Text Version Of the Interview
Different Types of Deal Structure
Once we identified the interested partners in India, we then started getting down on the drawing board of how the contours of the partnership would be.
During my journey of the last two decades in this business, what I've come across is there are largely two or three kinds of players.
- People see India as a very significant but complicated market. So they don't want to let go of the control or the reins of the Indian business, So they opt for a more joint venture.
- They want to be in the room in terms of joint management, operations, etcetera. But realizing that they need a heavy hitter in this market because it's a complex market.
- People, mostly Americans, see India as a big, but currently not as significant compared to the market in the United States. They would opt for a more master franchise deal where we have high-level control, but we don't invest in a business.
- We sell your product. We will help you with a lot of things, but basically, it's your skin in the game, and you get the upsides and downsides.
- License to market, which is large, lets you run with the brand the way you want. So the problem with licensing as a model, because it's a kind of loose governance model where you pay the royalties, but you're pretty much on your own.
There's nothing right or wrong with any particular model. But many people also tend to fancy that because it's the lightest touch of the model. So These are the three classics, so to say, models.
And then, of course, as markets have progressed, newer models have come into play in this business.
Are the Structures Based on Demographics?
Just by empirical evidence, we have more than 16 brands in our portfolio partnerships. We span from Japanese brands to American brands, North European, South European brands.
But the US brands tend to want the master franchise. So they follow the wholesale model. They want to sell you the product. They want to control where you sell it in terms of channels of sale, where you open-source, all of that, etcetera but don't want to invest with you.
As an example, we are the only player globally which has a partnership with Tapestry and Capri.
- Michael Kors
- Kate Spade
- Jimmy Choo
- Tory Burch
All of them are master franchise partnerships, not joint ventures. The only joint venture that we have out of the US, which I think is technically no longer American, is Tiffany. Because LVMH bought it over.
So we did a joint venture with Tiffany just seven, eight months before LVMH bought that company. And most recently, we inter- joint venture with an American IP company called CAA, creative artist academy. So these are only to join ventures out of the US. The rest are all typically very long-term master franchise partners.
Then I look at my Italian partners; we have ten partnerships. Seven of them are joint ventures. So was it just a coincidence? Or was it by design?
I get a sense that proximity matters. European companies see themselves as six to seven hours flight away, easy to manage a joint venture. The US sees India as a very far away country.
Which one is easier to structure?
In the short term, the master franchise is easier. All our joint ventures are what we call timeless. So we never sign a joint venture with either a time-bound put or a call option, which is unique to only us.
Unless there is a material breach by either of the partners, the partners are tied to the partnership. If you want to get a joint venture from us, it's like a marriage, and a traditional Indian marriage is there for keeps.
If you want a time-bound partnership, you are better off with the master franchise.
So joint ventures are more difficult to construct on the front end.
The master franchise has singular rules of the game. This is the price that you would buy the product; this is how you do marketing, open-source, all of that, et cetera.
Fairly cookie-cutter, although we still negotiate some of the terms. But in the long term, the joint venture is easier. Because I have skin in the game, the partner's involvement comes to a very different level.
What are Other Types of Arrangement?
It's called a Direct to Retail model, which the younger brother of Kenneth Cole invented. So the DTR concept is that you own the brand and do some marketing, but you don't get into the operational aspects.
So Cole signed a ten-year DTR, kept the brand name, and then started producing the product, started moving the price points, all of that, etcetera, et cetera.
And Cole ensured that a minimum guaranteed royalties were coming to him so the DTR partner did not squat on the brand. He has to perform a minimum threshold.
So he managed to get security, and he uses that money to buy more brands.
So he created a beautiful portfolio of 23 brands, and he started a company called Iconix.
Licensing vs. DTR
Disney is a master of the licensing model. So they are the holy grail. Typically in licensing, what you do is you slice and dice tactically. Someone has a license for tailored clothing; someone has a license for denim. Someone has a license to backpack; someone has a license to shoe etc.
Typically, these licenses tend to be with intermediate companies for shorter periods; one year, two years, and three years. I've never seen good licensees in five years.
The DTR model does for 10 years to 15 years, and they're more holistic partners. They acquire good brands that are in distress, and then they give that brand, one large, powerful retailer, for a long time.
Yes, it's not a model, but we do acquisitions. For instance, we just acquired the master franchise for the brand called Hamleys. It's an iconic British toy retailer with more than 260 other heritage sites.
So for the last 10 years, we have been running the Hamleys business in India as a master franchise. And then, when the opportunity arose to buy the parent brand, there was a change of ownership, and we acquired Hamleys in 2019.
So we globally own Hamleys. All going well by quarter for this year pre-Christmas. We will launch Hamleys in the US for a joint venture.
And then we've also made brand acquisitions. So there is this Italian denim brand called DAS Jeans, they needed money. We entered into a joint venture for India, where we will fund it entirely, and we will get 50% equity just by bringing in the IP of DAS Jeans.
And the third variation, we also acquired a 40% stake in a business. It's a minority deal, We got equal board seats, equal governance rights, but they run the business.
Deciding What Structure to Use
So we put some guard rails; first and foremost, what is a partner? We have to be creative because we don't have a one size fits all model. We don't want to overwhelm our partners; we want to make sure that we underwhelm.
We don't say, this is how we do it, take it or leave it. We understand your interests horizon. Do you want to be in operation? Do you see the operational parts of the business that you would rather not dirty your hands on?
So the whole idea is we try to find out what are good meeting grounds. One clear thing is any form of partnership starts coming to grief when there are conflicts of interest. So we put really strong guardrails on the governance structure.
This is why we have not had a single partnership, either unwind, dissolved, litigated, or come to any form of grief because we've put very strong guardrails on conflict of interest.
Very often, grief happens when businesses are good, not when business is bad. When businesses aren't so good, there's no food on their table. When there's a lot of food on the table, that's the time these issues come up.
So we make sure there is a meeting of the minds, and we are both pulling in the same direction.
If there is a brand that we believe in, we will have the risk appetite and then use that to back it up and do a master franchise. Which means I get all the upsides and also the downsides. It's my only skin in the game.
We also have a model where our license or franchise agreement allows a partner to convert into a joint venture. At the end of five years, they have the option to have a seat on the table and finally use their brand if they change their mind.
Strategy to Partner with Big Brands
Internally, we are hunters and partners. So we are a separate team, which is the farming team. And then we have a hunting team.
So we hunt by constantly tracking within fashion, lifestyle, lifestyle treasury. We are constantly following the customer's wallet in India, and we are big believers in research.
And we're constantly tracking what names come up. And most of this research happens through early adapters. So these are the guys early adapters who have a more cosmopolitan mindset.
They are big travelers all over the world. So as they travel worldwide, what are the brands that they're picking up, and what are the names that keep on coming?
So that's one way in which we build our radar. I'm having conversations with a Yoga brand. There's a good example of a brand that hasn't come up in research, but the story is incredible.
And you're also sensing that the whole active lifestyle is not a trend. It's a whole new direction of customer's journey that is here to stay. So all the wellness and mindfulness and active lifestyle, all of that, et cetera.
So I'm really excited about this Yoga Brand. It's $100 million currently, but we can really go places. It's a privately held company.
First Step In Engaging with the Target Brand?
It's Proactive and reactive. Often, brands call on us because you'll come back to the Reliance brand if you're looking at India sooner rather than later. So we get lots of proactive calls, but we also reactively reach out like this brand that I'm talking to.
After the initial hellos, the conversation is usually at the highest level. And after exchanging hellos, we'll do a presentation, a pitch deck as to who we are, what we are doing. Give them from 40,000 feet to a more 4,000 feet view of our business.
And through these conversations, because more often than not, it's about human chemistry. And as we start warming up to each other, we sign an NDA and then come up with a 5-year plan.
This is even before we decide whether it's a joint venture or a master franchise, so that you get a bit of an alignment of vision. Depending on the positioning, we come up with a detailed five-year plan.
Once we have an alignment, we then start working on structures, and then their legal team and ours will start discussing the package.
As I said, different companies have different internal hierarchies processes, but on our end, we pride ourselves in being very flat and nimble. We work literally like a startup model. A lot of our partners love that about us.
Common Challenges in Sourcing
Five years ago, it was India. People are hesitant because there are a lot of stories; some of them are true, some of them are fiction in nature.
Very often, it's also expectation management because you all started with 1.3 billion people. It's a hundred billion. It's not 1.3. The reality is most of the brands that we're talking to are the addressable audience in the next five years.
And the challenge with India is that, even now, it is still underwhelming. It's still disproportionate to the quantum of effort and energy you're putting in. But we believe in the potential of inflection points. We believe it would be pretty large, and that's why we are in this business.
So expectation management is a challenge, making them understand complexities in India.
But there are easier parts. One of the easiest parts is the language. Compared to China, we speak English and we have Google and Uber. So there won't be some weird conversation going on that they don't understand,
Language also makes marketing easy. Because when you open up our website or your marketing communication, the big part of the secret sauce is very clever communication. Some of the cultural nuances make it easier.
We find that if there is one champion, at a senior level, a believer in the Indian market, it becomes easy. If you have a disbeliever, it will always be an uphill climb.
Advice to Brands Entering Indian Market
No matter how sexy it looks, don't do it alone. It's the last of the big markets that's left, so a second entry is super expensive. You need to get it right the first time around.
Pick up a partner who has vision alignment with you, has heft in this market, and you really need patience, which means you need deep pockets, not just investment appetite.
And choose your model of partnership and ensure there are no conflicts of interest as always.
Don't be obsessed with owning 100% of your business. Owning 50% of something substantially big is far better than owning 100% of something very small.
Role as a CEO
On the farming side of the business, I have 11 business heads, fairly autonomous with P&L responsibilities. We are very institutionalized and we have over 900 people in our corporate office, and we run all our stores. We don't have a concept called franchise store or sub-franchise store.
All of them are headed, typically by what we call a business head who is a CEO, who very often presents to the board. The business side is the joint approval more often than not.
But I love the fact that I'm always there as, not just the face of Reliance, but as a Reliance owner. I'm always on WhatsApp; we are literally on 24-hour calls.
We have a small team; Two very clever analysts and two senior people. Very often on hunting, I'm front-ending the conversations.
Reliance has been a public company for more than four decades. By Indian standards, it's one of the youngest companies as compared to the Tata group, which is more than 140 years old. Both had around 200 billion market cap groups as individual companies.
The first 30 years, we were only a B2B business that threw up a lot of cash in our business. The culture mindset, the people skills in those businesses are very different.
We are the fastest company in the world to go from zero to $10 billion in less than nine years. We did not grow from zero to B through acquisitions. So the skill set that came into retail was very different.
And then in 2016, which is just five years ago, we launched GEO, which is our digital business, which is a business in which both Facebook and Google invested last year.
Suddenly the age became very young. I have about 5,000 employees and my average age is 27.2 years. If I go to the hydrocarbons business, the average employee is about 40 years old. In the Geo business, it will be maybe late twenties, early thirties, et cetera.
In less than ten years, our chairman has transformed from a very B2B energy company into a digital and retail powerhouse. In 2005, this group did not have a single joint venture; later, we had more than 250 joint ventures.
Also, the founder chairman believed that we'd buy technology and we will never share equity in the past. The belief in value creation is way different.
But they've started believing in this theme of value creation. When we move from 50 billion to 200 billion market cap, we will have to partner to get the kind of talent, even the other businesses that we acquired.
Sometimes I treat myself a bit of an outsider on the inside, watching this as close quarters. I've seen how we are constantly changing. We have a very agile culture because in 5 years we've moved from something else to an already different company.
Accountability for Leaders
I've never seen the level of empowerment that we have at Reliance. To think that I can sign a joint venture, our chairman would just read about it in the papers or on online media. That speaks of the levels of empowerment.
It's not a matter of how much you have invested in that partnership. It's not always about the money for any successful group or company, like Google, Apple, or Reliance. The currency is the brand name.
And investing in Reliance is the beginning of empowerment, and that empowerment creates accountability. I am constantly very mindful of the accountability or the trust issue that I hold.