By RASUL BAILAY
MINT (Exclusive Partner The Wall Street Journal)
DELHI, 26 August 2008

Since India bars overseas investments in a retail venture selling multi-branded products to consumers, the two foreign funds have invested in MedPlus’ wholesale arm

Two venture capital firms have invested $25 million (Rs109 crore) in Hyderabad-based pharmaceutical retailer MedPlus Health Services Pvt. Ltd in the first publicly known foreign investment in a medical store chain.

NEA-IndoUS Ventures, a Santa Clara, California-based venture fund, and an unnamed fund from West Asia have jointly invested the amount in MedPlus for an undisclosed stake, a person close to the transaction said, asking not to be identified ahead of a formal announcement.

A top MedPlus executive, too, declined details. “It’s confidential,” said Madhukar Gangadi, chief executive of MedPlus. “At this point of time I am unable to tell you anything.”

Since India bars overseas investments in a retail venture selling multi-branded products to consumers, the two foreign funds have invested in MedPlus’ wholesale arm. India allows up to 100% foreign investments in so-called wholesale cash-and-carry retail ventures that sell only to other retailers and businesses. Such ventures are not allowed to sell to end consumers. NEA IndoUS has, in the past, funded Microqual Techno Pvt. Ltd, a firm that makes telecom components and chips, and mortgage solutions provider ISGN Technologies Ltd.

In a bid to gain access to India’s more than $300 billion retail market that is growing annually by 7%, the world’s top three retailers Wal-Mart Stores Inc., Carrefour SA and Tesco Plc. have announced wholesale ventures in the country and let local firms manage the front-end stores that sells to consumers. Such branded retail businesses account for just 3% of the market today, but are expanding at about 35% annually.

Pharmaceutical products are retailed in India through 800,000 mom-and-pop stores and less than 1% is operated through organized ventures. In recent years, hundreds of branded pharma outlets have mushroomed nationwide operated by Apollo Pharmacy, Medicine Shoppe, Guardian Lifecare Pvt. Ltd, Subhiksha Trading Services Ltd and MedPlus among others. Guardian Lifecare is also looking for private equity (PE) investment, according to Ashutosh Garg, the company’s chairman and managing director.

MedPlus operates more than 500 drug stores in Andhra Pradesh, Maharashtra, Karnataka, Tamil Nadu, Gujarat and Rajasthan and plans to double that number by March 2009. Last year, MedPlus received $5.2 million funding from Mauritius’ iLabs Management Llc. (currently called Peepul Capital Llc.), a PE fund co-founded by Satyam Computer Services Ltd’s former chief operating officer Srini Raju.

Though the MedPlus funding is the first of its kind in drug retailing, foreign PE funds have backed retail ventures in other businesses in the past.

In 2006, for instance, UK-based Actis Capital Llp. invested about $65 million for a controlling stake in the back-end operation of Nilgiris Dairy Farm that through a different company operates a chain of supermarkets.

A retail expert predicted the MedPlus model may be copied in other retail niches. “That’s the kind of strategy everyone seems to be getting onto unless someone wants to retain control,” said Devengshu Dutta, chief executive of retail consultancy firm Third Eyesight. “That’s what has happened with Bharti-Wal-Mart, that’s what happened with Tesco and Tata.” Wal-Mart owns 50% in a cash-and-carry venture with Bharti Enterprises Ltd, the company that controls phone firm Bharti Airtel Ltd. Tesco, on the other hand, plans a wholly-owned unit in the back-end business that will supply to a Tata-owned supermarket chain, Star Bazaar.

August is the month when India celebrates gaining its independence in 1947.

So it is quite apt to think about the implications the word “independent” has in the world of grocery retailing as well.

India’s food and grocery retail sector (as most of the other product sectors) is full of traditional “mom-and-pop” operations. Estimates of their share of the market vary from 97% to 99.5% of the total food and grocery sales – but it is given that “independent” retailers rule the roost, and the estimates vary only in the degree of predominance.

The word “independent” in this context differentiates an entrepreneur-run stand-alone operation from a chain store, and encompasses all the kiranawalas and corner shops – traditional, modernizing, as well as the best-of-breed. The business owner-manager of these operations is solely responsible for merchandising, buying, staffing & HR, finance and the rest of it. If he works well, he makes a decent living and helps others to make a living as well. If he doesn’t work well, others may still make a living but he will most likely just scrape by.

In many ways, of course, the word “independent” is related to “freedom”. The phrase “independent retailer” also conjures up a picture of overall economic freedom, of self-ownership of one’s business and economic destiny.

There is freedom from an externally imposed operating framework, freedom in selection of products, freedom in pricing, freedom to service local customers for the store in the most appropriate and locally-relevant way, freedom to manage the cash-flows as the owner-manager wishes to, and so on.

This picture obviously is based on the premise that the independence that is assumed is actually available, as it would be if the market remains hugely fragmented and the supply base also becomes fragmented with many suppliers and brands fighting out for their share of the pie.

Clearly, to anyone who is actually involved in the retail sector that is a huge assumption.

Yes, the supply base is certainly becoming more diverse than earlier as new brands get launched in the market and battle for shelf-space. These brands include not just start-ups or mid-sized companies, but also large companies who are well-equipped to deal with the large incumbents on their own terms. This is surely a good thing for the independent retailer, as it provides him more choice and makes his shelf-space more valuable.

However, there is a quantum difference in the sophistication in organisation, information availability and financial capability between a single-location independent retailer, and even a mid-sized branded supplier, and the balance of power is actually more fragile than it seems. As a supplier grows, it builds up a differentiated position and a distinctive branding and becomes less easily replaceable, while each independent retailer becomes more and more generic, and therefore replaceable. The major differentiating or sustaining factor for most such retailers is their physical location, whose desirability and marketability is not as much within their own control.

When you add large modern retailers into the mix, the economic freedom of the independent looks even more fragile.

Some observers would have us believe that in India modern retailers have little or no impact on the long-term health of independent retailers. This is quite contrary to the ample evidence available from the modernization of retail over several decades in other markets around the world. (Should we chant the old hymn, “But India is different”?)

The fact is that modern retailers don’t suddenly lead to a boom in consumption of food and FMCG products. While there may be some increment due to greater supply and better retail techniques, a new store will invariably take business from existing retail channels. After all, given a choice of a wider variety, a better shopping environment, similar or better products, and similar or better pricing, why would consumers not shift some or all of their spending to a modern retail store?

This, then, brings us to the (sensitive) question – what would happen to the independent retailers in such a circumstance?

Of course, we can take heart from the fact that independent retailers continue to exist even in highly-consolidated and more “developed” markets, and imagine that such a thing will happen in India as well.

Let’s not forget that in some developed and consolidated markets, independents may be supported by local laws and regulations (such as urban planning constraints), while in other places they are supported by the community which may not just show their support by shopping at the mom-and-pop store but also by actively blocking the entry of large retailers and chain stores.

In India the picture is a bit more complex and nuanced.

One the one hand, the consumer is apparently quite happy to enjoy better shopping environments, the convenience of all-under-one-roof. And, while estimates of “wastage” in the food supply chain vary widely, it is widely acknowledged that modern retailers can have a significant positive impact on product quality, value addition, and logistical infrastructure. That is surely a good thing for the country when it is vital to explore every bit of efficiency in food production and its delivery to the population.

On the other hand, regulatory or activist blocks have started to appear already, very early in the growth cycle of modern food and grocery retailing. A few state governments have even taken to banning or at least restricting the growth of corporate-promoted retail chains. Traders’ associations in many markets are quite clear in their perception of the threat from modern retailers to the independent’s normal existence. They express the wish to retain a livelihood threatened by corporate-backed retail operations that are perceived to be competing unfairly with their deeper pockets.

One of the core issues here is the sense of ownership, of being one’s own boss, the dignity offered by being an entrepreneur. Think about what we said earlier about the sense of freedom. Is there a way to retain, or even improve upon that?

The answer may lie in franchising. This may be the bridge between the two sides, and the vehicle for a “co-opted” growth of both.

In a fragmented market like India, it will certainly be a while before corporate retailers can understand and service diverse localities as well as the independents can, or have operations that are as efficient as a kirana-store. As long as independents evolve their own business to offer consumers better service, keep their operating expenses low, manage their inventory closely and retain the energy to run their family business, they will thrive. Imagine if that management capability, sense of ownership and drive became available to a corporate retailer.

At the same time, surely the sourcing scale and marketing muscle that are available to retail chains could be useful to an independent retailer, and help him build more business.

The fundamental successful structure for franchising is identical the world over. The franchiser is an entrepreneur or a company with a product or service that has a market beyond what he can immediately service. The franchisee is an entrepreneur who wants to have the pleasure and privilege of being a business owner, but would also like to benefit from being part of an organisation.

For a win-win, both franchiser and franchisee have to bring something to the table, they both have obligations and responsibilities and both have rights. The framework of the franchise relationship has to be clear in defining these, and yet allow operational flexibility. The partners must also be able to break-away if things don’t shape up the way they have planned, without being too restrictive of each other after the break-up.

The Indian market is not new to franchising. Lifestyle products such as apparel, footwear and others have franchise networks that date back to the 1960s. However, food retail has only seen sporadic attempts at franchising (many of them unsuccessful).

Some of the problems can be tackled by improving the operational and system rigour, while others (such as how do you manage fresh produce consistently at franchise outlets) may be insurmountable in the short term and will require some constraints to be built into the business model.

I believe food and grocery retailers need to explore the option of franchising for faster and possibly more efficient growth, and for encouraging a spirit of partnership in the development of the grocery retail sector. Inclusive growth is a trite phrase, but very true in this context.

India has been and will remain a land of entrepreneurs, and companies would be wise to co-opt that energy.

Who knows – you may even be giving birth to a retail giant. After all, Sam Walton also began his business as a franchisee of another company.

Oswal Group is a premier textile group of northern India having its corporate office at Ludhiana,Punjab. The organisation has been for the last 40 years with spinning as its core competency. Earlier, they were part of the Vardhman Group but, after family settlement between two brothers in 2003, they named themselves as Oswal Group. The group is mainly into spinning and dyeing of all types of yarn in different blends and manufacturing of garments. In 2004, Oswal group forayed into innerwear business under the brand of ‘Sensa’ with a view to cater to the growing ready-to-wear fashion apparel market. Thereafter, the company renamed its retail innerwear business as ‘Straps’, offering lingerie, nightwear and maternity wear in 2006. And finally in 2008; Oswal Retail decided to wind up its innerwear business and close down its 22 exclusive outlets of ‘Straps’.

Market still in nascent stage

As per reports of study conducted by leading retail consultants, Oswal group had pegged the intimate wear retail market in India at a whopping Rs 2,200 crore and it was expected that it would touch Rs 4,000 crore mark by 2009. The company had planned to capture five per cent share of this market by 2010. Commenting on the market scenario, Pradeep Seth, CMD, Stadia Group, says, "The main reason for suddenly deciding to shut down all stores could be the financial losses in the business and not seeing the growth potential as was envisioned. The markets chosen for Indian Lingerie were probably right but there could be a reason that the more elite class still prefers to wear foreign brands which they purchase from abroad. The other population may still be having cheaper options. However, the reasons for closure could also be mismanagement."

Too many stores too fast

Oswal group had ambitious plans to open ‘Straps’ stores across the country. They opened 22 stores across Delhi, Gurgaon and Ludhiana and had committed investment of Rs 60 crore in this venture and planned to open 120 exclusive stores by 2009. It even tied up with several premium foreign intimate wear brands including Italian ‘Parah’, Rene Rofe, Wonder Bra and Women Secret of USA, Body Line and Moon Dance, which were sold through Oswal retail outlets.

Re-branding did not work

Re-branding is an exercise requiring meticulous plans and execution in order to retain its brand identity in the market. A company generally goes into re-branding after 10 years or more, when they feel that, with changing times, their brand too needs to be upgraded and consumer too needs the fresh look. Commenting on re-branding as a solution, Devangshu Dutta, Chief Executive, Third Eyesight, says, "The particular reasons behind Oswal’s decision to close down the chain will be best given by the company itself. Normally, if a company wishes to sustain the retail business, specific store-related decisions (changing the design, closing some stores, re-branding etc.) can certainly help. On the other hand, if the management wishes to exit the entire business for some strategic, operational or personal reasons, then there are essentially two options: either to sell the business or to close it down and book the losses."”

Lack of consumer interest

With everything being right in order, one very important thing the company skipped on was tile customer behavior commenting on consumer preferences, Mr Seth says “one reason is that more elite classes still prefer to wear foreign brands, which they purchase from abroad. Another reason lies in the possibility that people are still having cheaper options. However, reasons for closure could also be mismanagement. "

Possible solution

Is there a possibility that the company can be saved from such sudden closures of outlets? Can closing down of non- performing outlets or re-branding the brand be an option for survival? Or, is shutting down all the stores the only possible option? Talking about feasible solutions to this problem, Shubranshu Pani, President Retail Advisory Services, Jones Lang LaSalle Meghraj, says, "Normally the solution for such cases is a merger possibility with a known chain that is either into similar business in India or merger/acquisition by a foreign brand that may be looking for a foothold in India. Re-branding and shutting down of non-performing stores are solutions sometimes exercised by retailers to boost performance and cut losses. But many a time, retailers resort to sales and discounting. Some retailers abroad also resort to rationalization of format-size.and merchandising. For example, many ‘mom & pop stores’ and medical stores have started keeping other products like CDs, stationery and FMCG products. Getting a store chain out of trouble needs introspection and’ innovation. While reworking on space strategy is definitely required, it also calls for an overhaul in operations and client interaction." Giving his opinion, Mr. Seth says, "Normally, the solution to such cases is a merger possibility with a known chain that is either into similar business in India or merger-acquisition by a foreign brand that may be looking for a foothold in India."

The industry is looking for directions to improve its manufacturing and sourcing skills. Third Eyesight is providing important inputs for the same by organizing series of workshops and training sessions for the industry.

The apparel and textile industry has grown and matured a lot over the last few years – from an unorganized to an organized sector. However, this in turn has increased the need for constant improvement and upgradation of knowledge and skills. Keeping this in mind, various companies and consulting agencies are these days conducting regular workshops and training sessions and are trying their best to contribute to the growth of industry. Third Eyesight, a Delhi-based consulting firm, is following the same track and has taken the job of organizing a series of workshops related to the industry. The firm recently presented its first series of industry-focused workshops and seminars under the tag name Third Eyesight Knowledge Series@ on Textile Facts &Fabric Sourcing. The Third Eyesight Knowledge Series@ comprises several workshops, designed and developed to help functiona heads, line managers and executives, who upgrade themselves and attain product expertise. Moreover, the workshops have been designed as an integrated series where each module is complete and self-contained that allows participants the flexibility to attend either complete series or select independent modules according to their requirements.
The first part of series that was held in Delhi focused on clothing, textile and fashion industry. It covered topics related to Product Development, Supply Chain Management, Fabric Sourcing, Merchandise Buying and Planning, Business Communication and Fashion Brand Management. The prime
The workshops have been designed as an integrated series where each module is complete and selfcontained that allows panicipants the flexibilitvto aRend either complete series or select independent modules
objective of the event was to impart information about fabrics that are usually used by the apparel industry; identify the sources of these fabrics in the domestic and international source markets; understand costing of textiles ba1>edon the value addition and finishing processes carried out on them and acknowledged participants about end uses of textiles.
Sharmila Katre, Consultant at Third Eyesight, has been associated with the Clothing and Textile Industry for the last 28 years, conducting programmes and enlightening the participants about the facets of this industry. She has been teaching the subject at various fashion institutes including the NIFT,Pearl Academy and the Institute of Home Economics in Delhi.
Professionals from different brands, retail business and those engaged in design and product development participated at the event and appreciated the content of the workshop and the way concepts were presented. They felt that topics were very current and relevant to their requirements. Many mentioned that the workshop helped them in acquiring understanding of the basic and primary raw material, and resource of the business in their own company. Participants liked the one-onone interaction sessions between the workshops as they realized that many problems faced by them were common across the industry and were able to share opinions and suggested solutions. The next workshop in the Third Eyesight Knowledge Series@ would focus on Creating and Managing Fashion Brands and will be held at the ITC Sheraton, Delhi on 23rdAugust.

Source: ApparelOnline

By Rasul Bailay

MINT (Exclusive Partner The Wall Street Journal)

NEW DELHI, 11 August 2008

As costs rise and economic growth slows, Indian retailers are looking at ways to trim expenses and protect their profits.
Pantaloon India Ltd, the country’s largest listed retailer, has begun integrating the management, marketing, human resources, or HR, and information technology, or IT, departments of its units into one. The company says this one step will help it save around Rs. 165 crore (Rs. 1.65 billion) a year.

“It is only cost and efficiency that we are focusing on now,” said Kishore Biyani, managing director of Pantaloon. “Instead of having separate management, administration, HR and IT teams for different business units, we are merging them. So all the smaller businesses are getting managerially integrated into the larger ones.”

This essentially means the company will have a common HR team, one IT team and one management for all its business units. Pantaloon is also planning to prune its advertising budget, reduce electricity bills and cut packaging costs.

The company recorded a revenue of Rs. 3,236 crore (Rs. 32.36 billion) and net profit of Rs. 120 crore (Rs. 1.2 billion) in the business year ended June 2007.

Inflation, which has jumped to a more than a 13-year high of 12.01%, on the back of a surge in food and fuel prices, increasing interest rates and concerns of a slowdown in consumer spending, are for the first time casting a shadow on the ambitious expansion plans of organized retail companies.

Rapid economic growth in the past three years had prompted retailers to step up spending on opening new outlets, hike marketing and advertising budgets and spurred a frenzied hiring spree.

“Unlike mom-and-pop stores, large retail formats have much higher cost obligations,” said Devangshu Dutta, chief executive of retail consultancy firm Third Eyesight, based in Gurgaon. “Organizations with larger cost heads will be first to get hit in case of a slowdown.”

Shoppers Stop Ltd, the country’s No. 2 listed retailer, said it was studying options for cost rationalization and will take steps to prune overheads. “If the company fails to achieve its sales target, then there is a possibility of reducing costs to that the company’s revenue target is protected,” said C.B. Navalkar, chief financial officer at Shoppers Stop.

A recent study by Mumbai-based Edelweiss Securities Ltd said Pantaloon’s “same store”—stores that have existed for more than a year—grew between 11% and 12% during July 2007 and May 2008, compared with 16-17% a year ago.

Though Shoppers Stop maintained the same stores growth was 20% in fiscal year ended March 2008, Edelweiss says it came mainly from price increases rather than growth in volumes.

Subhiksha Trading Services Ltd, which operates the country’s largest chain of discount stores, said it had no special plans to prune costs. “We are a low-cost (retailer) and cost- cutting is a perpetual part of our life,” said R. Subramanian, its managing director.

Reliance Retail Ltd said the company is still in investment mode and has no plans to launch any cost-cutting drive. “For us, it’s business as usual,” said a top Reliance official, asking not to be identified.

Some retailers are even seeing a silver lining in the economic slowdown. Sky-rocketing real estate rentals, which had doubled in the last three years, have stabilized. “There is a perception among the retailers that there might be a slowdown and (rental) prices might cool off,” says Shubhranshu Pani, president for retail services at real estate consultancy TrammellCrow Megharaj. “Some of them are optimistic and feel that in some pockets the prices will fall.”