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June 14, 2004
Two years
ago, no one took Kishore Biyani seriously. His company, Pantaloon
Retail, was seen as a one-man show. Biyani himself was regarded
as unpredictable, and not a long-term bet. Today, he is the
biggest retailer in India. In two years, Kishore Biyani has
bounced back to become India’s largest retailer. Here’s how
the maverick ignored conventional wisdom on retailing, and won.
By M. Rajshekhar
The makeover of 26, Residency Road is almost complete. On this Thursday morning, Bangaloreans walking down this tree-lined avenue slow down to stare at the megalith that has replaced the old Victoria hotel. It’s a sharp, new mall. The sort with escalators and huge grey metal flanks clamped to the walls outside.
All around it, people are zipping around in what can only be termed as desperate hurry. Labourers are clearing the dirt from the cobblestones that surface the driveway. Nearby, a mason is relaying a slab at the fountain. Truckloads of merchandise are arriving. Most onlookers take all this in, correctly conclude that the store is about to open, and walk on.
Other, more observant, watchers notice a somewhat nondescript man sitting on a ledge between the fountain and the steps that lead up to the mall. He doesn’t seem to be doing much. Every few minutes, he pulls out a cellphone – one of three he carries – to ask about the latest election results, and how the stockmarkets are doing. For, on this Thursday morning, the final election results are being tallied, and it looks like the Congress might win after all. But there are more interesting sights that engage everyone’s attention, and the man escapes most people’s scrutiny.
That seems to be something of a running motif throughout Kishore Biyani’s life. Ask people who India’s largest retailer is, and chances are they will say B.S. Nagesh of Shoppers’ Stop or RPG Retail’s Raghu Pillai. And yet, it is Biyani who is the largest player in the Indian market today. This June, when he announces the 2003-04 results of his company Pantaloon Retail, his topline will be about Rs 650 crore. A clear Rs 100 crore more than RPG’s, the second largest player in the Indian market. Shoppers’ Stop is in third place with revenues of Rs 400 crore.
Back in 2002, when Businessworld last wrote about him, the ‘bania’ from Mumbai was in much the same position as the Congress Party was before the elections. No one took him seriously. Biyani hung around the periphery of the retail industry, which was dominated by personalities like the suave Nagesh, unlike whom, he was taciturn to the point of being tongue-tied. He fidgeted constantly during formal meetings, which made the task of carrying out any serious conversation with him quite an ordeal. Little wonder, he seldom received invitations to speak at industry seminars.
No one quite liked him either, because the man strongly believed – and said so bluntly – that his peers in the retail business were mere copycats. “Most Indian retailers tend to blindly copy from Western models. I am looking for a pan-Indian model of retailing,” he would say to anyone who cared to listen. His search for the ideal model also meant that he took colossal risks – something that scared away most financiers used to dealing with more conventional businessmen. On top of that, Biyani made no bones about the fact that he liked to run a one-man show. “I use people as hands and legs. I prefer to do the thinking around here,” he once famously said. As a result, both professional managers and investors avoided him. And few people gave him any chance of succeeding.
Between then and now, a lot has changed. Biyani has moved centrestage. Today he has three highly successful retail formats: the Big Bazaar hypermarket; Food Bazaar, that straddles the food and grocery business; and his original Pantaloons apparel stores. The property opening in Bangalore is his fourth model, a mall called Central. By the end of next year, he expects to have 30 Food Bazaars, 22 Big Bazaars, 21 Pantaloons and four Centrals. Right now, he has 13 Food Bazaars, 9 Big Bazaars (the 10th is opening next week in Nashik), 13 Pantaloons and one Central. Between them, Biyani’s stores occupy 1.1 million sq. ft of retail space. By the end of next year, they will occupy 3 million sq. ft.
With the opening of Central, Biyani says his portfolio is complete. Even as his competitors like the Rahejas (who own Shoppers’ Stop) embark on new formats (food and grocery), Biyani says that his appetite for experimentation is now sated. “I will no longer try out newer formats. My focus will be to consolidate our operations.” Don’t take him too literally, though. What he means is that he will continue betting on new opportunities ranging from gold to car accessories, but not on quite the same scale as, say, his first Big Bazaar or his first Food Bazaar. Instead, he will concentrate on ramping up each of his four main formats.
Drawn by his growth, in the last two years well-known financial institutional investors like Goldman Sachs and Citigroup Global Markets have picked up stakes in his firm. And when the stockmarkets looked buoyant just a few weeks before the poll results, the Pantaloon stock was among the best performing on the BSE. It quotes at Rs 311 today, up from Rs 51.25 a year ago. Things are going so well now that Biyani has stopped talking about selling out to foreign retailers when they come in.
“Things have really fallen into place in the last two years,” he says. It is noon, and we are walking through the mall. Inside, the whole place is a mess. There are less than 30 hours to go before Bangalore’s newest and largest mall opens for business. And, so far, nothing is in place. The escalators are not working. The shelves are still coming up. The merchandise is still coming in. The stuff which has come in hasn’t been unpacked yet. Cardboard cartons, plastic sheets lie everywhere. And yet, there is something oddly relaxed about Biyani’s demeanour. He wonders about the stockmarket. Why is it rising? Can Manmohan Singh be the next PM?
Perhaps Biyani is in an unusually good humour because he knows that the chaos will settle down soon enough. Just like it has with his entire business. A big factor, he says, was Big Bazaar Mumbai. The format was a huge gamble, says Bala Deshpande, who served as ICICI Venture’s representative on the Pantaloon board. Around 2001, when the first Big Bazaar opened, Pantaloon’s topline was Rs 180 crore. The company needed money to expand, but had just Rs 4 crore of profits. The share price was low (Rs 18), so it could not have raised much from the bourses. Biyani would also have had to part with a lot of equity – his family and he hold 40% in Pantaloon today. Biyani took a Rs 120-crore loan that pushed his debt exposure to as high as 1.5. If Big Bazaar hadn’t worked, he would have ended with huge debts and a loss.
But, as it turned out, the store clicked. In week one, the first Big Bazaar store pulled in over a lakh customers, and did a crore in turnover. By the end of the first year, Biyani had opened three more Big Bazaars. Riding on the hypermarket, Pantaloon saw its turnover of Rs 286 crore (2001-02) climb to Rs 445 crore (2002-03). Investors began to take notice. They also became more comfortable with the idea of him being a maverick. Says Biyani: “Investors look for growth. And there are not many growth stories in Indian retail. Most companies are growing very slowly.”
It helped, also, that around the same time, Biyani began to pay a lot more attention to what the investors wanted. Says Deshpande: “As the new investors came in, they told him that he needed to delegate in order to grow.” And so, he went on a hiring spree. Biyani pulled in the head of Globus, Ved Prakash Arya, to handle operations; Jaydeep Shetty from Inox to create new brands; Sanjeev Agrawal to handle marketing; Kush Medhora from Westside to look after new store rollouts; Ambrish Chheda came in to look after Food Bazaar and handle business development; Bina Mirchandani came in to look after the merchandising; V. Muralidharan came in from Lifestyle to head Central…
Persuading the professionals wasn’t easy. Take Kush Medhora. Initially, he didn’t want to join. “I thought the company was unprofessional from the way the first few stores looked. I had also heard that the company was a one-man show.” But during the job interview, Biyani told him he wanted to abdicate everything except strategic planning and the selection of new locations. That helped Medhora make up his mind.
There is probably another reason why Medhora joined. He enjoys the adrenaline rush. His job, opening new stores, keeps him on the road for 220 days in a year.
Ved Prakash Arya At Food Bazaar, Mumbai: Like the former head of Globus and current Pantaloons COO, many professionals are not averse to working with Biyani now
It is this frenetic pace that drew him to Pantaloon. “We will be (worth) Rs 5,000 crore by 2007,” he says. “Such expansion is fun. In a way, we are creating history.” Right now, he is running around – he is short of site engineers. His team has just one when it needs at least another three. He is also interviewing aspiring Big Bazaar store managers. In a break from regular retail recruitment, the company is hiring chartered accountants for store managers. Managing Big Bazaar is like financial tap dancing. The margins are slimmer. The business runs on faster stock turnarounds, and calls for a very different way of thinking from the other stores. And so, Pantaloon is looking for people with an eye for numbers. “Alternate Saturdays are holidays,” Medhora grins, “and so that is when we do our interviews.”
As the company grows by leaps and bounds, it is discovering all the advantages of scale. In everything, from raising finances to negotiating rates, the economies of scale kick in. To go from its current 1.1 million sq. ft of retail space to 3 million sq. ft by the end of 2005, Biyani estimates he will need an investment of about Rs 250 crore. Of that, Rs 32 crore has been raised through a convertible debenture offer made in November 2003. Another Rs 60 crore is being raised though debt. The current cash flows should take care of debt servicing without much problem. Meanwhile, the rapidly growing profits can be ploughed back to fund the expansion. The company has an EBITDA (earnings before interest, tax, depreciation and amortisation) of a little over Rs 65 crore. Right now, says C.P. Toshniwal, chief of corporate planning, “Our turnover is around Rs 650 crore. But by next year, the turnover will be Rs 1,300 crore. So, we will have an EBITDA of Rs 130 crore, all of which help fund the expansion.” In contrast, Shoppers’ Stop will throw up Rs 24 crore as EBITDA this year.
Interestingly, even as Biyani gets more cash from his business, at the same time, he is making that cash work harder. In the old days, he says, “I would have paid Rs 7 crore-7.5 crore for a 50,000-sq. ft store and I would have done an annual turnover of Rs 35 crore. Now, I spend about Rs 4 crore for a store of that size, and do a business of Rs 50 crore-60 crore.”
You can attribute that partly to the mall-making frenzy in
this country. There is a shortage of anchor tenants in this
country – at least ones that can pull customers in, and Biyani
is exploiting that. Not only is he able to negotiate lower rentals,
he has begun insisting that mall owners also develop the place
for him. In the old days, he says, “We would buy the property,
do the fittings and so on. Now, I just take a fully-appointed
building from them.”
Day two. Kishore Biyani is standing on a scooter. The Businessworld
photographer is trying to get some elevation into the photograph.
From that unsteady perch, he is talking about why he thinks
the best is yet to come for his chain. All his formats, he says,
are seeing an interesting evolution.
Take Pantaloons. This is the brand that started Biyani’s transformation into a retailer. Back in 1997, Biyani was manufacturing two brands, John Miller and Bare. Both were struggling. Even though his products were good, and the pricing was competitive, high distribution costs and margins were making the whole business unviable. And so he decided to set up his own stores. That year, the first of these came up in Kolkata. At this stage, the plan was that the company would open another 2-3 such stores, no more. Recalls Kabir Loomba, who worked with Biyani as a chief operating officer (COO) in that period: “When the first store came up, we did not know when the second store would come up.” But the Kolkata store was an eye-opener. Biyani had been hoping it would do about Rs 7 crore in its first year. It did Rs 10 crore. Loomba feels this taught Biyani an important lesson: the Indian market was under-retailed. This was when the aggressive retail expansion started.
Over the years, Pantaloons has been through a few makeovers. And right now, it is getting another one. Biyani is junking the old positioning of ‘India’s family store’ and is planning to target the youth instead. His consumer insight is, like always, a shade radical: “Within a family, people were thinking and dressing and acting very differently. Which is why I believe studying Indian consumers by demographics and psychographics is a waste of time. We should look at communities: techies, metrosexuals, etc.”
So, Pantaloons will now be about affordable fashion. (‘Fashion from Pantaloons’ is the new adline.) In the next two years, says Biyani, Pantaloons will be the Indian equivalent of Spanish fashion retailer Zara.
Internationally, in this business of fashion retailing, while the margins on individual garments are high, eventually, the margins are low. That is because the unsold stocks have to be liquidated through heavy discounting. For instance, it takes 90-120 days to design and ship, say, a new line of fashion merchandise. This means two things. One, the company will always be forced to order in lots of 90-120 days, lest it runs out of stock halfway. Two, if the fashion changes, the company is saddled with inventory which then has to be liquidated. Says Biyani: “If the margins on every garment are 50%, but I am going to sell half of them after a 12% markdown, my margins are already down to 44%.” And so, the company is trying to crash the time to market from 90 days to about 21 days.
Zara has a neat model that lets it launch new lines in less than 21 days. What made it possible is that it had its own factories. Biyani is doing something similar. Faster manufacturing, says Anshuman Singh, who looks after the supply chain, will let the company keep less inventory, which will make it more responsive to market changes while reducing the amount of stocks to be sold at a discount. At the same time, as fresh stocks hit the market faster, sales will rise. By becoming much more responsive, says Biyani, “We can up our margins by 5-6%.” Right now, he has brought the time lag down from 90 to 40 days.
But fashion tastes in India don’t change that fast. So the real question is: what will it take to drive disposability of clothes higher? According to retail consultant Devangshu Dutta, that is price. “Pantaloons will have to really bring prices down, by half or so. But that might create a problem between Pantaloons and Big Bazaar, for the latter is also based on apparel.”
As it were, Biyani’s new strategy for Big Bazaar also centres on fashion, but with a volumes orientation. It will retail what Biyani calls commoditised fashion – blue jeans, white shirts. Biyani is planning to buy these in very large numbers, drive prices down, and sell. Take denim. Recalls Singh: “Pantaloons has jeans from Bare at Rs 695 and above. Newport, priced at Rs 599, was the cheapest pair of jeans in the market. So, we contacted Arvind Mills and asked if they could give us jeans at Rs 299 if we were willing to take 100,000 units a month.” That is where Ruf-n-Tuf came in. The brand had been discontinued when Pantaloon first contacted Arvind. From now on, it will be available only through Big Bazaar. There is a similar deal for T-shirts.
This will have to be a lean operation. Pantaloon will carry no stocks. They will lie with the manufacturer and replenished just in time. In businesses where there aren’t any large manufacturers, like plastics, leather, food technologies, Pantaloon is trying to engineer its own low prices. For ketchup, it has an in-house label for Rs 38 as opposed to an industry average of Rs 58 for the same size.
And then, there is the format that fascinates and worries Biyani: Food Bazaar. Right now, of the company’s topline of about Rs 650 crore, Rs 250 crore has come from Pantaloons, the apparel store, another Rs 230 crore from Big Bazaar and the rest (Rs 160 crore-170 crore) is contributed by Food Bazaar. Biyani worries that Food Bazaar is growing too fast. He says: “I could double the stores I have and still face no problem. But it is important to recognise that it should not be more than 30% of my topline.” (That is why, he says, “I have underplayed food in Big Bazaar.”)
That flies in the face of conventional wisdom. Most retailers believe food is central to their retailing operations. If you look at the rival hypermarket format Giant from the RPG stable, 50% of its revenues come from food. In contrast, Biyani doesn’t want the share of foods to rise over 30%. He has a simple explanation: in India, cost of modern retailing is very high, and food doesn’t offer adequate margins. If cost of operations is 30%, food margins are just 12-14%. In contrast, apparel and non-food segments offer margins of 25-30%.
Part of his success is the ability to paint on a blank canvas. Incredibly, when Big Bazaar was conceptualised, he put in place a team of four people, including himself, none of whom understood the hypermarket business. And one of the first insights the team had was that all neighbourhood markets are the same – each of them has a bania, a dry cleaner and a chemist. “We knew we would have to create that same mix of the mandi in whatever new format we evolve.”
Or take Food Bazaar. “I am going to change the face of food retailing in India,” promises Biyani. Right now, he is working on a new focus for Food Bazaar. He calls it ‘farm to plate’ – essentially, a plank to improve freshness in the products. Boasts Chheda, the chief of business development: “The Ahmedabad Food Bazaar has a full-scale dairy set-up in place with a capacity to produce 1,000 litres a day. We make our own paneer and pasteurise milk. The company is also adding spice grinders and atta chakkis (flour mills).”
It’s an example of how earthy entrepreneurs think differently. Says Biyani: “It is obvious to everyone that what Indians prize most in their food is freshness. That is what I need to give my consumers. But most managers take that as a mandate to set up a cold chain in this country. But I wonder, why cannot I have a farm next to my store? Managers always complicate things. It is the MBA culture. B-schools teach you how to manage complexity, but I don’t think that is necessary. Life is quite simple.”
Central is a smart concept too. It is a seamless mall. In other words, while there are lots of retailers under one roof, the look and feel is like that of a department store, down to the unified billing centre. And yet, all the stocks are held not by Biyani, but by the partners. By the end of September, Biyani will add two more – a 210,000-sq. ft monster in Hyderabad, and a smaller one in Pune. A fourth one will come up by May next year. The four Centrals will do about Rs 360 crore in turnover in the first year.
To continue innovation, Biyani has a new businesses team. Newly constituted under the charge of former Globus manager, Anand Jadhav, it is trying to identify new businesses for the company. Says Jadhav: “In 4-5 years, same store growth might start to plateau. To keep that rate of growth intact, we are identifying new businesses we can expand into, or use to replace less profitable ones.” Right now, Jadhav and Biyani come up with the ideas and Jadhav’s team sees how each of the areas can generate a topline of Rs 100 crore in two years. So far, he has zeroed in on footwear, music and car accessories. His mandate: to launch 3-4 business ideas every year.
Talking about managing innovation brings us to contrast Biyani and Nagesh. Nagesh believes Biyani will have to give up on gut-feel soon. “Gut-feel is not consistent. He will just confuse his managers terribly. There is no doubt in my mind that Kishore will have to go in for tech-driven answers.”
In many ways, the two are poles apart. Nagesh is extremely systematic. He gets systems in place and then scales up very fast. Biyani works the other way around. He believes in growth first, and that problems can be fixed along the way. As the Indian market evolves, it will be interesting to see who has the better retailing organisation. The scientific Shoppers’ Stop, or the serendipitous Pantaloon. It will also be interesting to see how Pantaloon retains its founder’s intuitive spirit even as the professional managers and systems take root.
It is a little after 6 p.m. The diya is lit. The ribbon is cut. And the mall opens for business. A lot of employees are hanging around, all eager to see how the mall does. Medhora is standing, grinning, near the entrance. “Five days before the store opened,” he tells me, “A tenant called to say he could not get any cabinets for his counter. We had to run to find carpenters. We got the cabinets just in the nick of time.”
The mall begins to fill up. The first glitches reveal themselves. The public address system is not working too well – the speakers are too high. And then, a few minutes after the mall opens, the power fails. The lights dim. The escalators stop moving. Opening glitches, shrugs Biyani.
The Tarapur plant: As Biyani plans to reposition Pantaloons as a fashion store, he plans to crash the time to market to three weeks. It helps that he also makes clothes
Postscript: Less than a week later, half the Pantaloon managers were back in Bangalore ironing out some of the bugs.
Postscript two: Another week later, I call Murali, the head of the mall. Business is good, he reports. Getting close to 15,000 people on weekdays and 25,000 on the weekends.
(With reports from Irshad Daftari)
Article from BusinessWorld, 14 June 2004
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March 23, 2004
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March 12, 2004
With just eight months to go before MFA quotas are phased out, the industry in India is buzzing with activity. However, amidst this development, challenges and fears also remain.
With textile and apparel exports of about US$14 billion, India is one of the larger players in the US$360 billion global trade. Not surprisingly, the phase out of quota is being watched, analysed and debated with a mixture of concern and enthusiasm.
Government Support to the Industry
The restrictive industrial policy followed by successive governments over the decades has created an industry that is largely fragmented and dominated by small-scale enterprises. However, in the last 12-15 years, governments of all political affiliations have realised the importance of allowing the Indian industry a free-play, and these restrictions have been steadily removed.
Over the last few years, among the significant industry-friendly policies put in place by the Indian government are the following:
Removal of industrial licences that artificially choked manufacturing capacity, and later opening the textile and apparel sector to larger-scale investments.
Removal of taxation and duty imbalances which favoured small, unstructured companies. A unified Centralised Value-Added-Tax (CENVAT) mechanism in the textile supply chain has been established, though different rates of duty remain of various products.
Steady reduction of import duties on machinery and capital goods by the textile and apparel industry to allow factory modernisation. Simultaneous reduction in import duties on fabrics and other raw materials.
Providing soft loans under the Textile Upgradation Fund Scheme (TUFS).
Setting up textile and apparel parks to bring together textile mills, apparel producers, service providers, with centralised infrastructure such as effluent treatment and power.
Use of e-commerce by setting up B2G (business-to-government) initiatives such as the one by customs authorities to facilitate quicker processing of export and import shipments.
Increasing the convertibility of the Indian rupee against
major international currencies, and simplifying foreign
currency purchases, thus allowing the industry freer access
to raw material, trims, services and technical inputs.
Industry Gearing Up
In sectors such as spinning, where control was dismantled first, Indian companies have become amongst the most competitive in the world. India now holds a 25 per cent market share in world exports of cotton yarn.
Others sectors are now beginning to follow. A recent report by investment research firm SSKI highlights the opportunity Indian industry has to dominate the global trade in home textiles. Companies such as Welspun and Trident (Abhishek Industries) are already among the largest suppliers to the world’s largest retailers, while others are also ramping up capacities.
Previously neglected areas that are also seeing significant investments include weaving, where shuttleless looms may treble in the next three years. The fabric dyeing and processing sector has an estimated current capacity of 4 billion metres (not including traditional dyeing methods), and is seeing expansion of existing plants as well as new start-ups.
After the de-reservation of apparel from the small-scale sector, large mills are drawing up aggressive plans to integrate vertically into apparel manufacture. What initiative they had lost to the unorganised powerloom fabric sector, they are now aiming to regain through apparel.
A case in point is Raymond, India’s largest worsted suiting manufacturer and one of the largest denim producers. While expanding its denim capacity (slated to go up from 20 million metres to 35 million by mid-2005), it is also looking at setting up a denim apparel plant of 10,000 units a day with the potential for further expansion. It is also planning a tailored apparel plant in Bangalore. The total investments planned are in the region of US$46 million. In addition to this, Raymond is also said to be planning an apparel factory in Thailand, and evaluating opportunities in China.
Similarly, Arvind Mills, one of the largest denim producers in the world, has set up a denim garment factory in Mauritius with an annual capacity of 1 million pieces (planned to treble subsequently). It has also doubled the annual capacity of its shirt manufacturing plant in Bangalore to 4.8 million units.
Even yarn spinners have been investing in forward integration into fabrics, dyeing-processing and apparel, with the aim of providing a one-stop solution for customers.
Many of the larger companies have used recessionary trends in recent years to cut organisational flab, improve plant productivity and also reduce interest and other costs. This will now stand them in good stead as they look to compete more effectively in the global market.
The Role of Retail
Industry experts concur that the growth of organised retailing within India could be a huge enabler for improving product variety, quality and productivity amongst the supply base.
Though the largest Indian retailers are minnows compared to their global cousins, many of them have been steadily adopting management processes that compare well to global best practices including category management and B2B e-commerce. This has filtered through to the textile and apparel supply base as well, whether it is the adoption of data-interchange driven merchandise planning, or quality-improvement on the factory-floor.
Observers, including Indian retailers themselves, agree that foreign retailers would do much to hasten this process of development.
The government remains unmoved, although the Indian Finance Minister recently confirmed in an interview to the press that the government is “committed to the principle of allowing up to 26 per cent investment in retail by foreign companies,” provided the domestic retailers have achieved a scale where they can compete more effectively.
Opening of FDI certainly strikes a welcome note for financial investors and venture capitalists, who could later sell their stake to foreign retailers once the market opens up further. But the statement has left international retailers largely unmoved since many of them want a larger, if not complete, ownership of their operations in India.
More and more, India is seen by the world’s largest retailers as an important future market in which they must have direct access through their own subsidiaries, rather than through franchise or licence agreements, or minority stakes.
As a sign of their commitment to the country, many of them have been making politically-correct noises about increasing their sourcing volumes and supporting the local supply base.
JC Penney is looking at sourcing over US$700 million of merchandise in the coming years, while Gap is said to be already sourcing about US$600 million from the region. Others also see India as a growing source, and a potential market. The visit of Debenhams’ international director, Francis McAuley, was widely reported by the local press earlier this year.
Wal-Mart is also stepping beyond its generic sourcing of about US$1 billion to test market Indian brands in the USA. It has begun a pilot project in Houston (TX) with the producers of the Amul brand in India, to sell their sweets and ghee to the Indian population settled in the USA. If the response is encouraging, Wal-Mart plans to expand the presence to California, New York and New Jersey, the three largest states where the population of Indian-origin is sizeable.
UK’s Woolworths states in its CSR 2003 document that: “India is a growing source of inspiration…and it is essential that we develop our understanding of the potential to manufacture chosen products there.”
However, the world’s second largest retailer, Carrefour, deferred its plans to set up a retail operation in India, and recalled its representative Jean Chritophe Goarin in March this year. Carrefour initially explored the option of entering through a franchisee, before stating its preference for a direct presence, which is not allowed under current rules.
For most international retailers the domestic retailing angle will not be explored until a clear policy emerges from New Delhi. This must wait until the elections are over in May and the new government is firmly in place.
A Wildcard: Free-Trade with China?
An interesting recent development in March this year was the beginning of discussions to explore bilateral free-trade between China and India.
The two sides are scheduled to work out a clear timetable and study the areas of co-operation in trade, investment and other issues. Also, they will try to work out a specific five-year programme for economic partnership. Discussions are bound to be slow and tortuous given a 40-year old border dispute and traditional economic rivalry.
Bilateral trade between the two countries jumped 54 per cent in 2003 to over US$7 billion. Indian companies have also been actively exploring direct investments in China (currently estimated at only US$40 million).
Chinese companies have not been as enthusiastic to return the favour, seeing India as a large market for their entry-priced products rather than a new production base. Currently Indian infrastructure costs, such as power, remain higher than Chinese costs, as is the cost of borrowed capital. Industry sources also point to the lack of transparency in Chinese costing, which could indicate additional government subsidies, making it more attractive for Chinese companies to manufacture in China.
However, India’s rising resistance to inexpensive Chinese goods is an obstacle to setting up a free trade agreement between the two. In 2001 and 2002, 36 anti-dumping investigations were launched by Indian authorities against Chinese imports.
Sceptics also point out that the launch of a free trade agreement between India and Sri Lanka has not yet had any significant impact on trade between the two countries, and they do not expect quick wins from the Sino-Indian dialogue.
Re-Establishing a Business Model
However, Indian firms remain undeterred as they are looking to use a mix of Chinese, Indian and other production facilities, driven by Indian design and merchandising capabilities, to service their brand and retail customers. Among the companies said to be exploring this option are Raymond and Aditya Birla group.
Indian companies such as Shahi Exports, the House of Pearl etc, have already been following this model over the last decade, and have grown sizeable businesses through a mix of manufacturing and trading. Others are following suit.
Indians have been global textile merchants for thousands of years, selling goods produced in their home country as well as those produced elsewhere. 2005 may see the re-emergence of the “Indian trading house” with a business model that is driven more by design and product development with production taking place in multiple countries one of which might be India.
The author, Devangshu Dutta, has been involved with
the fashion, retail and consumer products sectors as an entrepreneur,
a manager and a consultant , working with companies globally.
His currently works with companies in the area of strategy,
outsourcing and incubation of business operations, and corporate
finance.
(Published in www.just-style.com, dated 12 May 2004)
(Copyright) Devangshu Dutta, April 2004
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February 16, 2004
The warm-up over, India’s retail industry is revving up for its most exciting phase ever. (By M. Rajshekhar)
Consider this: through the 1990s, organised retail in India added just 1 million sq. ft. of space a year. The pace picked up from 2001 onwards. But estimates have it that in 2003 alone, a breathtaking 10 million sq. ft. was picked up by this fledgling industry. If you thought that was heady, think again. The most exciting phase for the retail industry lies ahead.
Over the next three years, a confluence of events will push organised retail into a new orbit. One, a series of glitzy malls has already begun to redefine the shopping habits of urban Indians. Some call it “shoppertainment” or shopping and entertainment – and it’s quickly catching on. But guess what? Even till last year, the number of malls in operation was barely in double digits. This year at least 50 new malls – of 100,000 sq. ft. size and above – are slated to go into business in 2004. Retail consultants KSA Technopak estimates that another 200 malls will come up in 2005 and 2006. “In all, 40 million sq. ft. of organised retail space will enter the market in the next 3-4 years,” says Devangshu Dutta of Third Eyesight, a retail and sourcing consultancy.
Two, the sudden ramp up in retail real estate could create over-supply. After all, not every mall owner will find it easy to seek tenants. That, in turn, could bring down property prices. And suddenly, experts reckon, the new economics could make it attractive for a new set of players to join the party, especially retail formats like furniture and consumer durables, which need a lot of space. So if apparel and grocery led Phase I of development, new categories like furniture, pharmacy and fast food could help propel growth in the near future.
Three, the early birds – retail chains like Shoppers’ Stop, FoodWorld, Lifestyle and Pantaloons – are now well past the experimentation stage, and are findings ways to take their growth trajectories higher. Kishore Biyani, managing director, Pantaloon Retail, agrees: “There is a new sense of confidence in every Indian retailer. We now have formats that have been tried and tested.” But that’s a claim that very few other retailers can rightly make. While most of them have been largely risk averse and stuck to Western models like department stores and supermarkets, Biyani has tried innovating to discover what he loves to call the “pan-Indian model of retail”. In 2002, after much trial and error, he appeared to have hit upon one such winning formula: the Big Bazaar hypermarket model. Today, the chain of seven Big Bazaar outlets contributes close to Rs. 4000 million to Pantaloon Retail’s topline. Biyani says he plans to set up nine more by 2005.
It isn’t just Pantaloons though. Much of this rapid scale-up across the sector is helped partly by the fact that organised retail is no longer starved of funds for expansion. The older players are generating more substantive cash flows than ever before. Also, says Bala Deshpande, director (investments), ICICI Ventures, “The favourable stockmarket performances of Trent and Pantaloons have helped loosen the purse strings of promoters and banks.” RPG has also begun diverting its investments from Old Economy ventures to retail. Shoppers’ Stop, in fact, is readying for an IPO this year. Even Pantaloon, which scared away most investors with its over-aggressive investment strategy, is now finding takers in the market.
So what’s in store? Experts say that the current land grab will hit a higher pitch. Growth will attract newer players and fuel more growth. KSA Technopak CEO Arvind Singhal says: “The share of organised retail in the total retail pie is likely to grow from 2% now to 5-6% by 2007.” In their latest Indian Retail Review, real estate consultants Knight Frank presage a share of 20% by 2010, perhaps a shade too optimistically.
But things are likely to hot up once global retailers can set up shop in India. Current FDI norms don’t allow global retailers to step in, except for cash-and-carry formats, franchisee operations and special licences. Opinions differ on when the government will open the door. But even die-hard opponents of FDI concede that they won’t be able to stall the move for more than two years. The €52-billion German giant Metro AG has entered in the cash-and-carry mode. French hypermarket chain Carrefour has set up a representative office to develop an entry strategy. There are several others tapping their feet outside the door, trying to listen in closely.
Indian retailers are fully aware that they have about two years. Hence the hurry to ramp up fast. The frenetic pace of expansion will, of course, throw up a new set of challenges.
What will these be? Come, grab a ringside view of this fast-changing
battlescape.
admin
February 13, 2004
Devangshu Dutta, Chief Executive of Third Eyesight, a retail and fashion services firm, said. “Retailing in India is set for the next big leap – what began as forward integration for manufacturers such as Bombay Dyeing and Raymond in the 1960s, has almost suddenly reached a stage where even smaller companies, individual entrepreneurs and real estate owners are willing to build organisation and structure into their businesses.
“The availability of quality real estate in the form of shopping malls is probably the biggest enabler of the organisation of retail business. From small 300-400 sq. ft. outlets in disorganised high streets, one now has the option of opening a well-furnished store in the well-equipped environment of a mall.
Highlighting the challenges ahead, he pointed out that, “The biggest challenge for the mall owners is going to be to find enough different brands to fill the space, so that the differentiation between the malls is maintained. Otherwise the 35-40 million sq. ft. that is coming up will end up looking the same all over, and one can foresee a bloodbath in the mall business. The challenge for retailers, on the other hand is to develop people at all levels, from frontline sales staff to middle-rung and senior managers to run the retail business. Their skills need to be of global-best standards, to allow indigenous retailers to not only compete with foreign retailers in India, but also to enter markets outside the country.
“Indians have a long history of being merchants of fashion, and moreover, of being able to build powerful brands informally – we need to combine these capabilities to create a truly vibrant fashion and retail industry where innovative and uniquely Indian brands are created, that are world-class and globally accepted. Outsiders have long appreciated the Indian industry’s strengths – the industry now needs to realise these itself.
Speaking about malls presenting competition to high street retailing, he commented, “High streets need to reinvent themselves quickly. Unlike European high streets which had a lot of protection from urban planners, and some lead time to develop a competitive strategy against out-of-town shopping, Indian high streets are faced with the prospect of sudden demise with the entry of huge malls in their own vicinity. Local market associations must rush to making sure their members work together and recreate a vibrant and different shopping environment to retain their customers – otherwise independent shop-owners will fall prey to Indian organised retailers much before foreign retailers even hit Indian shores!”
