Meanwhile, the considerably bigger Reliance Smart network, first rolled out in 2016 and which sells clothing and accessories, is being expanded with 17 outlets having been added over the past year. With this, the retailer was running 502 stores across the two formats at the end of December 2017.

While the Reliance Smart format typically fetches higher margins, the details of the profitability of the two formats were not available. Persons familiar with the sector said the Reliance Fresh stores were far less profitable and sometimes unviable because of the high rentals. Consequently, the company was compelled to stop renewing the leases, the persons explained.

Anil Talreja, partner, Deloitte India, said the problem with the small format stores is the high rentals. “Margins and revenues are low for food and grocery compared to apparel. So to sustain this model, location and rents are very crucial,” Talreja pointed out.

The store optimisation exercise appears to have helped boost profitability: Profits before depreciation, interest and taxes (PBDIT) jumped 82% year-on-year to Rs 606 crore in Q3FY18 on a sharp 116.4% year-on-year jump in revenues to Rs 18,798 crore. For the nine months ending December 2017, the company’s PBDIT was up 105% year-on-year to Rs 1,113 crore on an increase in revenues of 92% y-o-y to Rs 45,015 crore.

A company spokesperson responded to a query from FE saying Reliance Retail is growing at a rapid pace across all consumption baskets including grocery retail. “Reliance Fresh registered a net addition of stores to its retail network during the financial year 2017-18,” the spokesperson said. He added the grocery business continues to explore new opportunities by adding both Fresh and Smart stores to the current retail network.” Experts point to the sharp increase in floor space in the past few years; at the end of March 2017, the retailer had 3,616, stores across 13.5 million sq ft. At the end of March, 2016 the space was 12.8 million sq ft across 3,383 stores.

In FY17, Reliance Retail’s revenue was up 60% to Rs 33,765 crore. EBIT in FY17 was up 55.6% to Rs 784 crore. In FY16, the Retail business posted a 22.5% increase in revenue to Rs 21,612 crore. The business delivered a 21.3% increase in its EBIT Rs 506 crore, according to the company’s annual report.

Reliance Retail is not the only retailer to consolidate the small format stores. Recently, Trent Hypermarket, a joint venture between the Tata Group and Tesco, which operates three formats — Star Bazaar Hypermarket, Star Market and Star Daily — has shut all its 20 loss-making Star Daily stores. Among those chains that have exited the market are Aditya Birla Retail, which exited Mumbai and Jaipur in 2012 by shutting its More supermarkets. Future Group shut all its KBFP stores in Bengaluru a couple of years back. RP Goenka-owned Spencer Retail also closed around 200 stores in the last five years.