Year: 2012

Zen and the Art of Retail Funding

Devangshu Dutta

February 26, 2012

Modernisation and consolidation will happen not only in front-end (retail) operations, but also in the supply chain of both products as well as tertiary suppliers such as equipment and service providers. Well-informed investors are looking at the entire ecosystem rather than only funding the front-end of the retail business.

The biggest challenge for private equity and venture funds looking to invest in the Indian retail sector is finding business models that are logically scalable within a four-to-five years time frame and allow the investor a decent exit. Due to the nature of the most funds and how they are structured, a seven-to-eight year term is the maximum time a fund would be involved with an investee company and it is difficult to find an investor with a longer-term horizon.

On the other side, this can also prove to be a challenge for the investee company: some of them may feel unduly pressured to grow faster than the natural pace of their business and could make strategic and operational decisions that are destructive to the business. As consumer incomes move up and the environment becomes more conducive, the life cycle to building a retail business becomes shorter. For instance, 20 years ago it would have taken over 10 years for a business to cross Rs. 100 crore (INR 1 billion). Today, with the right mix, it would take much less time. However, building a business that is both large and profitable (hence sustainable) still takes a significant amount of time.

Venture equity is suitable for businesses that can grow and add value inorganically, either in intellectual property-driven businesses such as technology companies and brands that can provide higher margin returns on a given equity base, or by selling the business further to investors who think they can derive even more value from it in future.

Retailing, on the other hand, is inherently an organic growth business, and the most suitable sources of funding for organically grown business are internal accruals and debt. However, the rapid economic growth in the last 15 years has created an opportunity for large businesses to emerge inorganically. Good examples of this are the large corporate groups that have entered retailing. Looking at them, one could be seduced into thinking that the environment and the business have changed significantly such that other professionally created businesses could be easily launched, venture-funded, and grown to exit. My take on this: If you can create a fund whose life is 20 years or more rather than the typical 10 years, there is a better likelihood of making it work.

Of course, bank debt is not easy for an entrepreneur either – Indian banks have become more progressive, but the norms are still relatively stringent. Unless the space is bought, the retail business has few significant-value fixed assets, and bank loans are limited for businesses that cannot offer much collateral.

Each stage of the retailer’s growth needs a judicious mix between own capital, supplier credit, bank loans and external investors’ equity. The last one evolves from friends and family at the inception, to angel and venture investment during growth to, eventually, public equity, if all goes well. Each of these sources of funding come with their own expectations on returns and disclosure, so an entrepreneur needs to balance these based on his own comfort levels. One of the most important characteristics for most institutional investors is that the business seeking funding should have a broad and deep management and executive team, rather than being over-dependent on the founder-entrepreneurs. There needs to be a demonstrated track record of growth that has been delivered by this team, and a clear future direction to sustain and grow the business.

It is a curious cycle: structured, process-oriented and systematic businesses that are not dependent on one person (the founder) are more likely to attract outside money, and outside money coming in puts more pressure to create transparency and broadening responsibility with which many entrepreneurs are uncomfortable. Most of them start their own businesses so that they do not have to report to someone else, but the moment there is external money involved, you realise that you are answerable to someone else. This is often a tough call for an entrepreneur – not just in India, but worldwide – a traditional, patriarchal and feudal mind set will just not work with external investors involved, especially in today’s environment where information and opinions flow more freely than ever before.

One of the most common mistakes Indian retailers make while trying to get funding is over-estimating the market demand. The second is underestimating the complexity (and costs) involved in starting and growing the business to profitability. Once you have put a business plan out there, it not only becomes a hook for your prestige, but valuation norms are also driven by the figures that have been agreed upon. This can cause business decisions that look productive in the short term – such as adding stores to grow sales immediately – but are harmful in the long run, such as adding stores in locations that are not sustainable. We have seen such decisions being made in the last five to six years, and investors as well as bankers are more wary today while evaluating businesses to fund.

A key thing to remember is: no matter how badly you want the money, it is not just about the money. From an entrepreneur’s perspective, who provides the money can be even more important than how much and how quickly the money comes in. For example, a particular investor could bring in a business perspective and relationships that are directly relevant to the entrepreneur’s business, which can add value well beyond the money that flows in. Commonality of objectives and a shared view of the time frames involved are also important, so that business decisions have the full support of the investor.

Timing is important: If you get an investor in too early, you may be losing on the valuation and selling out too much of the business to one investor. However, holding out for the ‘ideal’ benchmark valuation is possibly worse, because there is also a cost to the time and opportunity lost in getting the required funds. If I were to focus on one piece of advice to an entrepreneur looking to raise funding from a VC, it would be this: don’t try to extract what you think is your complete lifetime’s worth from the first investor deal that you sign. If the business is successful, and the first investors are happy with their returns, they and others are likely to come back to you in far greater numbers, offering much higher valuations.

Later-stage retailers still have avenues to raise debt and private and public equity, whereas start-ups and early stage businesses that can add significant entrepreneurial colour into the business are the ones that are struggling to get funded.

In many countries early stage seed, angel and venture investments are provided incentives in terms of tax structures – this is something that the venture community in India has been lobbying for with the government, and if provided, could improve the ‘investibility’ of early stage retail businesses.

[Readers may also find it useful to go through the brief presentation on Slideshare: “What does it take to create a fundable venture?”

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You can now have vegetables cut free

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February 24, 2012

Shilpa Phadnis , The Times of India

Bangalore, February 24, 2012

Homemakers are likely to love this – someone cutting vegetables for them for free, someone making chappatis for them, again at no charge.

It’s the latest from Future Group’s value retail chain Big Bazaar. They call it the Seva initiative, and the store at Rajajinagar in Bangalore has become the first to launch the services.

Customers in the store can choose from a combination of different grains that go into making a dough, and the store staff will then grind, knead and make it into fresh chappatis. The promise is that the entire process will take no more than 12 minutes. Customers can go to the vegetable counter and get the vegetables sliced and diced in different styles for free.

The ‘sevaks’ at the 1.3 lakh sft store will assist customers in availing free after-sales service for the electronic goods they purchase or in identifying a vendor for dry-cleaning their carpet. The store even has a Bangalore One counter where they can pay electricity or phone bills, and avail other public services.

"We don’t merely want customers’ share of wallet or mind. We also want their heartshare," said Ashni Biyani, director of Future Ideas, the innovation and incubation cell of the Group.

The retailer incurs additional costs to deliver these free services. But analysts say the cost is mostly related to labour. "This is a clever strategy to attract customers at relatively low-incremental costs," said Hemant Kalbag, partner at consultancy firm AT Kearney.

Usually, the cost attached to delivering a service gets embedded into the product. "But free give-aways along with experiential marketing become a hook for customers, which could potentially translate into a higher billing size at the counter," said Devangshu Dutta, chief executive at retail consultancy Third Eyesight.

The Future Group has both internal and external pressures to try and find innovative ways to build a more robust business. External pressure comes from Big Bazaar’s competitors like Spar Hypermarket, which offers a better ambience and attracts more upmarket customers. Big Bazaar has been upgrading its stores to enhance customer experience, and Seva can be seen as part of this. "Big Bazaar stores launched in the last one year are less chaotic and resemble a Spar," said an analyst who did not want to be named.

Internal pressure for the Group comes from its huge debt of about $1 billion and high interest cost, which has impacted profitability. The retailer is working on a plan to turnaround its retail operations. It is exiting some of its non-core businesses and shutting down loss-making stores. It has closed five Food Bazaar outlets and 11 E-Zone stores and has laid off 3,000 people in the recent past.

To cater to more evolved customers, the Group is rolling out FoodHall, a food store for value-added food products and international food ingredients. The Seva initiative will be rolled out to 12 Big Bazaar Family Centres in the next two months. The Family Centre sub-brand makes customized product and service offerings based on the needs of the people living in and around the catchment area.

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Future revives JV deal with Skechers shoes

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February 22, 2012

Meghna Maiti, Financial Chronicle

Mumbai, February 22, 2012

Kishore Biyani, whose proposed licensing and distribution venture (JV) with US footwear retailer Skechers fell through last year, has revived partnership plans with the foreign firm. It has even seconded one of its senior most executives Sanjeev Agrawal previously joint CEO at Future Value Retail as CEO of the proposed JV.

“The group is in the process of signing a JV agreement with Skechers and Agrawal will head this venture,” said at least three company officials in the know of the development. Future Group already has a 50:50 joint venture with UK-based footwear brand Clarks which is steadily scaling up.

“The footwear segment is seeing evolution in terms of product mix, pricing and demand growth, helped by the availability of international brands,” said Devangshu Dutta, CEO, third Eyesight, a consulting firm focused on retail and consumer products sector.

Earlier Future group had tied up with Liberty Shoes in a joint venture that was scrapped because of poor customer response. India is one of the strategic markets for Skechers and the company is said to have done good research over the last three years to establish the right strategy and partnership to develop the brand in India.

An email sent to Kishore Biyani, group CEO at Future group on February 20, 2012 seeking comments on the Skechers JV did not elicit any response till the time of going to press. Sanjeev Agrawal, ex-joint CEO at Future Value Retail said, “No comments.” Skechers USA in an email said, “Your email has been forwarded to the appropriate department for review.”

Purnendu Kumar, vice president at Technopak Advisors said, “The growth opportunity in the footwear segment is very high primarily because of low penetration in terms of point of sales, number of brands. There is pent-up demand in the market. Growing affluence is also driving demand in this category.”

Skechers USA, incorporated in 1992, designs and markets Skechers-branded lifestyle footwear for men, women and children under several lines such as those for shaping up, running and walking. The over $ 2 billion Skechers had signed a deal with Pantaloon Retail in the year 2009 to licence and distribute Skechers footwear and apparel in India. The deal involved Winner Sports, a wholly owned subsidiary of Pantaloon Retail India (PRIL) as the licensee and distributor of Skechers footwear and apparel through Future Group’s retail format Planet Sports.

The market for premium shoe products is growing at 15-20 per cent annually, according to Technopak Advisors. The growth potential has prompted several firms to enter the market in the past few months. Tata global trading arm Tata International started its chain of stand-alone stores, Tashi, targeting the segment late last year. Reliance Retail has entered into a licence dela with US-based Timberland.

Future Group’s other footwear JV Clark, has five standalone stores and around 10 shop-in-shops across India. “This venture will take two years to become profitable and it’s now in scale-up mode. By the end of the next financial year, we are confident that cash accruals from existing stores will be able to take care of the growth requirements of the lifestyle footwear, bags and accessories joint venture,” said a top Future group official involved with that business

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Home maintenance goes corporate

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February 6, 2012

Vidya Padmanabhan, Mint

Chennai, February 6, 2012

Banking on the growing purchasing power and busy lifestyles of urban, dual-income families, a slew of firms are now offering to help them run their homes, attempting to bring a measure of professionalism to a largely unorganized sector.

While there’s no dearth of cook’s cousins or aunt’s office assistants who will repair a ceiling fan, wash the car and even fix software bugs, entrepreneurs are now seeing an opportunity to step in with streamlined services for affluent professionals who want to avoid the uncertainties of the informal ecosystem.

“We did the research and saw the shift,” said Siddharth Bhatia, the head of operations of Gurgaon-based eTechies.in, a company he co-founded in mid-2010 to provide onsite and remote information technology support for individual users and small businesses. Bhatia and his co-founders, who had previously worked for several years in a firm providing remote technical support to users overseas, received a $2 million infusion in January from venture capital firm Inventus Capital Partners on top of an angel investment from Google India’s managing director Rajan Anandan.

“People in the middle and upper-middle classes are now ready to pay to get professional service and peace of mind,” Bhatia said.

With more than 1,500 individual subscribers and over 400 small-business subscribers for the company’s Rs. 3,000-per-computer annual contract—a 20-30% premium over rates at local repair shops, according to Bhatia—eTechies plans to extend its services to Bangalore and Mumbai in the next four months.

The move to organize the home-focused services sector is prompted by the same economics that drives the retail industry, which has seen mega malls and hypermarkets springing up in anticipation of the increase in the disposable income of India’s burgeoning middle class.

According to a recent report by the National Council for Applied Economic Research, India’s middle class, defined as families with an annual income between Rs. 3.4 lakh and Rs. 17 lakh, will grow 67% from the current level to 53.3 million households or 267 million people in the next five years. Further, according to the report, the typical middle class household spends half its income on basic daily expenses, leaving the other half for saving or discretionary spending.

Along with the growing affluence, however, comes increasing demands on the time of upwardly mobile professionals, which is where those who seek to organize the home-directed services economy come in.

“Given today’s busier lifestyles, with long commutes and extensive work-related travel, people have less time to hunt for a specific individual handyman—this offers an opportunity to companies that can offer a comprehensive set of services,” said Devangshu Dutta, chief executive of Third Eyesight, a retail and consumer products consultancy.

“Our target is the typical working couple that doesn’t have the time to deal with (service-related) issues at the end of the day,” said Prerna Bhutani, co-founder of Chennai-based One Call India, which facilitates home appliance purchase, delivery and after-sales service. She regularly sets up stalls in information technology parks, high-end apartment complexes and supermarkets to reach out to her target audience.

For Rs. 1,000 as annual subscription, or Rs. 100 per call, the company researches best prices among retailers, offers discounts through tie-ups with the retailers, arranges pick-up and drop services for purchases and repairs, and otherwise coordinates with retailers and repair centres to improve customers’ service experience, according to Bhutani.

With around 1,000 customers in Chennai, One Call India started operations in Bangalore and Gurgaon late last year, and may seek venture capital funding to expand to all major metros in the next three years.

“We have the exposure today to the kind of services people are using in the West, and customers are demanding that,” Bhutani said.

The potential in upscale Indian homes hasn’t escaped the big guns. The Indian arm of ISS A/S, a $14 billion Danish multinational that maintains facilities for the corporate sector, began a domestic cleaning service last year.

“Our research states housing and utilities make a prominent presence in the average consumer spending pattern of people in metros, hence a huge potential exists for ISS Homecare,” Stanley Britto, chief operating officer, said in an email.

The company charges Rs. 5-7 per sq. ft for cleaning services including specialized floor care, carpet care and glass cleaning, according to Britto. ISS Homecare earned about Rs. 1 crore from its operations in Mumbai, Bangalore and Chennai in the past year, and expects the figure to double every year, with services to be extended to other cities across India in the next 12-18 months.

However, Third Eyesight’s Dutta sees a gap between the demand and most efforts so far to tap it. “Most (of the companies) rely on a network of individuals as subcontractors, and there are gaps in terms of filtering these individuals for skill level, there is little or no roster management, and the result is highly inconsistent customer service. Therefore, customer retention for repeat contracts is an issue, and with time, if the poor reputation spreads, new customer acquisition also becomes difficult.”

In the case of eTechies, it was the management outlook, more than the market demand, that motivated Inventus’ investment.

“Yes, Indian consumption growth (of devices) was clearly a driver for eTechies,” Parag Dhol, a director at Inventus, said in an email. “We tend to be hugely entrepreneur driven, though.”

The founders’ work experience in remote technical support and their business model, proven successful in the National Capital Region, clinched the funding decision, Dhol said.

The companies, naturally, insist that their services beat what’s currently available. “Personally, as a working woman living alone, I found it very difficult to repair a broken tap or flush—just waiting for the guys—and safety was an issue,” said Shaifali Agarwal, founder of Delhi-based EasyFix Solutions, which provides plumbing, electrical and carpentry solutions.

The company checks recruits’ background, technical competency and basic reading skills needed to help them check and reply to mobile text messages, Agarwal said. They also undergo behavioural training to make customer interaction smoother, she said.

EasyFix, which charges a minimum of Rs. 100 per visit, has had about 1,300 customers in the National Capital Region, and plans to expand to Mumbai, Bangalore and Hyderabad by March.

Agarwal admitted that handling a large group of workers—24 in her case—was a significant challenge, one that probably has kept the sector mostly free of corporatization.

Pegasus Facilities of Chennai, which provides cleaning services for residences and vehicles, combines attractive employee benefits with a nifty micro-management system to stay in control of its workforce of 40 full-time employees. The company’s cleaning staff earn about Rs. 7,500 a month as salary, besides conveyance fare and a customer-referral bonus, plus tips, co-founder Vijay Simha said.

Employees must check in to the company with missed calls when they reach a customer’s residence, when they finish the job and when they leave, Simha said.

The company offers several cleaning packages—entire residence, kitchen, fans and fittings, windows—of which the bathroom cleaning service begun two years ago has been the most in demand, according to Simha. For a minimum of Rs. 5,500 per year, the company cleans two bathrooms twice a month. Of 9,000 households that use the company’s services in Chennai, about 60% are dual-income families, Simha said, adding that he gets three-four new contracts and one or two renewals every day. Pegasus expects to expand to Pondicherry and Coimbatore this year, and is seeking franchisees in cities across India. Simha gets occasional complaints from customers, he said, and he tells them, “I can’t make your bathroom new—I can just clean it. What you don’t have the time to do, I do—that’s all.”

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Junglee: Amazon makes quiet entry into Indian retail market via comparison shopping site

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February 3, 2012

The Economic Times
Bangalore, February 3, 2012

Amit Agarwal, vice-president of Amazon, would only say Junglee would "help customers discover products from online and offline retailers in India and from Amazon.com". He declined to say more about the company’s plans.

Conspicuously missing from the list of vendors on the Junglee site is Flipkart.com, India’s biggest online retailer founded by two former Amazon executives. Flipkart expects to post sales of Rs 500 crore by March 2012. Amazon ended 2011 with revenues of $48 billion (about Rs 2.5 lakh crore).

"Its recent moves to set up a fulfillment centre (in Mumbai) and now the Junglee launch certainly look like precursors to a retail launch whenever the government allows FDI in multi-brand retail," said Devangshu Dutta, CEO of retail consultancy Third Eyesight. A legal expert at one of the country’s largest law firms said Amazon was making a ‘clever entry’.

Agarwal said Junglee will display over 1.2 crore products and 14,000 brands for Indian consumers. The company has also launched Amazon seller services in India where vendors can hook up to Amazon’s portal to acquire customers.

(Read our perspective on this launch on our blog.)