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Consultants, developers set up mall management firms

MINT, July 26, 2011

Sapna Agarwal

Mall developers entering an increasingly crowded market are calling in experts to help them design and run their new projects. One such expert estimates that professional managers will be involved in every four out of five new malls that will open for business in the coming months.

Currently, one out of five malls is run by professionals, according to Sanjay Dutt, chief executive officer of Jones Lang LaSalle Property Consultants (India) Pvt. Ltd, a real estate consultancy services firm.

Quite a few firms, including Beyond Squarefeet Advisory Pvt. Ltd, Pioneer Property Zone Services Pvt. Ltd, Star Shopping Centres Pvt. Ltd and Prop Care, a division of real estate developer Mantri Group, are offering such services.

Even multinationals, including Jones Lang LaSalle Property Consultants, Knight Frank India Pvt. Ltd and CB Richard Ellis, which offer property consultancy, development and management services, are setting up separate divisions to cater to the growing demand of managing malls.

Such companies commit to the developers assured revenue and occupancy. In a builder-operated mall, the space is usually pre-sold to investors and retailers and the mall owners are not involved in driving footfalls.

In the new business model, consultancy fees are typically linked to incentives based on key performance indicators such as occupancy levels and rentals, said Dutt. The change is a result of the mall developers’ realization that the way a mall is managed has a direct impact on revenue and rentals.

“Professional management has a critical role to play to ensure the success of a mall. The combination of tenants and contracts is critical,” said Richard Cuthbertson, research director, Oxford Institute of Retail Management, Said Business School, University of Oxford. He has been conducting research at the International Management Institute, Kolkata on the future of India’s retail business.

“Organized retail is expected to add approximately 10 million sq. ft of new retail space spread across 50 malls in the next two years. About 300 malls now make up the organized retail space in India, spread across 50 million sq. ft,” said Anshuman Magazine, chairman and managing director, CB Richard Ellis.

India’s largest retailer by market value, Kishore Biyani, is also dabbling in this space. His venture capital arm, Future Ventures India Ltd, has invested in Star Shopping Centres, a three-year-old company that manages malls.

Star Shopping Centres signs up a property for 18-24 years and takes the responsibility for the entire asset as a tenant, offering the developer a guaranteed rent. It is working on three projects spread across 2 million sq. ft, has got proposals for 10 million sq. ft of new business but may take up 3 million sq. ft, according to Pranay Sinha, its co-founder.

Running a successful mall is not just about the right location. It includes getting the right tenants, merchandise mix, understanding the competition and marketing. Also, over the lifetime of the mall, it requires managing the facility, monitoring sales, planning events to keep the buzz alive and collection of lease rentals and so on.

“On an average, a mall operator needs to interact with hundreds of people regularly to run a successful mall,” said Susil Dungarwal, founder, Beyond Squarefeet. The developer may not have the bandwidth or know-how to do this and this is where a firm like Beyond Squarefeet steps in.

The rapidly growing sector is also facing a talent crunch. “Hiring a consultancy firm ensures continuity in services,” said A.K. Beri, managing director, West Asia property and asset management, Jones Lang LaSalle.

Organized retail accounts for 8% of the overall retail trade in India.

With competition intensifying, new malls are often being launched in close proximity to existing ones. Since they offer better experience and service, old malls run the risk of losing business. “A mall has to constantly evolve and upgrade service offerings to ensure footfalls and conversions,” said Devangshu Dutta, founder of retail consulting firm Third Eyesight.

“We have got a lot of enquires for providing such services and are now setting up a mall management division for end-to-end services,” said Rituraj Verma, national director, Knight Frank. His colleagues in Singapore are helping to set up the new wing.

To be sure, outsourcing mall management doesn’t work for everyone. For instance, Select City Walk has built up its inhouse capabilities after a failed experiment with an international mall operator. “We are learning as we proceed,” said Arjun Khanna, director, Select City Walk mall, promoted by Select Infrastructure Pvt. Ltd. The international consultant struggled to manage expectations. “There are very few people who can run it with passion the way we do,” said Khanna.

(This story was published in Mint, a partner of the Wall Street Journal.)

Will the Indian Apparel Sector Change its Fashion?

The apparel retail sector worldwide thrives on change, on account of fashion as well as season.

In India, for most of the country, weather changes are less extreme, so seasonal change is not a major driver of changeover of wardrobe. Also, more modest incomes reduce the customer’s willingness to buy new clothes frequently.

We believe pricing remains a critical challenge and a barrier to growth. About 5 years ago, Third Eyesight had evaluated the pricing of various brands in the context of the average incomes of their stated target customer group. For a like-to-like comparison with average pricing in Europe, we came to the conclusion that branded merchandise in India should be priced 30-50% lower than it was currently. And this is true not just of international brands that are present in India, but Indian-based companies as well. (In fact, most international brands end up targeting a customer segment in India that is more premium than they would in their home markets.)

Of course, with growing incomes and increasing exposure to fashion trends promoted through various media, larger numbers of Indian consumers are opting to buy more, and more frequently as well. But one only has to look at the share of marked-down product, promotions and end-of-season sales to know that the Indian consumer, by and large, believes that the in-season product is overpriced.

Brands that overestimate the growth possibilities add to the problem by over-ordering – these unjustified expectations are littered across the stores at the end of each season, with big red “Sale” and “Discounted” signs. When it comes to a game of nerves, the Indian consumer has a far stronger ability to hold on to her wallet, than a brand’s ability to hold on to the price line. Most consumers are quite prepared to wait a few extra weeks, rather than buying the product as soon as it hits the shelf.

Part of the problem, at the brands’ end, could be some inflexible costs. The three big productivity issues, in my mind, are: real estate, people and advertising.

Indian retail real estate is definitely among the most expensive in the world, when viewed in the context of sales that can be expected per square foot. Similarly, sales per employee rupee could also be vastly better than they are currently. And lastly, many Indian apparel brands could possibly do better to reallocate at least part of their advertising budget to developing better product and training their sales staff; no amount of loud celebrity endorsement can compensate for disinterested automatons showing bad products at the store.

Technology can certainly be leveraged better at every step of the operation, from design through supply chain, from planogram and merchandise planning to post-sale analytics.

Also, some of the more “modern” operations are, unfortunately, modelled on business processes and merchandise calendars that are more suited to the western retail environment of the 1980s than on best-practice as needed in the Indian retail environment of 2011! The “organised” apparel brands are weighed down by too many reviews, too many batch processes, too little merchant entrepreneurship. There is far too much time and resource wasted at each stage. Decisions are deliberately bottle-necked, under the label of “organisation” and “process-orientation”. The excitement is taken out of fashion; products become “normalised”, safe, boring which the consumer doesn’t really want! Shipments get delayed, missing the peaks of the season. And added cost ends in a price which the customer doesn’t want to pay.

The Indian apparel industry certainly needs a transformation.

Whether this will happen through a rapid shakedown or a more gradual process over the next 10-15 years, whether it will be driven by large international multi-brand retailers when they are allowed to invest directly in the country or by domestic companies, I do believe the industry will see significant shifts in the coming years.

The Art of Selling Discounts

Poornima Kavlekar, The Smart CEO
July 15, 2011

Who doesn’t love to strike a deal, especially if discounts could vary anywhere from 10 per cent to 90 per cent on lifestyle products and services? Exactly the reason why group buying (discount deals) businesses show strong potential for growth in India. But there are many variables that these businesses need to pay attention to in order to succeed in this space. A strong consumer-merchant equation, a clear understanding of each of these interested parties and the capability of bringing them together in the most profitable manner are the foremost parameters. This apart, one needs to be present everywhere, scale up quickly and differentiate itself from competition. Sounds simple? Then again, who said simple was easy?

When I walked into my gymnasium during my routine workout timing, I was baffled to see a number of people waiting in a queue for their turn to hit the cardio-machines. This was the first time, in the 15 months of my membership in the gym that I had to wait for my turn. I realised then that a good number of faces were new which made me wonder if June was some auspicious month to start an exercise regime! And interestingly, the profile of the gym users was slightly different too – most of them were in the age group of 18 to 25 years from what used to be 25 years and above. As a regular gym goer, I was intrigued by this sudden change in the profile of my co-exercisers.

Well, before I lead you on, this story is not about the business of fitness or gyms in the country. This story is about understanding how the gym managed a sudden spurt in its membership without any offline promotional activities. And my question was answered by the gym instructor who said that they had sold memberships for a day through a popular group buying website. That explains two things: one, the sudden rise in membership in the month of June, and two, the change in the profile of my co-exercisers (those who have grown up with the Internet). This story is to understand the group buying landscape in India, the changing dynamics of the consumer profile and what it takes to succeed in this space.

Understanding the ecosystem

While low Internet penetration and the lack of consumer comfort with transacting on the Internet (both very critical for group buying businesses) were two major hurdles for e-commerce growth in the past, things have changed over the last two to three years. Internet penetration has improved significantly, particularly with mobile usage. "Though e-commerce in India is still in a very nascent stage – save for the travel segment, I believe that with the exponential growth of smart phones, 3G and 4G, India is at the cusp of an e-commerce explosion," says John Kuruvilla, founder-chief executive officer, Taggle, a group buying website.

While using credit cards online is still a challenge, e-commerce players have so far circumvented this by coming up with different payment options for the customer. But, Devangshu Dutta, chief-executive, Third Eyesight, a consulting firm focussed on the retail and consumer products sector, says, "We are approaching a tipping point, with more widespread availability of credit cards among younger users, who have grown up with the Internet during the last decade." This makes spending on the Internet an option that’s waiting to take off.

The gradual rise in investments by the venture capital industry into the e-commerce space in the last three years is a reflection of this change. According to Venture Intelligence, a company that provides information and analysis on private equity, venture capital and mergers and acquisitions in India, the investments in this space have increased from US $33 million in 2009 to US $83 million currently.

Group buying or the discount deals business, a model popular in the U.S., adds a whole new dimension to the e-commerce industry. Put it simply, the sector gives offline retailers the opportunity to drive traffic into their stores through the online medium. Some experts even use the term offline-online commerce to describe the sector. This space has also grabbed the attention of the venture capital industry. Battery Ventures and Greylock Partners invested US $8.75 million in Bengaluru-based Taggle in June 2010 and Nexus Ventures and Indo US Ventures invested around US $12 million in January 2011 in New Delhi-based Jasper Infotech, the parent of Snapdeal.com.

The macro picture

In 2010, group buying saw phenomenal success with Groupon in the U.S. In fact, last August, Forbes magazine crowned Groupon the ‘fastest growing company ever’. It says Groupon made US $713 million in revenue in 2010, up from US $30 million in 2009. As of March 31 this year, its subscriber base was 83.1 million, up from 1.8 million at the end of 2009.

In the U.S., the retail industry is mature and there is already familiarity with the couponing system. While India is yet to get there in both these areas, there is no argument over the business potential in this space with over 20 million active Internet users (of a total of 90 million Internet users) in the country with an increasing number of them shopping online. It has already attracted entrepreneurial interest in India with several group buying sites, such as Snapdeal, Taggle, Dealivore, Dealsandyou and Vamoosevacations.com coming up in the last two years. Apart from products and services, many of these sites offer discounted deals in their city’s spas, gymnasiums, dance classes, car service centers and restaurants.

The whole model of offline – online discount coupons is based on a simple fact that everyone loves to strike a deal, to make a bargain and avail discounts. But, like Kuruvilla shares, there is no clear road map or trends on what works and what does not in a very nascent e-commerce space in India. And this means that you need to constantly try new things and continue experimenting with novel ideas to arrive at a working formula. He thinks a working model will evolve over the next 12-18 months with consumers getting hooked to buying great value online.

"But what’s happening in India is not a Groupon business clone," clarifies Vani Kola, managing director, IndoUS Venture Partners. The business model has been adapted to suit the changing demography of the Indian consumer and the orientation and exposure of the Indian merchant to the digital world.

Success definers

Companies need to differentiate themselves from their competitors. It could be based on the target audience, types of deals, brand positioning, the sectors they target and so on. The idea is to recognise and capitalise on one’s strengths and leverage on the scope of e-commerce growth in India. Taggle, for instance, felt that everyone was playing with bottom of the pyramid deals. So, it strategised to start at the top. "The move was a necessity given that by June 2010 many other group buying sites were already very much around, and it was important to get noticed quickly," says Kuruvilla.

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Wholesale Hopes 

By VISHAL KRISHNA

Business World

11 July, 2009

When Martin Dlouhy, managing director of Metro Cash & Carry India – a 100 per cent subsidiary of the German firm – signed a Rs 900-crore agreement with the Punjab government earlier this year to set up six stores in the state over a fiveyear period, it seemed to reinforce the intention of global retailers wanting to penetrate the Indian market. Foreign direct investment (FDI) in multi-brand retailing is not allowed under the current policy regime; besides, most consumers in India still buy the bulk of their retail products from the neighbourhood kirana (mom-and- pop) stores. The cash-and-carry (C&C) business caters to the needs of these store owners.

But in their brief history of five years, C&C players have not been able to generate cash from the business in India. "They continue to bleed not because of the supply chain, but because the kirana store owner has to have a reason to buy from a C&C," says Devangshu Dutta, chief executive officer of Third Eyesight, a consulting firm in Delhi. Ninety-five per cent of the retail trade is dominated by traditional wholesalers, the backbone of India’s fast-moving consumer goods (FMCG) industry. "These wholesalers can give the kirana store the best price," says Ajay D’Souza, head of Crisil Research in Mumbai. He says traditional wholesalers continue to rule the roost because they manage to deliver goods at the doorstep of the kirana stores.

But this is just the beginning. Large global corporations – such as Metro – can burn cash and stay unprofitable for a very long time. They have deep pockets. Bharti Wal-Mart, a joint venture between Bharti Enterprises and US based Wal-Mart, has recently set up its first C&C store with an investment of nearly Rs 30 crore in Amritsar, and hopes to spend Rs 500 crore to set up 15 more stores over the next five years. Metro has invested over Rs 750 crore so far, apart from the Rs 900 crore mentioned earlier. Their plan is simple: to convert 12 million store owners into dedicated customers. This is not an easy task. The capital costs for a C&C are very high. According to Crisil Research, capital costs are close to Rs 3,700 per sq. ft, which is three times higher than that involved in setting up a hypermarket retail store.

The average size of a C&C is 100,000 sq. ft. To top it all, the real estate is owned by the company itself. Therefore, for Metro to turn cash positive is not easy in the short run. It takes at least 15 years to turn profitable and 11 years to generate cash in this sector (see ‘Long Gestation’ and ‘Wait And Watch’). Like any other retail business, it works on a high-volume, low margin basis. Sources in the industry say that Shoprite – a South African firm that has a C&C joint venture with Nirmal Lifestyle in Mumbai – was losing Rs 40 lakh a month at the back end, supplying to just one store in the country. An email sent to Nirmal Lifestyle did not elicit any response. Given the enormous challenges encountered by those trying to make a go of the retail business, will Metro and its brethren be able to survive the cash bleed?

New Avenues

Though kirana stores are the primary target customers for a C&C, business for the moment is coming mostly from others – hotels, restaurants and caterers, who buy in bulk from this wholesale format. A C&C can also gauge the quantity needed by understanding client demand and stock only as much required. Metro’s success has been supplying fruits, vegetables, meat and fish to its hospitality clients based on only demand. "Our strategy is to understand what our customers need, and then provide them a solution which offers quality product, right packaging size, and competitive pricing," says Dlouhy. The supply chain is not a problem for Metro as it worked with consolidators, farmers and fishermen to share knowledge on waste reduction, increase yield and produce high quality.

"The kirana guy will have to travel to a large cash and carry, usually located outside the city, and think twice if his transportation costs negates his margins," says Dutta of Third Eyesight. The other challenge is of scale. Most C&Cs have a bad kirana turnout because they never buy in bulk. More often than not, a kirana store owner will pick up the phone and call his distributor to send in the supplies. Metro or any other C&C does not provide such a service. But they believe their model can be successful, and they are serious about their intent, opening as many stores as they have.

For the kirana store owner, it is about saving on inventory costs. Analysts say that another reason why a C&C could work for a store owner is its ability to avoid stockouts for the customer. Metro serves as a warehouse and offers a selection of over 18,000 products. "We give the kirana guy a choice of products; with traditional retailers a kirana has to buy one product and in bundled quantities," says a spokesperson for Metro. In certain cases, Metro is also trying to specialise by sourcing from local manufacturers and stocking local brands, including an assortment of spices, rice and other food items. "This was earlier a forte of the traditional wholesaler. But we offer these solutions too," he adds.

Such a strategy of sourcing local products is also being employed by Bharti Wal-Mart. The C&Cs have their own private labels, which are selling well with the stores they have tied up with. Fifteen per cent of the sales of Bharti’s front end stores – called Easy Day – are in the form of private labels sourced by their backend partner. Bharti Wal-Mart is also selling honey, pickles, fruits and more under the private label name Great Value, which is also the international private label for Wal-Mart. Metro sells items under its international private label Arro.

"Their processes help reduce operational costs, which are very low, and they also have lesser employee cost per sq. ft," says D’Souza of Crisil Research. This is also why foreign brands such as Tesco and Wal-Mart sense opportunity in the Indian market with their back-end expertise. Tesco has already announced it is investing £60 million (Rs 474 crore) in the Indian market and has tied up with Trent, one of the retail arms of the Tata Group.

"While FDI is held up in the front end, the C&C business allows foreign retailers to sort out supply chain issues," says Pinakiranjan Mishra, partner and national leader for the retail practice in Ernst & Young (E&Y) in Mumbai. "Once that opens up, they will create efficiencies that will set the tone for building modern retail." Raj Jain, managing director of Bharti Wal-Mart agrees: "The whole Wal-Mart business revolves around saving in every aspect of that supply chain," he says. "It is not just about negotiating better prices with the suppliers, but actually about working with suppliers to remove any inefficiency in the supply chain." Bharti Wal-Mart is currently working with suppliers on packaging, stock control and inventory management.

Breakthrough Ideas

So what is eating into C&C margins? Simply put, there are not many kirana store owners walking in on a regular basis. For a C&C to make a dent in the Rs 2 lakh crore FMCG industry, it has to beat the traditional wholesaler who has been around for years. A C&C can help a retailer reduce the problems of dealing with multiple wholesalers, but cannot wipe them out. The distribution system in India has been built by the FMCG companies themselves to get their products off the ground quickly. Analysts say this multi-layered system takes a product to the smallest of stores in a village. "It makes sense for a C&C to find large buyers; they will burn cash if they focus on small businesses," says Dutta of Third Eyesight.

There has also been concern about how C&Cs can sell to their customers. Although a C&C is typically seen as a wholesale trade supporting small businesses which possess a trade licence, many point out that there have been sales to individuals who do not own businesses. The average threshold billing is Rs 1,000, and then it does not matter what you purchase in the C&C, or if it is personal purchases. This flouts the FDI norms that prohibit C&Cs from selling directly to consumers. As Businessworld noticed in a certain C&C recently, a man shopping with his wife had bought many single items. The only items they bought in bulk were brooms.

But Metro and Bharti Wal-Mart maintain that they have checks to avoid such a situation. "It is difficult for C&Cs to monitor every customer who buys because he will be a member who has a trade licence," says Mishra of E&Y. "This implies they are legitimate business owners, but it is not the job of a C&C to check their background." Stopping a customer and questioning him about the particulars of his purchases could create customer service problems that are avoidable.

Bharti Wal-Mart has about 30,000 primary members and about 75,000 total members registered in a particular trade area, around a 30-40 km radius of where its first store is opening in Amritsar. "There has been a very rigorous programme to control processes in our stores. People have to possess a trade licence," says Jain of Bharti Wal-Mart. If they do not have a trading licence, they need to have a trading association licence. "We will continue to renew that licence every year to ensure that only businesses are dealing with us, which is the law," Jain adds. Metro follows similar processes.

These hiccups, however, do not appear to slow down the C&Cs, at least the international ones. Metro Cash & Carry has opened 40 stores across the world in 2008, taking their global store portfolio to 655 wholesale stores. Their focus lay on growth markets such as eastern Europe and Asia. Officials say that group sales rose by 5.8 per cent to €68 billion (Rs 4,62,400 crore) last year. Its bigger rival Wal-Mart has even greater staying power. All of them appear to have enduring faith in the adage that only the strong will survive.