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Carrying and Being Carried

Are you being carried, or are you carrying others?

To know the answer to that question, bear with me while I take you on a short mental journey through the emerging landscape of “ethical business” and to the stories at the end of this piece. (Okay, you can cheat and skip ahead, but I would really prefer you to read through the whole thing.)

For the most part sustainability and responsibility – or “corporate social responsibility” (CSR) to use the proper jargon – is seen as more relevant to the western economies, rather than the emerging economies like China, India and Brazil.

The pressure to do the ‘right thing’ is like a carpenter’s vice, whose one jaw is public opinion and the other is regulation, together squeezing ever tighter on corporate business. Clearly, there is a significant portion of customers in western markets who are vocal in expressing their opinions on business practices that are seen as wrong or unethical. On the other side, judicial implementation of regulations is also extremely stringent.

In fact, in the last 10-15 years CSR and sustainability have become far more important to top management in western economies since the real penalties in terms of negative impact on the brand and financial penalties through regulation and litigation are extremely high. Multi-billion dollar businesses certainly have much at risk, as demonstrated by well-documented PR disasters of large brands and retailers in the last decade or so. The variety of issues they have faced has covered sweatshop factories, child-labour, product safety, food adulteration and many others.

Since the mid-1990s there has been a steady increase in CSR initiatives, or at least an increase in initiatives that are labelled under the CSR umbrella. There is no doubt that there is good intent behind many CSR initiatives.

Some of these are focussed on improving the core business processes and practices of the company, and have measurable improvement goals that also have a positive impact beyond the company itself. These can truly be called socially-responsible corporate initiatives.

However, one can’t help but question many others which are fuzzy in their impact on both within the business and outside. The motivation of this type of initiative seems to be a two-pronged PR effort: firstly to get positive PR for “good work” mostly unrelated to the business and secondly, more importantly, to avoid negative PR for poor or questionable business practices in the company’s mainstream products or services.

Lest I sound too cynical about the corporate efforts, let me say this: there is also lack of clarity and agreement in non-corporate circles about what constitutes “corporate social responsibility” or “responsible business”. The label is relatively new to mainstream management thinking and very mutable. Social responsibility, ethical business, sustainability are all terms that are broad-based, used interchangeably, and are open to interpretation which can change with the context. (I wrote about this in an earlier column “Corporate Responsibility – Beyond Babel” about 18 months ago.)

And that brings me to four separate incidents that happened recently, which are (in hindsight) neatly threaded together with a common thought process. (Thank you for your patience so far!)

The first was a discussion recently initiated by an international organisation about what could motivate Indian brands and retailers to make moves in the area of corporate responsibility, whether regulations needed to be tighter or whether it would be consumer pressure that would bring about a change. The underlying assumption – right or wrong – was that, as corporate entities, Indian retailers and brands were not sufficiently motivated to take significant and visible steps towards making their businesses more sustainable and socially responsible than their current state. The discussion was inconclusive, with many different, all potentially valid, points of view on the subject.

Very soon thereafter, I had the opportunity to participate in a dialogue with Gurcharan Das, the philosopher-author who, in his last corporate role, was Managing Director – Strategic Planning for Procter & Gamble worldwide. The dialogue primarily centred on his latest book: “The Difficulty of Being Good”. There was much debate and discussion on the wider consequence of individual actions and especially of those in positions of authority, highlighting the importance of individual choices.

A few days later, in a totally different context and with an entirely different person, the third incident occurred, when I was told an updated version of an old story to demonstrate the power of “a few good men” (and women). The story was as follows:

“50 people were travelling in a bus. Part-way through the journey, the weather suddenly turned stormy, with massive thunder and lightning bolts cracking all over the place. At times it seemed as if lightning would strike the bus and kill everyone on board. Then, someone proclaimed that there was someone on the bus whose end had come, who the lightning was seeking, and that it would be better for everyone else to get that person off the bus. The driver stopped the bus, and each person was sent off by turn, to go and touch a tree at a distance. 49 people got off the bus and returned unharmed after touching the tree. Then, as the last person got off and walked away from the bus, the bus was struck by a massive bolt of lightning.”

I thought this was a gruesome but effective moral science tale! During the next few hours I went about my activities, but kept mulling over the lesson(s) in that little story.

Then, that very afternoon, I got an email containing the following thought: “…when it looks like the whole place is going to implode – with pollution, disease, and war; famine, fatigue, and fright – there are still those who see the beauty. Who act with kindness. And who live with hope and gratitude. Actually, they carry the entire planet. (Mike Dooley)”

In looking back to the article 18-months ago, I closed the loop: it is the individual manager, who is also a citizen in a community, a consumer, and as a parent a stakeholder in future generations, who has to make the choices. His or her choices – both right and wrong – do have an impact beyond his or her own life and business. The so-called triple bottom line – profit, people (community) and planet (environment) – are irrelevant unless the first question is answered: “what does this mean for me?”

So as we go about our day, launching and growing brands, opening new stores, creating new products, I offer you this thought to reflect upon: are we carrying, or being carried? Is the bus safe because of us, or are we the ones the lightning is seeking?

[Go to the earlier post: “Corporate Responsibility – Beyond Babel“, December 2008]

Textile mills ride realty boom to sell land, raise cash

Reporting by Aniruddha Basu; Editing by Harish Nambiar

Reuters, Mon May 31, 2010

India’s top textile firms are generating additional revenue streams by developing or selling precious real estate as land rates rise in a buoyant economy.

Bombay Dyeing & Manufacturing, Century Textiles & Industries, Provogue India and Alok Industries are some of the firms intent on developing or selling valuable land parcels to boost cash flow and cut debt.

Property prices in major Indian cities such as Mumbai and Delhi have nearly doubled in the past year, as home and office buyers return and mortgage rates are still in single digits.

Mumbai is rated among the most expensive office locations in the world.

"There are a lot of companies who have huge land banks. But the issue is market gives valuations to only those companies which have come into the market for development of these landbanks," said Kishor P Ostwal, chairman of brokerage CNI Research.

Ostwal has a "buy" rating on both Bombay Dyeing and Century who have premium large tracts in central Mumbai.

Bombay Dyeing, which has around 9 million square feet in Mumbai alone, recently sold a property to Axis Bank for 7.8 billion rupees, according to a statement by Shree Nath Commercial & Finance, the broker to the deal.

The firm has relocated its textile mills outside the island city near Pune and the land freed has been earmarked for two real estate projects in central Mumbai, Ostwal added.

Century Textiles, with 16 hectares in Worli in central Mumbai, is constructing two commercial buildings to be completed in 12-15 months.

Most old mills in Mumbai received huge tracts of land "almost free of cost" during colonial times from the British, who were keen on developing the city as textile centre for cotton because it had the right conditions, Chandrashekhar Prabhu, an urban development expert said.

"A number of mills had got land for a nominal lease for industrial use," making Mumbai an important textile producing centre, Prabhu said.

A crippling industrial strike in the early eighties saw the textile sector collapse and mills silenced. Over the past five years the state government of Maharashtra, of which Mumbai is the capital, allowed more land from textile mills to be used for real estate development.

Analysts said mill owners are finally getting to reap the benefits of this provision with land rates on the rebound.

"It is a strategic move. It would unlock financial value for the mills and help the city as well, because you would have real estate coming onto the market," said Devangshu Dutta head of Third Eyesight, a textiles consultancy.

Not all firms are developing their land, though. Alok Industries for instance, is planning to exit its real estate portfolio lock, stock and barrel to cut debt.

Alok expects about 7 billion rupees through sale of four large blocks, including properties in the heart of Mumbai.

"We should be able to sell a major chunk in a year. We have a big land parcel at Lower Parel (in central Mumbai), that’s a major portfolio. We will look at selling that property within one year," Chief Financial Officer Sunil Khandelwal said.

BUILDING TO GROW

Not all are selling land in premium metros of India. Apparel retailer Provogue India, for instance, is getting ready to launch a residential project in tier 2 cities.

Provogue is planning to launch three residential projects in Indore, Nagpur and Coimbatore by the year-end, on land owned by Prozone Enterprises in which Provogue holds 75 percent.

The first phase of the housing project will span 34 acres across the three cities, its deputy managing director, Salil Chaturvedi, said earlier this month.

The developed value in the first phase of the residential project at Indore alone was pegged at 3.5 billion rupees, Chaturvedi said.

"The question is will this prove to be a sustainable source of income or just one-time gains. That would depend on a company’s capability to handle it. Different companies would handle it differently," Third Eyesight’s Dutta said.

Malls – Surviving the Slump

By Vishal Krishna

Businessworld, May 28, 2010

Even the cautious are now convinced about the Indian recovery. The GDP projections are creeping up, production figures look good and, more importantly, demand is back. Organised retailers are heaving a sigh of relief with an uptick in sales after a bad year. But one group in the organised retail business is still not smiling: the mall owners.

The usual practice for mall owners is to have a revenue-share agreement with retailers. Most get about 5-7 per cent of monthly net sales, and if sales fall below a minimum level, the builder gets a fixed rental. A workable business model in ordinary times, this arrangement came under pressure when retail sales slumped last year. Things have improved in the past three months; sales are up 10 per cent as per industry estimates. But they are still a far cry from the 25-30 per cent growth of three years ago, which formed the basis of the revenue-share model. Some, however, believe that it is only a matter of time before the mall owners get their share. “Sales have picked up this quarter,” says Govind Shrikhande, CEO of Shoppers Stop. He says builders will have to be reasonable in their expectations and that in the long run the revenue-share model would benefit both parties.

Other experts believe that mall owners will have to think of new ways to drive business. Either find out the right mix for their malls, or explore the possibility of switching to commercial or housing properties as they offer quick cash exit. “Developers are struggling to think through what mix they can provide and make viable in that amount of space,” says Devangshu Dutta, CEO of Third Eyesight in India.

Throwing Anchor
When Sushil Mantri began building Mantri Square in Bangalore for Rs 900 crore, he realised that investing in organised retail was going to be a financial risk, and that it could also offer tremendous rewards if it succeeds. “Most builders now have three or four anchor tenants to increase the turnover per sq. ft,” says Mantri, MD of Mantri Developers. He says the job on the mall owner’s side was to engage customers. “We collect data on the sales of retail chains in our mall on a daily basis and then sit with them on ways to increase footfalls,” he says.

The mall owner-retailer relationship is changing too. One such change is that retailers are now pushing for sharing their revenue on usage-per-carpet area, unlike three years ago where rentals were also charged for the common area around the store. “Usually builders do revenue share with anchors and sell off the smaller stores to retailers. But the land will essentially be with the builder,” says Abhishek Malhotra, vice-president and partner of consumer practice at Booz & Company in Delhi. He says while retailers need deep pockets to survive, builders work on a yield basis for increasing revenues.

“Anchor stores in malls are beginning to pick up. But, the mall story is still slow in India,” says Dutta. He says smaller stores in malls are paying higher rentals and have not been able to manage their operational expenses. Whereas, retailers such as Shoppers Stop, Spar and Lifestyle have pared down their rentals below Rs 60 per sq. ft to be anchor tenants in large malls such as the 1.7-million sq. ft Mantri Square in Bangalore.

Restructuring Drive
Some believe that though macroeconomic factors such as rising incomes and industrial development would keep the mall market busy, only a few would survive in the future. “This is the time that we have to expand across India, as the space will saturate in 10 years,” says Atul Ruia, promoter of the 1.5-million sq. ft Phoenix Mills in Mumbai, in a previous interview. The company is expected to open 15 malls in five years and is likely to spend over Rs 600 crore in this space.

According to property research firm Jones Lang Lasalle Meghraj (JLLM), there are over 240 malls in India and 30-40 more are expected by the end of this fiscal. “Expansion is still the buzzword in the shopping mall space,” says Shubhranshu Pani, MD of retail services at JLLM in Mumbai. But, he says, fund flows continue to remain an issue because most projects are not tied with funding bodies in a structured manner. Mall launches are also plagued with licensing issues and government clearances. Over the years, in order to attract retailers, developers have been committing deadlines they cannot realistically adhere to. This has forced retailers to go slow on their expansion plans. Retailers, therefore, want a cushion effect in the form of lower rentals or a revenue-share spread over a long period to make up for the delay.

“Large retailers in malls and standalone properties have seen a growth of 10 per cent over the past two months,” says Pinaki Ranjan Mishra, partner and national leader of consumer practice at consultancy firm Ernst & Young. He says the industry will see an upward trend because of their expansion into tier-2 and tier-3 cities, but he believes that metro properties will grow at a nominal pace. Currently, small towns have a 38 per cent share in the organised retail space, with the top 10 cities accounting for 60 per cent of organised retail penetration. But, even in tier-2 and tier-3 cities, the challenge for mall owners will be to decide what mix of retailers they want. For example, analysts say, of the 40 million sq. ft recorded by the end of 2009-10, only food courts – which occupy just 5 per cent of the space – seem to be the most profitable for mall owners.

According to Ernst & Young, retailers across various formats were resizing and relocating non-profitable stores. Last year at least 4 million sq. ft of retail space shut down. Analysts estimate that at least 2,300 stores spread across malls and prime locations were closed.

Kim Culley, an expatriate from England, has been in the mall business for 30 years. Culley is anxious about his new Rs 750-crore project in Chennai, the 1.1 million-sq. ft Express Avenue mall. “I have been in charge of malls around the world and in this business you have to be fresh,” says Culley, COO at Express Infrastructure. He says after the initial momentum of sales dies, footfalls depend entirely on the builders’ ability to pull customers with attractive promotions.

Clearly, mall owners have to innovate to survive.

[From BusinessWorld]

Policy Blow On Cash & Carry

By Vishal Krishna
Businessworld, 24 May 2010

A change in rules may have put a pause on organised retail’s expansion

Just as French retailer Carrefour prepares to launch wholesale cash-and-carry (C&C) operations – a key part of the supply chain – in India, the government stunned the organised retail companies with a clarification on the rules that govern the C&C business. Now, any retailer tying up with foreign C&C wholesale businesses can source only 25 per cent of the stock keeping units (SKUs) from such a venture.

By implication, the C&C business will effectively have to supply 75 per cent of the SKUs to kirana stores. Analysts estimate that there are more than 50 million of these small and medium businesses in India; 90 per cent of them are kirana or mom ‘n’ pop stores.

The announcement reiterates an election promise that the Congress party made, since organised retail business was perceived as a threat to the kirana stores – apart from a host of middlemen – whose owners make up a vote bank too large to ignore. The announcement also comes amid rumours that Carrefour could tie up with Kishore Biyani’s Future Group to help build their retail outlet Big Bazaar.

"This decision can affect those retailers whose front-end businesses are supported by the cash-and-carry business," says Devangshu Dutta, chief executive officer of consultancy Third Eyesight in Delhi. Bharti Wal-mart has one cash-and-carry unit that supports its front end ‘Easy Day’. There are nine such stores in the Delhi and Punjab regions.

Even Trent’s Star Bazaar, which has more than 50 stores across the country, will have to wait for its UK partner Tesco to begin C&C operations by end of this year. The government’s rationale is that letting C&C tie-ups with organised retail make sense only when kirana stores collectively are part of India’s retail growth story – estimated at $350 billion by global consulting firm Ernst & Young (E&Y).

"The wholesale C&C business will effectively give kiranas a chance to modernise and organise their stores," says Pinaki Ranjan Mishra, partner, consumer practice, at E&Y. Even then, India’s retail business will be driven by the kirana stores supported by distributors, agri-middlemen and traders.

"The policy will hurt those players who have cross holdings in both retail and C&C business," Mishra adds.

But will organised retail chains actually drive costs so low that they could wipe out the middleman through the C&C business? True, supply chain efficiencies are dismal. Kiranas, on the other hand, have very low operational expenditures on fast-moving consumer goods (FMCG) – they do not include power and labour. That allows them to drive costs way down and yet stay profitable. And with food and produce, kirana stores can mark up transport costs and still deliver cheap goods to customers, something organised retail is unable to do. Organised retail does not make profits from food; they mark down food products, but gain through impulse purchase of FMCG items.

Although tying up with the C&Cs drops supply chain costs, the government still puts organised retail on the back foot. "By 2013 all the top global retailers will be here. The success will depend entirely on changes in shopping habits," says B.S. Nagesh, vice-chairman at Shoppers Stop and interim chief executive officer, HyperCity, in Mumbai.

But the current note on what a C&C business can actually do will make front-end retail merchandising teams go back to the drawing board and realign business strategies. The C&C businesses, which include Germany’s Metro, Bharti Wal-mart, Star Bazaar-Tesco, Shoprite and Carrefour, have invested over Rs 2,500 crore in India so far. Changing the rules may not necessarily derail organised retail’s ambitions.

(From Businessworld.)

Chargebacks – the Ugly Side of Retailer-Vendor Partnership

A lively discussion / debate took place on Retailwire.com about whether retailers were using chargebacks as justifiable penalties for poor performance by vendors or an unjustified means of generating income for the retailers.

The fact is that fees, discounts and chargebacks are becoming more common, and in private conversations – when no retail customer is within earshot – vendors will verify this. Retailers say that such chargebacks are only compensation for vendors not complying with processes that have been clearly laid down and agreed to, since non-compliance creates extra costs for the retailer, or loses the retailer margin.

But is vendor performance really becoming worse with each passing season? Or is it that difficult trading conditions or insufficient skills are making buyers take this easy road to margin?

It’s an open secret that merchandise quality and delays – the two most common causes for chargebacks – are easily overlooked when the market is hot and the product is in demand.

Chargebacks are a dangerous tool in the hands of a lazy, short-term thinking buyer who is incentivised on gross/realised margins from season to season; to him/her they are a quicker way to get to that bonus check for the season. Pragmatic vendors, for the most part, don’t want to antagonise the buyer because that risks not just business with the current retail customer, but any retailer that the buyer moves to in the future.

It’s ironic that vendors are mainly cited as “partners” when it comes to sharing the retailer’s pain. I don’t recall any retailer calling such vendor-partners up to a stage for distributing checks to share extra margin in particularly profitable years. Comments are welcome from anyone who can remember that happening; we’ll all have something inspiring to quote in industry meets, then. (And I’m really hoping some comments quoting such incidents will appear soon!)

The Retailwire discussion on this topic (with comments justifying both sides) is here – “Clothing Vendors Take a Chargeback Hit” – and the original article in Crain’s New York Business is here – “Retailer fee frenzy hits designers“.

In a bid to boost sales, retailers turn to ‘happy hour’ discounts

Sapna Agarwal & Gouri Shah

Mint, Mumbai, May 18, 2010

Across Mumbai, New Delhi and Gurgaon, children’s apparel and accessories store Okaidi has been inviting customers for happy hour sales over the past week. No, the French chain hasn’t suddenly started selling drinks; it’s offering a flat 20% discount on the purchase of its usual T-shirts, chemises and other items between 10am and noon, Monday through Thursday.

The marketing mantra may sound incongruous outside a bar, but retailers from a range of sectors have started borrowing it to push sales in traditionally lean hours—betting that everyone loves discounts.

“It’s definitely a trend,” says Devangshu Dutta, chief executive of New Delhi-based retail consulting company Third Eyesight, adding that sectors such as organized retail, telecom and entertainment are adopting the strategy.

Retail analysts say that besides boosting revenues, the strategy eases seasonal and peak-time customer load and improves manpower utilization.

Fashionandyou.com, an e-commerce site that sells premium brands such as Moschino, Salvatore Ferragamo, Dolce and Gabbana, Hugo Boss and GAS at hefty discounts, last week introduced happy hours between 5pm and 8pm that let consumers win “free luxury gifts” every 15 minutes.

“We just wanted to offer our consumers some fun incentive to log on to Fashionandyou.com, but once the figures came in, we were surprised to see that the announcement had generated tremendous traction,” says Pearl Uppal, co-founder and chief executive, Fashion and You India Pvt. Ltd, which runs the website.

Uppal adds that traffic has doubled since the website announced the happy hours.

A few months ago, Cinemax India Ltd, which has 94 multiplex screens nationwide, introduced earlier-than-usual screenings of the film 3 Idiots. With 28 shows daily in some places, the first would start as early as 6am, with as much as 50% slashed off the ticket.

“My rentals and manpower costs are fixed. The only additional costs are electricity. But we managed to get a new set of audiences to walk into our theatres during those times,” says Devang Sampat, senior vice-president at Cinemax India.

The shows, which also offered free tea and biscuits, drew college students and senior citizens after their morning walks.

“It worked beautifully,” recalls Sampat, adding that the strategy has worked for other films too, pushing up audience numbers by at least 100%.

Okaidi, for instance, has registered a 200% hike in sales, says Neelu Mundra, sales manager at the Okaidi store in Mumbai’s Atria Mall. “Mornings are usually dull with hardly any walk-ins or sales,” she says, but adds that the promotion has seen sales grow three fold.

Candies, a multi-cuisine restaurant in Mumbai, offers 25% off on food between 8pm and closing time.

“Close to 15% of the day’s products are usually left unsold at the end of the day, but with discounts like this we see all our inventory sold with just 1-2% left unsold,” says manager Ashish Anton.

Dutta of Third Eyesight points out that retailer Big Bazaar offers deep discounts every Wednesday, which has traditionally been a weak day for it, while mobile service provider Bharti Airtel Ltd offers free or discounted rates during some hours to spread its load more evenly.

“It (promotions) typically also serves to attract new entry-level customers who otherwise might not have come—so if you take away the cost of customer acquisition, then these promotions become even more profitable,” says Neelesh Hundekari, principal at global consulting firm AT Kearney.

As a bonus, consumers who go for such promotions also tend to buy at full prices, helping them trade up at no extra cost, he added.

But happy hours pose some dangers as well. Managers at Okaidi are wary of letting the promotion wean away customers willing to buy at full price during peak hours between 5pm and 9pm, which are typically half of total sales.

“The objective is to increase the sale, assuming that the peak hour sales remain the same,” says Kamal Kotak, director, Major Brands India Pvt. Ltd, which manages Okaidi.

“The expectations from this offer is to see an increase in (overall) sales of 25-30%,” he said, adding that if successful, Major Brands could adopt the strategy for other brands they manage, such as Mango, Promod and Aldo.

This may be a challenge but it is not impossible, says Hundekari of AT Kearney. “People are used to different discounts at different times of the year; getting used to different times of the day is not very hard.”

He Wants More

Vishal Krishna
Businessworld, May 17, 2010

The outskirts of Bangalore, home to many large hypermarkets, see a lot of frontier action in retail. Recently, the Raheja Group’s hypermarket, HyperCity, opened a store in Mahadevapura, where the likes of Future Group’s Big Bazaar and the Jubilant Organosys-owned Total already enjoy a loyal clientele. But nobody was more anxious about fresh competition than the manager of More, which also has a store here.

As it turned out, “Our sales were not affected in the weekend in which the new store opened in our catchment,” says Kapil Agarwal, More’s vice-president, operations hypermarket (south), with relief. “The Mahadevapura store hopes to grow by 30 per cent this year.”

The $25-billion (Rs 1.15-lakh crore) Aditya Birla Group’s retail chain is on a quest to garner greater market share in the $350-billion (Rs 16.1- lakh crore) Indian retail market. More’s CEO Thomas Varghese says he has a strategy in place to get the company back on track. This newfound confidence comes after a three-year struggle with runaway overheads that saw More shutting down some 100 stores, in spite of which its balance sheet continues to bleed. Now, More has only 631 stores, including seven hypermarkets. To make up for the closure, More has had to scale up quickly to 3 million sq. ft of more affordable retail space.

Even as it focuses on hypermarkets and consolidates its position in the south, More is betting big on private label products that add up to 320 items or stock keeping units (SKUs). Varghese believes the company can grow only by driving private labels, something that Future Group’s Kishore Biyani has tried successfully at Big Bazaar.

Currently, market leader Pantaloon (Future Group) holds 10 per cent of the $20-billion (Rs 92,000 crore) Indian organised retail space. More expects its turnover to touch Rs 1,500 crore in 2009-10, up 30 per cent from the past year. It also hopes to break-even operationally by 2012, and is aiming to match Pantaloon’s share by 2015. It is a tall claim and tough to achieve: competition is growing and survival depends on large groups’ ability to sustain bleeding retail businesses.

Going Private

More’s private label gamble is one of the reasons why it has to be watched closely. “We are one of the largest private label players in the industry,” says Varghese. “Close to 17 per cent of our sales comes from our private label products. The share is growing by 50 per cent in the food category, and by 20 per cent in the fast-moving consumer goods (FMCG) category.”

In food items such as noodles and sauces, More’s private label sales touch 30 per cent of the sales. This is not unexpected. Globally, Tesco and Wal-Mart earn 55-60 per cent of their revenues from private labels, of which nearly 60 per cent comes from food, and only 45 per cent from FMCG. Like many large retailers, More too has its own brands such as Feasters (food category), Jaan (tea), Kitchen’s Promise (pickle) and Enriche (personal care), across 40 categories.

But industry analysts have reservations about More’s pre-emptive private label strategy. “In terms of branding, apart from quality and the category acceptance, private labels usually succeed when the retailer has managed to build brand equity at the store level,” says Sanjay Badhe, a retail consultant who has worked with the Aditya Birla Group. “More, on the other hand, is betting big (on its private label) even before establishing itself.”

In sheer numbers, More is close to Pantaloon, which has more than 50 private label categories that offer more than 350 SKUs. “The Pantaloon brands are now powerful retail brands that strengthen our lead in modern trade,” says Santosh Desai, CEO of Future Brands in Mumbai. He adds that powerful product brands also act as strong store differentiators in the long term.

Private label precedents have been established already in India. Pantaloon has the highest private label sales — close to 85 per cent in apparel and 35 per cent in food. Shoppers Stop credits 20 per cent of its turnover to private label. More hopes to achieve 30 per cent by 2012.

“We realised the potential of private labels with our project in Visakhapatnam,” says Farida K., assistant vice-president and private label head at More. The company realised that when more private labels were stacked along with FMCG brands, customers did not mind experimenting with More’s in-house brands. Now, More’s private labels account for 30 per cent of all sales in its 17 stores in Visakhapatnam.

More now works with 45 vendors through the 17 distribution centres it has created with warehouse space of 450,000 sq. ft to make timely deliveries. It also sources 25 per cent of its fresh food products directly from farmers, the rest from local mandis, and has eight farmer-linked collection centres across India for vegetables.

While Pantaloon has more than a thousand suppliers, according to Biyani, More wants private label to be its main business as it involves low supply costs, offers margins of up to 70 per cent, and forces FMCG firms to offer better terms of trade.

“Now, our strategy is not about expansion,” says Varghese. “We will add a few stores and keep shutting down unviable ones.” He wants to keep capex costs as low as Rs 1,500 per sq. ft over the next two years — the average capex for a retailer is about Rs 1,750 per sq. ft.

Analysts say More was successful in the south — 60 per cent of its stores are there, and 55 per cent of its revenues come from the region — after its acquisition of Trinethra Retail’s 160 stores, with an established supply chain and process in place. The deal cost More Rs 170 crore in early 2006. It was from Trinethra, a value retailer, that the Aditya Birla Group created the blueprint for More.

Paying For The Past

While More seems to be pulling itself out of trouble, it still has a long way to go. In mid-2006, Kumar Mangalam Birla, chairman of the Aditya Birla Group, gave Sumant Sinha, a former investment banker from the US, the charge of the group’s plans to compete with the likes of Reliance Retail. At that time, Reliance Retail had just announced its
Rs 25,000-crore plan to conquer India’s consumer market.

But when Sinha’s team suggested a strategy of rolling out only 10 branded stores in a region and offered a conservative plan on expansion, the board rubbished the strategy. “The board did not want to lag behind Reliance or Pantaloon, and it wanted to roll out 500 stores in six months,” says a source in the company. “So, the management team just signed properties at higher rates, without processes to support the stores.”

So by 2008, 730 More supermarkets were making high losses to high rentals, exorbitant staff costs and a disorganised supply chain. It nearly ended the conglomerate’s retail dream.

To make matters worse, the entire senior management of the retail chain was either asked to leave or shifted to other departments. In fact, some say the problem with the retail chain was more internal than at the store level.

More’s management and Trinethra’s CEO Pranab Barua had differences over the methods of running the business. Barua is now the member of the board and advisor to the retail chain. “We understand retail is a low-margin business,” says Varghese. “But when I took over the company, the overheads were extremely high.”

Varghese says he had little understanding of retail when he took over as the chief executive in 2008, but he had to act fast. He froze hiring, and shut down properties that had high rentals, which added up to 10 per cent of the company’s turnover.

In 2009, the company was paying a whopping Rs 731 per sq. ft of retail space as compared to Pantaloon’s Rs 573. Since then, More has renegotiated rentals for 90 per cent of its stores (see ‘It’s A Tough Business’ and ‘Repenting At Leisure’). Standard rentals are now below Rs 500 per sq. ft.

“Unless the rent is 4 per cent of the cost of sales, a retail business will not make money,” says Varghese. Usually, builders ask for 5-8 per cent of sales in a revenue-share model or charge high rent in case of lower sales, he adds.
However, a revenue-share model is not the perfect answer. Says Ajay D’Souza, head of research at Crisil, in Mumbai: “What matters is whether there is traction in going into organised retail. Only increased sales will determine if retail companies can sustain even the revenue-share model.”

Hypermarkets And More

As a sign of the times, all organised retail chains are bullish. Says Govind Shrikhande, CEO of Shoppers Stop: “Retail is coming out of the slump, and sales are on the rise.” Lower rentals and revenue-sharing models bring quicker profitability to retail chains, he says.

Retailers such as More see sense in opening hyper-format stores because of the large assortment of customers it caters to, the higher incidence of sales, and the absence of competition from kirana stores, which hit the supermarket end of modern retail.

In effect, hypermarkets allow corporate retailers higher efficiencies than neighborhood stores on equivalent square footage basis. “This happens because, for a given amount of management resource and possibly lower financial outlay, there is significantly greater sales turnover and higher margin,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy in Delhi.

By the end of this year, there will be two more hyper stores from More in Hyderabad, and there is talk of a property being signed for a possible hyper store in Chennai, taking its all-India tally of hyper stores in Mumbai, Ahmedabad and Nagpur to 10. It is expected that the new stores will cost Rs 10 crore each to build. “We want to create world-class hypermarkets,” says a confident Varghese.

The Aditya Birla board had devoted Rs 8,000 crore to its retail venture when it started out. Now, three years, Rs 2,300 crore and several setbacks later, More looks less upbeat. Its struggle for an identity is far from over.

[From BusinessWorld issue dated 17 May 2010]

Taming the CEO’s Nightmare

REVIEW: BEATING THE COMMODITY TRAP: Richard D’Aveni (Harvard Business Press)

In his latest book, Professor Richard A. D’Aveni focusses on a topic that most businesses should be acutely concerned with: the problem of commoditization. In interviews he has accurately described commoditization as “the black plague on modern corporations” and “a deadly disease that’s spreading like crazy”.

Certainly, if one had to pick the ultimate nightmares to keep CEOs awake at night, commoditization would definitely be among the top of the list. Specifically, given the economic uncertainties around the world in the last couple of years, business leaders who are not concerned about their products or services being turned into commodities are either supremely equipped to maintain their differentiation, or immensely deluded as to their capabilities to fight market forces. Prof. D’Aveni suggests that maintaining differentiation alone is not enough to sustain business.

A product or service becomes a commodity when it is not distinguishable from competing offerings and therefore not valued above the competition. Prof. D’Aveni views commoditization along two key attributes: the benefits or features that are being offered and the price (margin) that is available to the business. Based on his model, he has identified three types of competitive stress that a business could face:

  • Deterioration: In a deteriorating market, competitors present low-cost and low-benefit offerings that appeal to the mass market. This is possibly commoditization in its “purest” sense, where the customer ends up valuing the lowest price over and above any other benefit or feature. In this scenario a business can either get stuck in the commodity trap, fighting an ever downward spiral of price and cost minimisation, or could marginalize itself to a niche where it can protect its margins.
  • Proliferation:  According to Professor D’Aveni, a proliferating market constantly sees the emergence of new combinations of benefits and price that serve specific segments. This is not about the business offering turning into a true commodity, but extreme differentiation and proliferation of choice do make it difficult for businesses to create a clear value statement that can be priced above competition. Professor D’Aveni describes this as “being squeezed in the middle of a pack of piranhas” which are snapping away pieces of the market.
  • Escalation: This form of commoditization is possibly the most prevalent in industries that are prone to disruptive changes (such as technology, consumer electronics and communications). Simply put, extreme competition here results in more for less, as each competitor goes one-up in terms of offering more benefits for the same price, the same benefits for a lower price, or at its most extreme, higher benefits for a lower price. Prof. D’Aveni suggests that companies try and control this downward momentum.

The book suggests competitive strategies that a business could take to avoid getting caught in the commodity trap.  These strategies can be boiled down to the biological choice: fight or flight (escape). Professor D’Aveni echoes the basic warfare strategy laid out by many military and business strategists through the ages. He suggests that businesses need to gauge the opponents, choose their battles, and pick opponents against whom they can win. He also calls for pre-emptive action: where companies can, they should either change the business environment to avoid commodity battles entirely, or initiate the battle of commoditization and control its direction and momentum.

In fact, anticipation and pre-emption is the key to avoiding the commodity trap. To help with this, Prof. D’Aveni offers a relatively simple framework to analyse a current market situation in terms of a price-benefit matrix, and to identify the advance corrective actions to be taken.

The book is short and straight-forward enough to pick through a domestic flight, or to read in the back-seat during a long commute between office and home. The easy to understand framework gets the messages across quickly. In analysing the variations of commoditization, both in consumer and business oriented industries, the Professor also offers up something for everyone.

However, the book’s strengths also turn out to be among its biggest weaknesses. The book would have benefited from more depth to each of the concepts. Skipping quickly from one area to the other, in some places the book risks losing coherence of thought.

Some short books are like downhill hairpin bends on a mountain road; Prof. D’Aveni’s book is one of those. Much as you might be tempted to go fast, it’s advisable to go slow. If you speed through it, you might miss a nugget that actually makes sense to your business.

One of the other grouses I had was with the examples quoted. The predominantly US market examples reduce the book’s relevance for a global audience – the Professor presumes the reader will know the company and its context well enough to understand the lessons being discussed. In some cases the examples are incomplete and possibly even incorrect: one such is the example of Zara. The broad-brush attributes Zara’s business success to turning fashion into commodity, and ignores the fact that fashionability and desirability are a cornerstone of Zara’s offer, not the cheapest price. Others would possibly be far more accurate examples of commoditization in the context of price.

However, if you are sufficiently concerned about the possibility of being commoditized out of profitability, or being marginalised out of market share, I would suggest that you could easily overlook these flaws. The fundamental premise of the book is far too important to ignore. [Beating the Commodity Trap on Amazon]

(This review was written for Businessworld.)