better understand the psyche of the Indian consumers. The chances of communication gap will also be minimal. The Indian staff will be able to satisfy the consumers in a better fashion as they will be well versed with the nuances of business in the country. The onus of training these employees on retail specific issues should be on Shoprite. The alliance should ensure that employees are paid as per industry norm. Along with the fixed compensation, these employees should be paid incentives on key deliverables so that they are motivated to perform their duties with full vigor. Conclusion The aforesaid discussion establishes that Reliance Group will be an ideal joint venture partner for Shoprite. Reliance, through its various subsidiaries, operates in diverse businesses including retail. The joint venture will prove to be a win-win situation for both companies and help them increase their footprint in the Indian retail sector. Reliance’s image will enable the joint venture surmount political and legal hurdles, if any. The combined entity has the wherewithal to carry out the requisite functional level strategies and succeed in the marketplace. References Bose, N. (2014). Mukesh Ambani’s Reliance Retail set to make profit after 7 years. Live Mint & The Wall Street Journal. Retrieved from http://www.livemint.com/Companies/dfxa8g5lmWFvR6iuE4q1xO/Mukesh-Ambanis- Reliance-Retail-set-to-make-profit-after-7-y.html Datta, A., & Shrivastava, B. (2010, May 27). Reliance retail continues to get capital from parent: RIL invested another Rs1,220 cr in reliance retail in FY10, taking its total investment to Rs5,220 cr. McClatchy - Tribune Business News Retrieved from http://search.proquest.com/docview/345942034 Mody, T., Saldanha, B., Sawhney, H., Finnerty, C., Hongo, J., Parsch, K. Vishwanath, R. (2012). India permits foreign direct investment in retail sector. Journal of International Taxation, 23(12), 8-9. Retrieved from http://search.proquest.com/docview/1437355611 RIL. (2014). RIL :Reliance Industries Limited :Reliance Group. Retrieved 1 June 2014, from http://www.ril.com/ Roy, R. (2013, Jul 23). India rethinks its retail rules; proposals would ease foreign investment limits in supermarket sector. Wall Street Journal (Online) Retrieved from http://search.proquest.com/docview/1411097362 Read More