Reliance Retail initiates big price war in FMCG space

When Wal Mart was first started in the 1950s by Sam Walton, he quickly realized that he had to turn the retail model on the head. The old model was just too static and the need of the hour was a more dynamic retail model. But how do you create such a dynamic retail model? Sam Walton quickly realized that there two factors that would have to be put in place. Firstly, the goods will have to made available to the customers at a place that is convenient for them. Secondly, the retail model would be impossible to sustain unless they controlled the supply chain. Wal-Mart did both these to perfection, becoming the king of retail. Since then, its model has been an inspiration for many companies. Now Reliance plans to adopt a similar model for its FMCG foray; low prices and control of supply chains.

Latest price war will be in FMCG

As Reliance expanded its retail positioning, the one thing it realized was that India always was and always will be a cost conscious market. Hence, success in retail would boil down to offering an incomparable value proposition at a very affordable price. Reliance designed its telecom venture, Jio, along these lines with enormous success. One of the strategies to leadership in telecom was through price wars. Later, Reliance also triggered a price war in the cola business after it took over Campa Cola and decided to take on the global soft drink giants like Pepsi and Coke on their own turn. In the latest roll out, Reliance has launched a similar approach in the FMCG business, where it sees huge potential. It is selling comparable FMCG products that are 30% to 35% cheaper compared to competition.

Reliance recently launched its FMCG business through Reliance Consumer Products Ltd (RCPL) a 100% subsidiary of Reliance Retail Ventures. The launch has bene soft with only selected cities and areas being targeted for the launch of its FMCG foray to first test the markets before making a bigger commitment of funds, strategy, and management bandwidth. However, RCPL has already confirmed that it is currently building its formidable dealer network on a pan-India basis. Once that is done, then the availability of its products will be scaled up across modern and general trade channels. RCPL plans to leverage the power of offline, online and hybrid models to reach out most effectively to customers.

RCPL has selected attractive price points

For its FMCG foray, Reliance has already launched attractive price points in most of the FMCG product categories. Here are some examples.

• RCPL has priced its Glimmer beauty soaps in the price point of Rs25, which is substantially lower than other leading brands in the market like Lux, Santoor and Dettol, which are priced in the range of Rs35 to Rs40.
   

• In case of liquid detergents to be used in washing machines, RCPL has dropped the prices of its Enzo 2 litre front load liquid detergent to Rs250 on Jio Mart, while similar products from Surf and Ariel retail at around Rs325 for a similar size.
   

• On the dish washing segment, RCPL has launched bars of Rs5, Rs10 and Rs15; apart from gel packs at Rs10, Rs30 and Rs45. It has also launched Rs1 sachets of liquid gel for a very price conscious market. Here RCPL competes with Vim, Exo and Pril.

The Indian FMCG product market is estimated at $100 billion or Rs8.20 trillion. That is substantially a price sensitive consumer market and it is estimated that this price point would be very attractive to the semi-urban and rural users, where the slowdown in demand has been most palpable.

Can RCPL do a telecom in FMCG?

In the past, several companies like Nirma and Hipolin made a low-cost foray into the detergents sector, but eventually could not match up to the brand investments and distribution reach of Hindustan Unilever and other global names. However, Nirma did prove that there was a huge potential for tapping the low cost FMCG market and now RCPL is planning that in its FMCG foray. While some are sceptical due to the brand recognition of Hindustan Unilever, Reliance has done that quite successfully in the case of telecom. It has the balance sheet size, the deep pockets, and the ability to handle complex distribution models by combine offline and online.

But a lot will depend on the product perception of the customer. In the case of telecom, Jio not only offered a lower price point, but much higher bandwidth, free calling and an incomparable voice and data experience. That was the cutting edge that made Jio stand out. In the case of FMCG also, the price migration will have to be managed by Reliance without compromising on the user experience or the user satisfaction zone. However, the timing of Reliance’s entry is perfect. It can now play on the customer good will of Jio and also make the best of the shifting FMCG market from the unorganized to the organized. That would prise open a much bigger new market for Reliance; and that will be a price sensitive market.

Distribution maybe the real enigma for RCPL

If there is one real challenge that Reliance has to contend with; it is distribution. It takes time, bandwidth, and investment to create iconic FMCG brands with pull and a formidable distribution network. One thing is certain that this move is likely to transform the FMCG industry in India and would surely give the existing players a run for their money. For the success of its FMCG business, RCPL will look to leverage on its control over supply chains, its massive distribution and retail network, its ability to coordinate with third party manufacturers and its ability to leverage the digital experience. The eventual success mantra may be an amalgam of all these factors, but we have to wait for it to evolve.

However, the real challenge would be to scale up and reach consumers across the physical retail channels. E-Commerce is still just about 5% of retail, so that balance is still about brick and mortal. Also, only about 15% of FMCG products sell through modern retail. For the balance 85%; the dependence is still on general trade, local small chains, neighbourhood Kirana stores etc, which number close to 1.3 crore outlets on an all-India basis. How the distributors and dealers are compensated would also decide the success of FMCG retail.

For now, Reliance has made its big FMCG foray. Eventually, it will boil down to good old distribution.