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RIL’s New Business Pangs

Nevin John, Businessworld

New Delhi, 26 December 2014

The Annual General meeting (AGM) of Reliance Industries (RIL) on 18 June 2014 was significant. RIL chairman Mukesh Ambani’s wife Nita was inducted to the board of the $67 billion petroleum giant with the overwhelming support of shareholders. She is the first woman from the family to join the key decision-making body.

Four months later, on 11 October, RIL subsidiaries — Reliance Jio Infocomm and Reliance Retail Ventures — announced the appointment of Ambani scions, daughter Isha and son Akash, to their boards.

The induction of family members to the boards of group companies comes at a time when RIL, India’s largest private company by revenue, is in the midst of its largest investment cycle. The company will pump in Rs 1.8 lakh crore into a large pet coke gasification plant, a petchem cracker unit, a country-wide fourth-generation (4G) digital network and India’s largest network of retail stores spanning ‘value’ and ‘speciality’ formats.

Again, while the telecom and retail businesses hold promise, many of the group’s businesses are struggling.

The hydrocarbon exploration and production (E&P) business is falling apart, with no significant recovery in sight. Anomalies surrounding gas pricing and the fast depleting Dhirubhai-1 and -3 gas fields — due to geological complexities in the Krishna Godavari (KG) basin — are stifling the growth prospects of the company’s upstream business. Even the organised retail business is yet to come anywhere close to the projected revenue growth, while the broadband foray has been delayed on account of the extensive technical work involved in creating a pan-India network.

That sure is a lot to handle for the Ambani family, which faces the tough task of rebuilding the company into a global force to be reckoned with.

Spending Spree

Based on RIL’s March 2014 annual report, Moody’s estimates that the company has invested around Rs 40,000 crore in Jio, with Rs 30,000 crore more to be pumped in over the next two years. Jio, the only private player with broadband wireless access (BWA) spectrum in all 22 telecom circles, is expected to provide high-speed broadband connectivity and rich digital services on a pan-India scale.

In 2010, the company bought 20MHz of spectrum in the 2,300MHz band for Rs 12,847 crore. Three years later, in October 2013, it received the unified licence — against a one-time entry fee of about Rs 1,673 crore — for all the 22 service areas to offer all telecom services, including voice telephony. This February, adding to its broadband reach, it acquired more spectrum in the 1,800MHz band in 14 circles for Rs 11,054 crore.

To ensure high data transmission speeds, Reliance Jio has laid around 100,000 km of optical fibre across the length and breadth of the country. In areas it doesn’t cover, the company has signed agreements with Bharti Airtel, Reliance Communications, BSNL, Tower Vision, ATC India, Viom Networks, Bharti Infratel, Indus Towers and GTL Infrastructure that will allow it to share tower infrastructure, among other things.

According to a Credit Suisse report, the company has installed approximately 32,000 long-term evolution (LTE, which is a technology standard for high-speed wireless data networks) base stations. It has signed on Samsung Electronics for supplying equipment for 60,000 base stations and is expected to sign an agreement for an additional 50,000-70,000 base stations soon, says the report. In all, the number would be on a par with big operators such as Bharti Airtel, Vodafone India and Idea Cellular.

Work In Progress

Ever since broadband licences were handed out, the industry, Jio’s rivals, analysts and consumers have never ceased to speculate about the launch of services. But Mukesh refuses to set a deadline for his team. “Broadband is going to be a big stroke. He wants his team to be free from compulsions,” says a company executive.

At the 2013 AGM, Mukesh announced that the launch of Jio’s services would take place in 2014. But in the latest meeting, he extended the date and said services would only start in 2015. According to him, the project would cover all states — around 5,000 towns and cities, accounting for over 90 per cent of urban India, and over 215,000 villages. The target is to cover over 600,000 villages. The company’s acquisition of Network 18, a media group, is said to be helping in the creation of content for its 4G services. In the midst of Jio preparing to launch its services, a controversy erupted recently when the Comptroller and Auditor General (CAG) of India reported that RIL had benefitted unjustly to the tune of Rs 22,842 crore in the grant of 4G licences. Despite repeated attempts by BW | Businessworld, RIL did not revert with a response to BW’s queries.

The spectrum issue aside, among other things working against the company is the price war in the telecom space. Bharti Airtel is already offering high-speed 4G packs at rates lower than those of 3G plans, signalling a tariff war on the mobile data front. Anil Ambani’s Reliance Communications, on the other hand, has launched ‘Pro 3’, an unlimited data plan for Rs 999 a month, with speeds of up to 14.7 Mbps, enabling lightning-fast data streaming. Handsets are another pressing issue for the company. RIL shareholders still remember the Monsoon Hugama of 2003. Then, as part of Reliance Infocomm’s cellular services, the company gave away mobile handsets for Rs 500 along with a CDMA connection. The customer base skyrocketed within months of the launch. Though CDMA as a technology failed to catch up with GSM, Monsoon Hungama went down as a super success.

Jio has to come up with something similar on the gadget front. The Credit Suisse report says smartphones below $100 could become a reality and prove disruptive in the market. Jio is already testing its services through its products at Navi Mumbai and Jamnagar. Also, it has written to the Department of Telecommunications for a network test to be conducted along with security agencies.

For The Long Haul

The other area where RIL is looking to make its mark is retail. It was Mukesh’s idea to enter the sector, essentially with the aim of expanding the company’s revenue base. But Reliance Retail, which opened its first store in 2006, has not contributed even half a per cent to RIL’s revenues in the past five years.

The company has, however, emerged as the largest retailer in the country after the degrowth of other big names such as Big Bazaar, More and EasyDay. Reliance’s various speciality formats — Trends (apparel), Digital (consumer durables and information technology), Footprint (footware) and Fresh, Mart and Super (value formats), have achieved the leadership position in their respective segments.

In its initial years, Reliance Retail had more than its fair share of problems from state governments and kirana traders. In excess of 50 licences and permits are needed to set up a store in India. So, setting up a pan-India supply chain and store network wasn’t a walk in the park. Mukesh stayed the course and his persistence began to pay off. The business now spans 2,000 stores, covering an area of 11.7 million sq. ft across 155 cities. Last year, 367 new stores were added — effectively one store every day!

In the first half of the current financial year, the revenue from retail stood at Rs 8,166 crore — up 17.3 per cent from the same period in the previous year. The earnings before interest and taxes (EBIT) went up more than two times,to Rs 180 crore. In the last fiscal, the retail business posted revenues of Rs 14,496 crore and profit before depreciation, interest and taxes (PBDIT) of Rs 363 crore.

“In the coming years, retail will emerge as a major growth engine for our consumer business and for Reliance by creating significant societal value,” said Mukesh at the AGM. Reliance Retail’s projection on the revenue front for 2017 is Rs 40,000-Rs 50,000 crore, which S.P. Tulsian, an independent analyst, says will be tough to achieve.

Devangshu Dutta, chief executive of retail consultant Third Eyesight, says RIL is in retail with a long-term plan. “They have the cash flow to stay put in the business and experiment with different business models. They recently rationalised their stores — closing non-profitable ones and opening at other locations. Even the top team changed several times as part of the experiments.”

In 2012-13, the retail business’s earnings before interest, taxes, depreciation and amortisation (EBITDA) turned positive for the first time. But Tulsian doesn’t buy it. “I am not very excited about it (positive EBITDA) because interest and depreciation are major factors in the retail business. Reliance has a huge interest burden. Since it is a cash-rich company, it doesn’t have an interest in counting the liability of the retail business or is not factoring in the liability,” he says.

Arvind Singhal, chairman of Technopak Advisors, justifies the numbers and says the return will not be robust if retailers invest in size and scale. “Reliance has created solid back-end resources to travel the distance.”

Lately, the organised retail market has not been doing too well. Very few Indian retailers have increased the number of stores in the past four years; instead, many have cut down. Future Group’s Big Bazaar and Aditya Birla Group’s More have shut down 30-50 per cent of the value format stores and are now focusing on the high-margin supermarket and hypermarket businesses.

Since RIL is number-focused, it continued adding floor space. This could turn out well for the company in the near future, unlike the investments in some of its ‘successful’ businesses that are experiencing a downturn.

Pain Point

RIL entered the E&P business in line with the backward integration concept propounded by founder Dhirubhai Ambani. Since its very first extraction of oil from KG-D6, the business offered humungous margins to the company. But in the last two years, the production of natural gas has witnessed a steady decline. The revenue share from exploration and production fell to 1 per cent in the last financial year from 5 per cent in 2010, while the EBIT plunged to 7 per cent from 27 per cent.

In the first quarterof the current financial year, the average production from KG-D6 stood at 13 million standard cubic metres a day (mscmd), against the projected production of over 80 mscmd. In 2010-2011, the revenue and EBIT from the E&P vertical was Rs 17,250 crore and Rs 6,700 crore, respectively; both fell to Rs 6,068 crore and Rs 1,626 crore, repectively, in 2014.

An RIL press release calls E&P highly complex operations, having a low success rate , saying “initial interventions have not met expectations.” But, statistically speaking, RIL made profits in this business too. Of the nearly $10.5 billion invested on productive offshore assets, the company has already recovered partial costs through the sale of gas. In addition, it raised $7 billion by selling its 30 per cent stake in its upstream assets to British giant BP in 2011.

While its D1 and D3 discoveries have no scope of producing gas, RIL has decided not to make further investments on developing the R-series, MJ1 and satellite fields till the government gives its nod to the ‘market price’ — linked to the international price of crude — for gas.

According to the Rangarajan Committee report, while the UPA government had approved doubling of gas prices to $8.4 per mbtu, the Election Commission stalled the move during the elections, leaving it to the new government to decide. The NDA government, on its part, sanctioned a lower price of $5.6 per mbtu (up from $4.2), making deepwater exploration unviable.

The new government also imposed an additional fine of $579 million on RIL for reduction in gas production, taking its total penalties to $2.4 billion. The company has begun arbitration proceedings to seek redressal.

Tulsian says there is no logic to increasing gas prices since the contractor has recovered costs. “BP’s investment in these fields is a big mistake. It cannot recover the cost…. They (RIL and BP) are trying to link their cost recovery to gas prices, which is wrong.”

Considering this, BP, in the last quarter, wrote down the value of its investment in KG-D6 by $770 million. “The charge arises as a result of uncertainty in the long-term gas price outlook, following the introduction of a new formula for Indian gas prices,” the company said in a statement.

But RIL’s view is that it, along with its partners, spent $7.4 billion on developing non-KG-D6 blocks and on exploration work at relinquished blocks. “In case prices are to be fixed on the basis of cost of production, the additional cost of $7.4 billion will also need to be reimbursed,” the company said in a report titled Flame Of Truth. Besides, the interest burden on its investments spread over 10 years is yet to be recovered, says a senior company executive. V.K. Vijaykumar, investment strategist at Geojit BNP Paribas Financial Services, says the market’s short-term worry is gas production from KG-D6 and its price. “The revenue from shale gas is the cushion for RIL when KG-D6 underperforms. But shale gas will not become a substitute in the long run,” he says.

Big Money-spinners

RIL’s last major asset creation happened five and a half years ago when it developed India’s largest offshore hydrocarbon block, KG-D6, along the Andhra coast, and commenced production in September 2008. Three months later, it completed the construction of the second refinery at Jamnagar in Gujarat.

The only noticeable asset addition after that was the acquisition of stakes in shale gas blocks in the US. In 2010, RIL invested in shale gas, when there was no clarity about its prospects. Today, RIL has three joint ventures — with Chevron, Pioneer and Carrizo —and has made a cumulative investment of $7.7 billion (as on 31 September 2014). The JVs have witnessed strong growth in production, driven by good additions and strong productivity over the years. RIL’s revenues and profits from shale gas have overtaken its domestic E&P business. In the first half of the current financial year, RIL’s revenues from shale gas stood at Rs 3,236 crore, reflecting a year-on-year growth of 43.6 per cent, and EBIT was at Rs 1,047 crore, up 44.8 per cent. The EBIT margin was at 32.4per cent.

So, from the financial point of view, RIL’s refineries and the petrochemical complex continue to be its financial backbone. The twin refineries with an aggregate capacity of 1.24 million barrels of oil per day (mbpd) generated a revenue of Rs 4,02,149 crore, which is 78 per cent of the total revenue, in the last financial year. The EBIT from the business was Rs 13,392 crore, about 55 per cent of the total. While refineries contributed over 70 per cent to RIL’s revenues in each of the past five financial years, the petrochemicals business stood second with over 20 per cent. But the contribution to the EBIT was much higher for the petrochemicals business — at 36 per cent last year. The business generated Rs 69,539 crore in revenues and an EBIT of Rs 8,403 crore in 2013-14.

In the first half of the current financial year, when the company recorded Rs 2,21,301 crore in revenues and Rs 22,895 crore in profit before depreciation, interest and tax, the revenues and EBIT from the refineries were at Rs 2,01,671 crore and Rs 7,658 crore, respectively. The average gross refining margin for the second quarter rose to $8.3 per barrel from $7.7 a year earlier. The revenues and EBIT from petrochemicals in the first half were at Rs 52,049 crore and Rs 4,224 crore, respectively. The petrochemicals division has registered an 8.1 per cent EBIT margin.

Debt For A Reason

RIL was debt-free on a net cash basis until a year ago as cash reserves were higher than the consolidated debt. But the extensive borrowings for telecom and petrochemical capacity expansion have tested its balance sheet. On 30 September 2014, RIL had a consolidated debt of Rs 1,42,084 crore. Discounting the cash hoard of Rs 83,456 crore on its books, the net debt stood at Rs 58,628 crore.

The analysts, however, support the massive capital investments by the company. Mukesh’s foray into broadband and the telecom sector at large will ensure effective deployment of its consistent cash flow from the traditional businesses, they opine. Deven Choksey, managing director of K.R. Choksey Securities, says RIL’s cash flow of around Rs 40,000 crore has forced it to invest in capital-intensive sectors. “Which means, the cash flow of three financial years and the existing cash reserve are enough for the company to fulfil the next three years’ investment commitment of Rs 1.8 lakh crore,” says Choksey.

In the past four years (3 January 2011 to 19 December 2014), RIL’s scrip has dipped 14.69 per cent, while the BSE Sensex gained 33.12 per cent in the same period. In 2014 (till 19 December), its share price staged a modest recovery, gaining 1.28 per cent, to touch Rs 900, even as the BSE Sensex rose 29.48 per cent.

According to Mukesh, the company is at an inflection point in its journey to create value for its stakeholders. “In the next two years, we will go up in debt to about Rs 60,000 crore. Our goal is to become debt-free by 2017-18 on a much larger base,” he said. It appears he is risking the short term for the long term.

(Published in Businessworld issue dated 12 January 2015)

More than Being Human

Sharleen D’souza , Business Standard
New Delhi, 25 December 2014

Mandhana Retail Ventures, the retail arm of Mandhana Industries, which holds the licence for the brand Being Human, plans to dig its heels in building more brands. While its parent company exports textile and garments to popular global apparel brands, Being Human was its first brush with retailing in its home market. Licensed out by a charitable trust under the same name set up by Bollywood actor Salman Khan, the Mumbai-based garment and textile manufacturing company demerged the retail business in November, 2014.

It has set the stage for the company to launch more retail brands. It has a three-pronged plan for Mandhana Retail to expand – extend Being Human into more categories, sign licensing deals with global brands and even flag off a home-grown brand of its own.

Being Human, which currently has more than 500 points of sale, appears to have instilled the confidence in Mandhana’s promoters to forge out on their own in apparel retail in India, which is not only crowded but also unorganised to a large extent.

"Retail is here to stay, it does require a different mindset and skills. But with Being Human, we have gained that confidence and now plan to start our own brands, as well as get into licensing deals due to the good prospects they offer, and to give value to our shareholders," says Manish Mandhana, MD of Mandhana Industries.

Mandhana’s, the textile division already exports to big brands overseas like H&M, Marks & Spencers, Abercrombie & Fitch and Banana Republic. It also retails Being Human abroad-Europe, West Asia, South Africa and Sri Lanka, notching up a global presence through shop-in-shops.

Licensing of international apparel brands already has players with considerable clout in the business. There is Reliance Brands (RIL) and Arvind Lifestyle Brands are some of the well-established players. "Mandhana Industries supplies apparel to many international brands and this will help the company get its foot in the door. But beyond that, it will have to show capabilities. There is a huge opportunity in the market to bring in more brands and create home-grown brands but these depend on the organisational capabilities, and management of multi-product portfolios. Mandhana has shown it has what it takes to make a brand grow with Being Human," says Devangshu Dutta, CEO of the retail and consumer consultancy Third Eyesight.

Mandhana Retail Ventures has the licence to handle the retail, designing, manufacturing and marketing of Being Human till March, 2020. It has also started to offering clothing for women and kids under the brand. In the next six to eight months, the collection’s accessories arm (includes belts, wallets and slippers so far) will be strengthened. Accessories in fashion enjoy considerable higher margins in general, and for Being Human, contributes 10 per cent to its topline (other apparel with accessory lines often see revenues from accessories at 5-7 per cent according to industry observers). A greater focus could take the accessories contribution to 30 per cent in the next two years, estimates the company.

Prashant Agarwal, joint-managing director of Wazir Advisors agrees that, "The company needs to focus not only on the charitable part of Being Human, but also increase the fashion quotient of the apparel brand. Being Human has become a strong brand but the product’s value will be enhanced when design is given due importance."

The company also sees 15 per cent of revenues come from e-commerce. "You can’t disregard e-commerce, it forms a considerable part of our retailing; we are present across most websites like Flipkart, Myntra, Jabong and will take Being Human to other sites as well," says Manish.

In 2013-14, retail for Mandhana clocked Rs 132 crore in revenue and the company hopes to see it grow by 30 to 40 per cent in FY-15. Experts say that de-merging the retail business is a logical step for a textile company which has stepped into retail and this will help improve the valuation of the company.

"It helps to keep both the businesses separate as both have different requirements. Also, it will not create unnecessary competition amongst the employees," says Agarwal. The company also needs to focus on which brands it plans to tie up with to arrive at a clear positioning, says Agarwal.

(Published in Business Standard)

More niche acquisitions likely in e-commerce sector, say analysts

Arpita Mukherjee, Business Today

New Delhi , 19 December 2014

In a bid to strengthen their presence in the e-commerce sector, large players such as Amazon, Snapdeal and Flipkart are likely to look at acquiring companies with niche, differential capabilities, say industry analysts.

With the recent acquisition of gifting technology platform Wishpicker by Snapdeal and reports about its acquisition of online order management platform Unicommerce, experts feel e-commerce players are looking to benefit from the vertical capabilities that such companies have on offer.

"Snapdeal will be able to leverage Unicommerce’s platforms to achieve in-depth visibility into its vendor profiles in terms of both inventory and accounts as well as improve its customer services," says Sanchit Vir Gogia, Chief Analyst and CEO, Greyhound Research.

Snapdeal is flush with cash after recently receiving $627 million in funding from Softbank. The online retailer earlier this year also acquired social product discovery technology platform Doozton.com.

With Flipkart acquiring Myntra this year, and several other acquisitions that have been taking place over the past couple of years, this seems to be one of the trends emerging in the industry, says Devangshu Dutta, CEO of consulting firm Third Eyesight. "The key word is differential, because the generic ones have already happened to a certain extent," says Dutta.

Arvind Singhal, Chairman of Technopak Advisors, says that as investment dries up for the several niche smaller players who have been unable to show growth, these are likely to be snapped up by the bigger players. "We will see that happen more in the next few months," says Singhal. "Amazon, Flipkart, Snapdeal will start looking for specialty players, or very niche specialty players, either for the market, or for technology."

Analysts also note that while this kind of consolidation helps establish one or a few clear winners, it is not good for the industry as a whole.

According to Harminder Sahni, Managing Director of consultancy Wazir Advisors, for any industry to strive there needs to be a lot of players, creativity and lots of new ideas. And, primarily driven by investor interest, with these kinds of acquisitions, the industry is likely to go the modern retail way where there are only a few players such as Shoppers Stop and Future Group. "(Investors) are not interested in building a large ecosystem where a lot of players strive. They want to have a winner and they all want to be a part of that winner," says Sahni.

(Published in Business Today)

Big e-tailers like Flipkart, Snapdeal getting richer; Zovi, Yepme yet to touch Rs 100 cr in sales

Sagar Malviya & Snigdha Sengupta, The Economic Times
Mumbai, 18 December 2014

Despite an online shopping frenzy in the country and large investors stepping in to fund several online retailers, most e-commerce players are yet to turn their click-and-buy model into big businesses as the big ones steal the show.

While nearly half a dozen shopping portals such as Zovi, FashionandYou, Yepme and Shopclues have doubled their sales since the last two years, they are yet to reach the Rs 100 croresales mark, and pale against the likes of Flipkart, Snapdeal and Jabong that clocked anywhere between Rs 500 crore-Rs 2,800 crore in sales for 2013-14, according to filings with the Registrar of Companies.

India, one of the fastest-growing ecommerce markets, is expected to have 100 million online shoppers by 2016 when the industry will grow to $15 billion, or about Rs 93,000 crore, up from 35 million consumers and $3-billion valuation this year, according to a recent Google report. Yet, in a highly competitive marketplace, where big discounts are the primary sales drivers for online retailers, many small players are struggling to gain ground.

"For every successful online retailer, there are at least 10 others which have either shut shop or got acquired," said Devangshu Dutta, chief executive at retail consultancy Third Eyesight.

He said just selling at lower rates isn’t enough for small players at a time large players flushed with funds aggressively look to grab market share through deep discounting. "Smaller players should have some key differentiator so that customers can give business to them instead of competition," Dutta said.

In fact, with small players forced to match discounts offered by bigger rivals, most of these firms reported higher losses, some even posting half their overall sales as net loss. VAS Services, which runs Yepme portal, posted a net loss of Rs 45 crore on net sales of Rs 61 crore last fiscal, while the net loss of Shopclues at Rs 38 crore was higher than its net sales of .`30.5 crore. But investors are still upbeat about ecommerce players, due to the huge growth opportunity.

"Investors are still willing to pay fairly healthy valuations for some of the smaller players in the market," said an investor who has backed a private label e-tailer.

"Compared to other developed markets, e-commerce entry valuations in India are still relatively attractive," the person added.

Some small players did manage to improve their performance though. Robemall’s Zovi, which more than doubled its sales in FY14 to Rs 51 crore from Rs 21 crore in the previous year, reduced its net loss to Rs 19 crore from Rs 34 crore during this period. FashionandYou, a flash sales site of Delhi-based Goldsquare sales, also managed to reduce losses to Rs 20 crore in FY14 from Rs 77.9 crore in the previous year as it consolidated its business after acquiring fashion and beauty e-tailor Urbantouch a year ago.

"The focus throughout the year was to bring efficiency and cut down cost that included trimming down the employees from 1,000 to 300 people," said Aasheesh Mediratta, CEO of FashionandYou, which posted a 21% decline in sales at Rs 75 crore due to the reorganisation.

(Published in The Economic Times)

eBay lags behind Amazon and Flipkart in commission revenues

Sagar Malviya, The Economic Times
Mumbai, 16 December 2014

eBay India, one of the earliest online marketplaces in the country, has slipped behind both Flipkart and Amazon on revenues from seller commissions as its two rivals along with Snapdeal have been aggressively pushing sales with big discounting events and high-decibel marketing.
eBay India posted revenues or income of Rs 107 crore calculated on commission earned from sellers along with advertising revenues for fiscal 2013-14, according to its annual filing to the Registrar of Companies.
In comparison, Amazon Seller Services posted revenues of Rs 169 crore and Flipkart Internet that manages the portal reported income of Rs 179 crore. A year earlier, eBay’s revenue was Rs 81 crore while Flipkart trailed with Rs 15.4 crore.
These numbers are not sales from actual goods sold on their portals but are transaction and listing fees from the sellers as well as advertising revenue which is the actual revenue of e- commerce sites. eBay declined to comment on its financials.
While eBay and Amazon don’t disclose income from merchandise sales, Flipkart India, the website’s wholesale arm, said sales more than doubled to Rs 2,846 crore in the year ended March 2014, against Rs 1,180 crore in the previous year.

Experts feel that the aggressive strategy of Flipkart, Snapdeal and Amazon has affected most others including eBay.

"These three companies are playing a game for market dominance and their aggressive stance has taken options away from rivals," said Devangshu Dutta, CEO at retail consultancy Third Eyesight.

"These Indian players (Flipkart and Snapdeal) are funded well to continue that strategy while Amazon seems to have clearly seen a huge opportunity in India," he added.

In July, Amazon announced it would invest $2 billion (approx Rs 12,400 crore) in the company’s India operations that have exceeded gross merchandise sales of more than $1 billion within a year of the launch.

San Jose-based eBay bought local auction platform baazee.com for $55 million (about Rs. 344 crore) to enter India back in 2004, at a time when online retail was unheard of in most of the country.

The Indian e-commerce industry picked up in a big way in the last couple of years, triggered by deep discounting strategy from newer players even if that meant incurring heavy losses.

Soaring sales and rising losses bear witness to this. Combined losses of Bangalorebased Flipkart, Delhi-based Snapdeal and Amazon India was more than Rs 985 crore for the last fiscal. Flipkart and Snapdeal — which counts eBay, Azim Premji and Ratan Tata as investors — together sold goods worth more than $4 billion. eBay India has been mostly lying low and hasn’t been actively participating in recent mega sale events. Yet, the company has posted Rs 83 crore net loss during year to March 2014, a 15% increase from a year ago period.

Frequent change in its leadership team may have also affected eBay. Its current managing director Latif Nathani is its fourth India head in the past five years.

Parent company eBay Inc is trying to sort out issues in its home market by spinning off its PayPal unit into a separate business in an attempt to negate the slowing growth of traditional marketplace business.

Experts, however, aren’t discounting eBay India yet and feel the Indian online retail market, which is estimated to grow over four-fold to touch $14.5 billion (over Rs 88,000 crore) by 2018 can absorb a handful of large players including eBay.

(Published in The Economic Times)

Global brands change partners for more reach in India

Vijaya Rathore, The Economic Times

New Delhi, 12 December 2014

Brioni, a luxury menswear brand from Italy, is currently looking for the "perfect" location in a south Delhi upscale mall to open a store, almost after a year it shut down its earlier store located inside a five-star hotel.

Store location is not the only change that Brioni has initiated in the country. It has found a new partner to sell its jackets, ties and shirts in India.

Another luxury brand, Etro, is holding talks with a number of retailers in India to make a comeback, after it split ways with Genesis Luxury and all the India stores were shut last year.

A host of popular brands, including Ferrari, Bang & Olufsen, Montblanc, Etro, Brioni and Bulgari are revisiting their India business plans by tweaking one of the most important factors – the local partner. Reasons differ. It could either be inefficiency of the existing partner to infuse new energy and money in the business, or the desire to take control of the operations by choosing someone docile.

Iconic jewellery brand Bulgari has formed a joint venture with a new "silent partner" with an aim to have better control over its operations in this market.

"Our ambition in India is much higher than before," Bulgari chief executive office Jean Christophe Babin told ET on his recent visit to India. The decision to make direct investments in this market, instead of simply relying on a franchise partner is like "pressing the reboot button". Bulgari had ended its seven-year relationship with Mumbai-based Dia Group’s Lifestyle Tradelinks India in 2011. Likewise, Ferrari has hooked up with Yadur Kapur, a dealer of luxury cars for the Delhi market and Navnit Motors in Mumbai, splitting with Delhibased Shreyans Group.

Kapur, who is working on a plan to open a new showroom, sales and service centre for Ferrari in Delhi, says, "The brand will now be represented in the right way in the country." One of his focus areas would also be to make sure that the company sent enough cars to India to match demand and that the buyers don’t have to wait too long.

Experts point out that the change in partnerships was partly due to the natural lifecycle of a relationship between the two parties, apart from other factors. "Many pacts were originally signed for a limited period, and when that time passes, people move on," says said Devangshu Dutta, chief executive at retail consultancy Third Eyesight.

Also, as brands become more serious about the market, they revisit everything in order to infuse a fresh lease of life into the business.

"When international brands realise the importance of India and sense that the existing partner may not have the capacity, interest or potential to address the same, they move on," adds Dutta.

Etro, for example, is one of the brands looking for a new partner to conduct business in India. "We have had a meeting with them," said a senior executive of one of the top luxury retailers in India who did not wish to be identified.

Some separations are bitter. Former cricketer and businessman Dilip Doshi and Montblanc are fighting a legal battle amid allegations of fraud and deceit. Doshi claims that Montblanc pulled out of a possible joint venture at the last minute and terminated its distribution and franchise agreements in March this year.

Earlier this year, Montblanc announced a 51:49 joint venture to setup single-brand retail stores with Titan Industries, a Tata Group company.

Similarly, Brioni and Badasaab Designs (retailer of Brioni in India) went to court against each other and the legal tussle went on for some time. "A mutual settlement has been reached between the two," said a person aware of the development. Brioni is understood to have finalised OSL Luxury, which sells Corneliani menswear in India, as its new partner. OSL executives, however, did not comment on the development.

New Partners, New Plans

To begin with, most brands are working on re-establishing a retail presence besides enhancing brand visibility and "consumer experience."

Denmark-based high-end entertainment systems maker Bang & Olufsen (B&O) for instance has just opened a single-brand store in Delhi, and so has Bulgari. Ferrari and Brioni are doing the same. "We also have access to outside investment to expand B&O’s business in India," said Gaganmeet Singh, director of BeoWorld.

For the Bulgari CEO, it was important to take control of India’s operations."Though we have a partner here, we are behind the driving wheel," Babin said.

It’s not the first time brands are shuffling their relationships. In 2009, Gucci parted ways with its old franchisee Vijay Murjani and moved to a franchise agreement with investment banker Ashok Wadhwa’s Luxury Goods Retail.

Versace, is now with Infinite Luxury, but was earlier retailed by Blues Clothing Company in India. In 2012, Giorgio Armani ended its joint venture with DLF Brands to get into a deal with Genesis Luxury, run by Sanjay Kapoor.

A recent Euromonitor report said that India was the fastest-growing emerging market for luxury goods. The country’s luxury market will grow 86 per cent in constant value terms between 2013 and 2018, while China, Malaysia and Indonesia are expected to grow 74 per cent, 62 per cent and 59 per cent, respectively, over the period. India’s luxury market was expected to reach $14.73 billion by 2015 from an estimated $8.21 billion last year, with about 30 per cent of the customers coming from smaller cities.

(Published in The Economic Times)

Money talks… from a mobile phone

Rashmi Pratap, The Hindu Businessline

Mumbai, 12 December 2014

Vinay Singh does not own a debit or credit card, nor does anyone in his family, which has lived for four generations in Bihar’s Gaya district. Yet, they regularly shop online from Homeshop18 and Naaptol. Even their holiday hotel bookings are done online, again without internet banking or cards. Singh instead has a mobile wallet from Paytm, which allows him to load cash on his mobile phone through a nearby mobile retailer or ATM and use it for all his online transactions.

In the recent case where a customer of Uber’s car-sharing service was allegedly raped by the driver, Paytm helped Delhi Police close in on the accused. As Uber riders can only pay through Paytm under RBI guidelines for credit card use, the police downloaded the Uber app and Paytm wallet, booked a cab and directed the driver to take them to Uber’s office in Gurgaon. This was a neat ploy to track down the office, whose physical address remained unknown until then.

This new world of mobile wallets is expected to become a $20.4-billion business by the end of the year, according to a joint study by the Internet and Mobile Association of India, Payments Council of India and IMRB.

Besides loading cash, users can also sync their credit or debit card with Paytm’s mobile wallet and avoid having to punch in confidential card details during an online transaction. Several companies including PayU, CCAvenue, among others offer mobile payment services, but Paytm is different as it has its own mobile marketplace, which brings it into the league of Snapdeal and Shopclues.

Card-free shopping

“When smartphones came, people wanted to shop online and operator wallet (payment through mobile operator) was not allowed. We saw that gap and created Paytm in 2011 to build an online payment option for the masses,” says Vijay Shekhar Sharma, founder and CEO of Paytm. Short for ‘pay through mobile’, Paytm is the consumer brand of mobile internet company One97 Communications, whose investors include SAIF Partners, Intel Capital and SAP Ventures, among others.

Paytm began by offering payment services for utility bills and mobile recharges. It has expanded through tie-ups with companies since January this year, after the RBI gave its nod for mobile wallets. Shoppers can store cash on mobile phones for payments to a whole lot of retailers from Myntra to Zovi and Fabfurnish to Yepme.

“If you are on an online shopping site, Paytm gets your card details pre-filled and you just have to add your CVV number. The card details are only with us and not with any of the merchants,” says Sharma.

Paytm also takes care of any reversal of transaction. And if any merchant fails to fulfil obligations, Paytm blocks the merchant and the payment. Over 22 million have used Paytm since January, making it one of the largest mobile commerce companies.

Customers love it

Online furniture retailer Fabfurnish has witnessed this growth first-hand. “Paytm offers buyers incentives like cash-back and additional discounts. It also makes payment much more convenient. Tying with them leads to greater sales for merchants like us,” says Reeju Dutta, CRM manager of Fabfurnish.

At Fabfurnish, the number of transactions through Paytm has increased 10 times in the last six months. “Paytm drives a certain number of sales and revenues. Even though the order value may not be too high, the number of transactions through Paytm is relatively higher, making it very important for us,” Dutta explains.

Ditto for Homeshop18. Vikrant Khanna, its COO – TV Business, says: “Within a month of our partnership, 10 per cent of our online paying customers adopted this wallet service. It also gave us access to over 10 million Paytm customers and saw referral traffic.”

Currently, 12 per cent of Homeshop18’s online paying customers uses Paytm. “We are looking at launching Paytm option on all our mobile platforms next year and expect to grow by 50 per cent every month after that,” Khanna adds.

Paytm users can load their mobile wallets with cash from banks, retailers and ATMs. “We are in talks with some large nationalised banks for tie-ups. And on the retail front, we want to see that any place where a phone can be charged can also load money into a Paytm wallet,” says Sharma. He expects one million such outlets in the next three years.

Already, 16 million Paytm wallets have been created since January and the company has seen a Rs. 3,500-crore annual run rate of transactions. “Consumers have accepted us wholeheartedly. Our wallet users are growing at more than 40 per cent every month, while transactions are growing at more than 20 per cent,” he adds.

Forget cash-on-delivery

This growth for Paytm is driven by online services such as food delivery, cinema ticket bookings, travel bookings and so on. “These services typically don’t accept cash on delivery, but users want to book with assurance. We are an answer for businesses that don’t accept cash during delivery. We are an alternative to cash-on-delivery,” says Sharma. India’s e-commerce boom was primarily driven by cash-on-delivery, but Sharma believes the next wave of services including taxis and medical appointments will grow with mobile e-commerce. “But unlike e-commerce, we don’t require logistics.”

According to a study by Accel India, the number of cash-on-delivery transactions in India will drop from 60 per cent in 2013 to 50 per cent by 2016. And the share of third-party wallets such as Paytm will rise 7 per cent. Third-party wallets, despite being a new phenomenon, have a strong value proposition and will become popular quickly, just like in China. They will become a significant alternative to cash-on-delivery, the study says.

Khanna says additional factors such as greater adoption of mobile payment technology, high penetration of mobile internet and a strong demographic dividend will see young India increasingly favouring quicker, safer and convenient payment options.

Gateway to the market

Encouraged by the growing number of merchants and customers opting for Paytm, the company set up its marketplace in February. This is basically a common platform where customers and merchants can discover each other. “We are like the checkout aisle where you can pick up things on the way out,” says Sharma, adding, “we were getting traffic as we were sorting payments. So we began offering an opportunity to merchants to have their catalogue discovered.”

Globally, too, payment gateways and marketplaces have been linked — eBay and Paypal, and Alibaba with Taobao, for instance. “All marketplaces in the world are successful as they control payment to the merchant. Otherwise, you are an inventory owner and can’t control the experience of the customer and you can’t create trust. This is our fundamental understanding,” Sharma adds.

Paytm currently features a staggering 3.5 million products and over 10,000 merchants in its marketplace. “We will be the fastest to reach a million merchants in the next two years,” says Sharma.

As a marketplace, Paytm does not hold inventory. In contrast, the e-tailer owns the products in inventory-led models. “We don’t store goods but offer logistics to merchants through our cloud service,” says Sharma. Instead of big courier companies, Paytm has tied up with multiple smaller players in every location, allowing it to deliver to 20,000 pin codes across the country.

Double business

With nearly $30 million invested so far, Paytm is currently raising more money. “No other e-commerce company is using our model. There are independent payment companies such as CCAvenue and Airtel Money, while the marketplace model has Shopclues and Snapdeal. But nobody has this combination of payment+marketplace,” says Sharma.

This model, however, is not an easy one. Flipkart would know. It launched the payment gateway PayZippy in July 2013 only to shut it down a year later for want of traffic. Flipkart then tied up with payment gateway ngpay.

Devangshu Dutta, chief executive at consultancy firm Third Eyesight, says a payment gateway-cum-marketplace eases two pain points for merchants — acquiring customers and handling the payment transactions. “And, in theory, that’s something which can be delivered by the same company. But in practice, the skill sets and mindsets required are different.”

In the payment space, any company’s aim is to drive down the transaction cost, while the marketplace seeks to acquire customers, drive sales volume, drive conversion (visitors into buyers) and increase transaction value as well, he explains.

“There is nothing to say that the same company cannot execute it. But given that the marketplace model is undergoing significant changes and seeing a lot of action and competition (Amazon and Snapdeal are investing billions of dollars), it does need phenomenal execution ability to compete in that space,” Dutta adds.

Considering its dream run so far, Paytm will be hoping to ride the two boats simultaneously and successfully.

(Published in The Hindu Businessline)

Jabong, Myntra signal revolution in fashion e-tailing

Sagar Malviya, The Economic Times

Mumbai, 11 December 2014

Just three years… and the fashion retail industry may be at the threshold of a revolution. Jabong and Myntra, India’s biggest e-tailers of fashion, are clocking up impressive top line numbers and, more importantly, red hot 3-digit and 4-digit growth figures that signal a tipping point in how urban Indians will dress themselves — they will likely move most of their clothes shopping to e-commerce.

Consider the numbers. In three years of operations (2012-2014), Jabong and Myntra’s combined top line has hit Rs 1,000 crore for the year ended March 2014. Growth has been more than blistering.

Jabong sales in 2013-14 jumped to Rs 527 crore, from a mere Rs 4.6 crore in 2011-12 — that’s an eye-popping 11,357% growth in sales. Myntra’s Rs 441-crore top line in 2013-14 was an only slightly less staggering 558% jump from 2011-12’s Rs 67.1 crore. And in these three years, Jabong’s and Myntra’s top lines have outperformed those of brick-and-mortar fashion biggies, Zara, Levis and Marks & Spencers, which have been in business in India for between 5 and 10 years.

Plus, growth in the big brickand-mortar chains, Shoppers Stop and Future Lifestyle Fashion, which have been in operations for two decades or more, has really slowed down in comparison, over the same period.

As Amazon chief Jeff Bezos had said, the big success of fashion etailing is the biggest learning he’s taken away from India. And market analysts and fashion-conscious urban middle and upper middle classes are saying the same thing differently.

Analysts say a tipping point has been reached in e-tailing fashion. Consumers say the sheer convenience of browsing through thousands of big label options from the comfort of one’s home or office and the ease of returning clothes that don’t fit are the reasons they will stay with buying a dress through a mouse click.

"Where will I get international brands such as Dorothy Perkins, Mango, FCUK, and not-so-highpriced Harpa and Femella all in one place? I won’t ever get to browse 5,000 designs at stores and I can’t go there every day braving the traffic. But I can go to the virtual store every single day and if I don’t like what I have shopped, I can just return, all from the comfort of my chair," said Ruchi Sally, director at retail consultancy Elargir Solutions and an online shopper explaining the growth of online fashion retailers.

"Online retail has passed the inflection point as customers have stopped questioning its viability and authenticity," said Devangshu Dutta, chief executive at retail consultancy Third Eyesight.

Fashion e-tailers attribute their success to multiplier effect from good customer experience and some serious brand-building efforts.

"Apart from the acceptance of e-commerce at a macro-level, we have, over time, built our reputation through customer experience. This will now translate into higher sales as we laid a strong foundation," said Praveen Sinha, co-founder of Jabong.com. "There has been a lot of focus on branding and investment to build fashion properties and technology which will help in the long run even as though it impacts profitability now."

Jabong and Myntra also attribute their growth to an increase in its product portfolio and exclusive tie-ups, especially with international brands.

The Indian online retail market is estimated to grow over 4-fold to touch $14.5 billion (over Rs 88,000 crore) by 2018 on account of rapid expansion of e-commerce in the country, according to research and consultancy firm RNCOS that projects compound annual growth rate of 4045 % during 2014-18. The current market size of the online retail sector has been pegged at $3.5 billion (over Rs 21,000 crore).

Fashion e-tailing, say market watchers, is poised to become the top category in the near future. RNCOS says while online sales account for nearly 4% of the overall apparel market, as compared to 15% for smartphones and between 5-10% for flat panel televisions, digital cameras and personal care gadgets, the hierarchy is set to change.

"It is likely that few years down the line, apparel and accessories will take over the top slot from electronic gadgets," the RNCOS report said.

Fashion e-tailing in India, say pundits, is going through the classic e-commerce growth pattern at a quick pace. In a very short time, the likes of Jabong and Myntra have crossed the first two stages — attracting the first enthusiasts and seducing a wider set with product promotions. The third, really defining stage will come when clicking for a dress becomes an even wider habit.

"Initial growth came mostly because of early adopters. The second set has come because of variety, good deals and promotions as part of customer acquisition strategy, triggering high growth. This two categories itself represent a large market opportunity. The big-bang change will be when a majority of consumers start buying fashion online, just as the first two categories are doing," said Gaurav Gupta, Deloitte’s senior director, retail.

The twist in the fashion e-tailing thread is the same as that for all e-commerce — the red-hot growth phase that’s bulking up losses. Jabong’s losses climbed from Rs 16 lakh to Rs 16 crore between 2012-14 and 2013-14. Myntra’s went up from Rs 134 crore to Rs 173 crore in the same period. In fact, the combined losses of e-commerce’s leading lights — Flipkart, Amazon, Snapdeal, Jabong and Myntra — is Rs 1,200 crore. But pundits say losses in the big growth phase is a pain all e-commerce firms have to bear and investors look at future market grab potential. On that count, analysts give a thumbs-up to the likes of Jabong and Myntra.

Fashion e-taliers are not carefree about their losses, though. Myntra, which has a more unfavourable revenue loss metric had told ET last week that it is working on cutting costs, improving back-end supply chain efficiencies, seeking more margins from brands and boosting private brand business. All this in a bid to break even in the next 15-18 months.

Analysts also say the next test for e-tailers is to keep customers happy even while reducing discounting sales. But a significant inflection point will be when a bulk of the sales will be on non-discounted products: Third Eyesight’s Dutta makes the point that Jabong and Myntra should now prepare for life with non-discounted sales, since that’s where sustainable success lies.

But while, like most other etailers, Jabong and Myntra must turn their losses to profits at some point of time, they have received validation of their business model from most the unlikely sources — their bitter business rivals in brick and mortar.

E-tailers’ customer acquisition strategies has produced sharp reactions from brick and mortar chains. But physical stores are now allying with e-tailers to expand their market share, including in apparel. Future Group is with Amazon and Fabindia is in alliance with Myntra.

Even brick and mortar, it would seem, has seen the future.

(Published in The Economic Times)

Looking Beyond Tobacco

Himanshu Kakkar, Outlook Business
New Delhi, 28 November 2014

There is no denying that business histories are rarely documented, let alone in print, so a museum that chronicles a renowned company’s tumultuous history was till recently a far-fetched idea. This is where the experiential DS Museum started by the Dharampal Satyapal (DS) Group has scored a major first, recounting the grassroots-to-major-group transition of the entity, covering its diverse interests, from tobacco, mouth fresheners, confectionery, food and beverage and dairy ­— its core businesses — to latex, agroforestry, packaging, hospitality and infrastructure — its emerging businesses. Started by Dharampal in 1929 as a tobacco business, the group, which many of us now associate with the Catch spices label, counts Rajnigandha and Baba among the prime building blocks of its emerging empire.

Indian digestives have taken a beating in recent years, so the idea of using a museum to bring the brand’s story alive — from the colourful streets of Chandni Chowk in Delhi to the founder’s laboratory, painstakingly detailed with life-like marionettes and the original accouterments of Satyapal’s office — is heightened with dramatic possibilities. Satyapal was responsible for steering the fledgling company towards quality, research and its early experiments with branding. Audiences love rags-to-riches stories and there’s enough of that here to endear the company to the small groups that have permission to visit the museum, which is located on the group’s office premises. Similar museums at the Akshardham Temple, also in the capital, and the Khalsa Museum at Anantpur Sahib have used comparable tropes, but DS distinguishes itself by providing a more intimate experience to the audience.

For this purpose, visitors enter through a ‘fragrant forest’ where lights and aromas are triggered by the visitor’s footsteps, a kind of tactile experience unexplored in India so far. In the next section, a theatrical dramatisation of the group’s founders is used as an emotional hook to retain interest in the two remaining zones, which are built around the group’s aspirational vision and the range of products manufactured in its state-of-the-art factories. Though the museum is not yet open for the general public, it may not be long before it is: the Rs 4,800-crore group has a story to tell and it has done so with poignant vigour, something other companies may do well to emulate.

Changing Shape

It was during Satyapal’s era that the group firmly ensconced itself in a highly commoditised category like tobacco by pioneering the branded chewing and paan masala market in the country. Lala Satyapal had realised in the late ’50s that branding was critical for the company’s survival. The inception of the company’s first brand was just as fortuitous — Satyapal was walking around Connaught Place in 1958 when he came across a small laughing Buddha statue in a shop. Enamoured by the image, he got an artist to redraw the figure, albeit wearing a doshala and tilak. In 1969, graced with image, the first product from the company’s stables — Baba — was introduced, also holding the distinction of being the first-ever branded chewing tobacco product in India. Soon, new brands such as Tulsi in 1979 — to mark the 50th anniversary of the business — and Rajnigandha were created. Satyapal found the name apt because it was a sweet-smelling flower that had a popular film song dedicated to it, ensuring easy recall among the audience. The Catch brand name, inspired by a one-off cricket match, was also his brainchild.

After ruling the tobacco and paan masala market in the ’70s and the ’80s, the group diversified into the food business with Catch salt shakers in 1987, followed by Catch spices. Since then, the group has been entering new market segments quite regularly — packaging (with Canpac), spring water (Catch), mouth fresheners (Pass Pass), rubber (Uniflex), hospitality (Manu Maharani in Nainital), agroforestry (in the northeast) and dairy (Dairybest and Ksheer). The diversification has largely been driven by Satyapal’s two sons, group chairman Ravinder Kumar and Rajiv Kumar, who is the face of the group. The group’s turnover currently stands at Rs 4,894 crore and they hope to be a billion dollar company by the end of FY15. Putting the expansion in perspective, 52-year-old Rajiv, VC and MD, DS Group explains, “We are not top line- or bottom line-obsessed. We enter businesses where we see value and where we can add value. Though some of them are niche categories, in a country of a billion, that translates into numbers equaling the population of European countries such as Switzerland.”

The diversification is not without reason. Tobacco companies the world over try to break free from the negative image associated with tobacco consumption and dependence on tobacco products. The group, too, has spread its basket with this aim. The constant focus on reducing dependence on tobacco has meant that it today contributes just 25% to revenue. “At its peak, tobacco, along with paan masala, made up for the group’s entire revenue in late ’80s. But that’s no longer the case today,” points out Rajiv. Though the tobacco business brings in a sizeable Rs 1,262 crore in revenue and has been instrumental in making the group cash-rich over the past four decades, it is mouth fresheners — mainly the flagship Rajnigandha paan masala — that contribute 40%, or over Rs 2,334 crore, to the group’s top line. “Though tobacco is not likely to be banned in the foreseeable future, we chose to work on healthier alternatives as well,” he explains.


Making A Mark

Though the group’s journey seems starkly similar to the way tobacco major ITC remodeled its business to emerge as an FMCG-to-hospitality conglomerate, Rajiv disagrees with this observation. “It is the media that compares us with ITC. There are so many businesses where we are present and they are not, and vice versa. Our diversification is our natural progression,” he emphasises. In others words, the group consciously chooses to stay away from the personal care segment and food categories such as wheat flour. Instead, it is now betting on FMCG businesses through its DS Foods subsidiary, banking on its existing strong sales and distribution channels that have been hawking salt and spices for decades. The group has chosen to enter niche categories with a premium positioning attached to them. “Premiumisation is in our DNA. My father would travel all the way to Kashmiri farms to ensure that the right quality of saffron was being supplied to us,” points out Rajiv. The habit of getting the right ingredients has been crafted into a business strategy for the premium positioning of its mouth fresheners.

“It is a choice that each company makes. However, my opinion is that if you are committed to building a brand from the very beginning, then instead of competing on the price front with generic products, it is best to start with a premium brand. The additional margin available can be invested in strengthening the brand and its product attributes. The premium itself can serve as a vehicle to establish a difference from the competition,” says Devangshu Dutta, chief executive, Third Eyesight.

As early as 1987, much before the consumerism wave hit India, the group entered the foods space by going premium with table salt. Today, it has found its sweet spot in the dining condiment arena with its free-flowing table salt and pepper shakers under the Catch brand, which is today worth Rs 400 crore. Though Tata came out with its own brand of shakers, Catch continues to dominate the salt and spices shaker category. At Rs 15 for 100 gm, Catch is costlier than ordinary packaged salt. “In the table shaker category, we perhaps hold 99% market share,” points out OP Khanduja, associate business head, food business, DS Group. Similarly, In 1999, it launched bottled water by positioning Catch Natural Spring Water as having been bottled at source in the Himalayas. At Rs 53 crore per year, the brand today accounts for a lion’s share in the bottled spring water market.“The demand for Catch Natural Spring Water is more than the supply, given that the number of springs in the Himalayas is limited,” points out Bhavna Sood, senior vice-president, DS Group.

The premium plank has worked well within the group’s flagship business too. The total size of the paan masala industry is worth Rs 27,000 crore, with the premium segment accounting for Rs 2,800 crore. Of this, Rajnigandha holds close to 80% share. CK Sharma, business head, mouth freshener, who handles the Rajnigandha portfolio, says, “Over the past couple of years, the rural-urban divide has narrowed, with an increasing preference for branded products. This reflects in our sales.” As a result, the Rajnigandha business has seen an astronomical spurt in size last year (from Rs 1,300 crore to Rs 2,334 crore). Besides an aggressive TV commercial strategy, the company kept consumer interest alive by introducing several variants, with the latest — Rajnigandha Silver Pearls — being introduced in convenient plastic packs.

What is also working in favour of the mouth freshener category is the gutka ban in 26 states since 2012, which Rajnigandha paan masala seems to have benefited from. Sharma says the brand has tried to steer clear of gutka — a banned product that could tarnish its clean image. “Based on consumer demand, we did manufacture gutka in the past but were not that successful. However, after the ban, we have abided by the law and stopped manufacturing gutka.”

Though consumers have simply shifted to mixing paan masala with chewing tobacco (both of which are available as the company’s products) after gutka was banned, Sharma believes that this is not what is driving Rajnigandha paan masala’s sales. “People consume paan masala in a variety of ways but largely as a mouth freshener. There is no correlation between the rise in the sales of Rajnigandha and the gutka ban; the former is due to expansion and focus on rural penetration.”

Keeping in line with its expansion, the group entered the dairy business in 2011 with the acquisition of a plant in Rajasthan, including an institutional brand called Dairy Max. Two years later, it forayed into the premium dairy segment with ultra high temperature (UHT) processed milk and cow’s ghee under the newly launched Ksheer brand. With only a handful of players such as Nestle (GLYPH), Mother Dairy, Amul and Parag Milk present in the Rs 2,000-crore high quality and long shelf life UHT premium segment, the group chose its positioning carefully, with industry forecasts predicting the UHT milk market to grow at 20% annually. Rajiv claims that even with stiff competition, the initial results have been satisfying. “The dairy business has grown from Rs 30 crore in FY13 to Rs 111 crore in FY14 but it will be at least three-four years before cold chain infrastructure comes into place and we are able to realise its potential with new products,” he adds. The group is now looking at revenue of Rs 300 crore from the dairy business by 2016.

Network Connections

The group has managed to create a sizeable FMCG business as it has leveraged and ramped up its existing distribution network. Sharma says, “From 8 lakh retailers, we have reached 10 lakh in two years and have entered new towns and villages. Perhaps, we enjoy the highest retail reach after ITC,” mentions Sharma. The retail penetration is an outcome of its revamped distribution strategy that resulted in the number of depots increasing from 24 to 30 with 160 super distributors and close to 1,400 sub-distributors covering close to 9,500 villages.

The deeper penetration coupled with changing consumer preferences has worked in favour of the group. In case of mouth fresheners, DS was a strong player in northern and western markets, but not in south, which is what it is trying to change. “Pass Pass is our carrier brand in the south and we are leveraging our distribution and reach, to place Rajnigandha paan masala and other products in kiosks in the south,” says Sharma. The group is convincing retailers for better display of their brands. “If a retailer earns Rs 500 and Rs 250 comes from our products, we can influence space management in his shop,” adds Sharma.

“Consumption is rising rapidly in the higher income segments where availability and branding are greater drivers of product off-take than price-based competition. Most FMCG companies in India are under-penetrated with regard to distribution. Perhaps about 20% of the market is unserviced even for a market leader such as Hindustan Unilever; for other companies that figure is far higher. So increasing a brand’s availability across geography and penetration within the locations already serviced are avenues of future growth” says Dutta on DS group’s expansion plans.

In the case of Catch salt & spices business, which has grown over 30% over the past two years, the retail reach has gone up from 1.5 lakh outlets to 2 lakh outlets. “We revamped our reach in southern and eastern markets where we were weak, and outsourced part of our production,” points out Sharma. In case of the spices business, the group is focusing on all sales channels — general and modern trade, and restaurants and catering. Though there are several regional players and MDH and Everest dominate the general trade, Khanduja points out that they lack a national focus unlike the DS group.

The Way Ahead

Over the past five years, the group has trebled its turnover of Rs 600 crore with a diversified portfolio. By going that extra mile, it stands separate from other homegrown peers such as Kothari Products (Pan Parag) and Dhariwal Industries (RMD Gutka). Says Sood, “We are a privately held company but our accounting practises are at par with that of a public company. We aren’t required to present annual reports but we do. We are transparent and follow best practices.”

Today, the group garners more than a fourth of its revenue from food and beverage products and intends things to remain that way. Industry experts believe that given the competitive landscape, the DS Group has its task cut out. “The biggest challenge for them is how to get blockbuster brands. Catch is only one brand; they have to look at a much broader horizon and launch fresh brands in other categories such as processed food, chocolate or chips, the way ITC has progressed,” says Harminder Sahni of Wazir Advisors. But Rajiv has a different plan and doesn’t believe that the group needs to create fresh brands in multiple categories. “Catch will be like an umbrella brand — like Nestle — and sub-brands such as Catch Ksheer or Catch Piyoz (powdered beverages) will make space for themselves.”

However, getting market share is not that easy. In case of Catch spices, DS’ market share is hardly 7-8%, even after two decades in the business. The Rs 6,000-crore spice market has two major players — MDH and Everest — and numerous regional players. Catch is a premium but niche player. But Rajiv is willing to be patient. “MDH is 80 years old, Everest 50 years old, so our brand too needs time to come of age,” he feels. Nevertheless, the group is doing all it takes to create a buzz around its products, including celebrity advertising; actress Vidya Balan endorses its spices brand. While FMCG is a core part of the group’s strategy, its blueprint for the hospitality industry is taking shape. After acquiring a 67-room hotel — Manu Maharani — at Nainital in 2000, DS is ready for a second round of expansion.

“We acquired our first hotel fifteen years ago and have learnt the basics of the hospitality business. It’s only now that four of our properties are coming up at Kolkata, Jaipur, Guwahati and Jim Corbett National Park,” Rajiv adds. With close to 1,000 rooms, the new properties will be a mix of budget and star hotels and will be largely funded through internal accruals. Though the group seems to be aping the ITC growth model, Kumar believes otherwise. “We entered agroforestry because we needed herbs for our spice and mouth freshener business, packaging because of company needs and hospitality because of my passion and our group’s emphasis on Indian culture,” he mentions. That being the case, the experiential DS Museum will probably have a lot more tales to tell about the group’s journey in the coming years.

(Published in Outlook Business) (By Himanshu Kakkar with inputs from Kishore Singh)

Burger King eyes a big slice of the Indian market

Samar Srivastava, Forbes India
Mumbai, 28 November 2014

When Forbes India first visited Burger King in July this year, its office in Mumbai’s Lower Parel business district was a beehive of activity. Employees were busy scouting for locations, negotiating with suppliers, conducting blind tastings and fine-tuning the international hamburger chain’s India menu. At the time, the $1.1 billion (2013 revenues) global fast food giant was still a quarter away from launching in India, but the countdown had begun.

A late entrant into the market, Burger King has seen many a competitor trip in its understanding of the Indian consumer.

Which is why, 45-year-old Rajeev Varman, chief executive officer of Burger King’s India operations, emphasises that menu will be the differentiator. “We will have burgers that no one in India has ever had before,” he tells Forbes India.

This would sound like a grand claim, one that is easier said than done: Development of the menu and, more importantly, adapting it to appeal to Indian tastes has taken established international players years to implement. Rivals such as McDonald’s and KFC met with success only after they indigenised their offerings as per local taste profiles. It took them a decade to arrive at a winning and money-making formula.

And therein lies Varman’s biggest challenge. Can he find a shortcut, and give a menu that Indians will love from day one? He is confident of his success.

At the time of writing this story, Burger King was set to open its first India outlet in Select Citywalk in Saket, Delhi, on November 9; this will be followed by a Mumbai launch the week after, at Phoenix Mills. By December, there will be a dozen Burger King outlets but only in Mumbai and Delhi—for now. Varman does not want to reveal the fast-food chain’s long-term India plans.

Burger King is entering the hyper-competitive Western quick service restaurant (QSR) space at a time when consumer spending has been under pressure. Competitors such as McDonald’s, which has over 350 outlets across India, KFC, with a chain of 361 stores, Domino’s Pizza (772 outlets) and Subway (472), have all seen consumer spending—hit by high inflation— slow down in the last year. Still, Crisil Research estimates the market to grow to Rs 7,000 crore by 2018 from the present Rs 3,400 crore; this is an annual growth of 27 percent with average spends of Rs 3,700 per household per year in metro cities.

It’s very early days, but 3G Capital, the multi-billion dollar Brazilian private equity parent which owns Burger King, has made all the correct moves. “The only reason we had not entered the Indian market till now was because we couldn’t find the right partner,” says Elias Diaz, president, Asia Pacific, at Burger King. The company was loath to enter the Indian market on its own realising that real estate, sourcing and taxation issues would divert its attention from the task of getting stores up and running.

In 2013, however, in what could well be a master stroke, Burger King tied up with the Sameer Sain-led Everstone Group (an Indian private equity firm with experience in the QSR space) to help it navigate the already-crowded Indian market.

A Fortuitous Partnership

Burger King has been keen on entering India since it was acquired by 3G Capital in 2010 in a $3.8 billion deal. “Any private equity player will be looking for rapid growth, and India would be an obvious market for a brand like Burger King,” says Devangshu Dutta, founder of Third Eyesight, a retail consultancy in Delhi. And the fast-food chain plans to be in India for the long haul. “Everyone has seen spends slow down in the last couple of years, but if you are entering a market with a 20-year time horizon, this slowdown is just a blip,” says Dutta.

At the time, Everstone Group had its hands full with the takeover of Blue Foods, now Pan India Food Solutions, which owns Copper Chimney, Noodle Bar and Bombay Blue, among other brands. Before it was acquired by Everstone, the restaurant chain had been burdened with heavy debt and high attrition. But it was in turning it around that Jaspal Singh Sabharwal, a partner at Everstone Group, saw an opening in the QSR arena. “We realised that there was room for a brand in the space, but what we needed was an iconic name,” he says.

Everstone was also aware that the Indian market had matured considerably since McDonald’s opened its first outlet in New Delhi’s Basant Lok market in 1996. At the time, most of its machines were imported, and even the fries and meats were flown in. It was only in 1997 that McDonald’s started taking its vendor development programme seriously. Today, all its products are locally sourced and manufactured.

In 2013, Everstone hired STEER Partners to introduce it to fast food players in Europe and the US, and talks with the parent company, Burger King Holdings Inc, began. That very year, the two firms agreed to enter into a joint venture to enable Burger King’s foray into India.

It was a win-win situation for both parties. Everstone, with its keen eye on real estate, helped the chain identify prime locations far more easily, and used its relationships with mall developers to get Burger King in. In Mumbai, for instance, the fast food chain will be opening an outlet in Phoenix Mills, a dozen metres from arch-rival McDonald’s. This would not have happened as easily without Everstone; after all, its Blue Foods had already leased the space.
Spicy, Crunchy and Juicy

Once the joint venture was inked, Rajeev Varman was deemed the best person to head the India operations. He had already made a name for himself as the man behind Burger King’s turnaround in the UK market, and had been with the company for 15 years. His last post was general manager in North-West Europe. However, though he had graduated from Bangalore University, India was an unfamiliar terrain.

“The first thing I did after I got to India was to get on a plane again,” says Varman. He’d been away from the country for the last 25 years and realised that he needed to tour the length and breadth of India to understand the palate. Along with Everstone boss Sameer Sain and Sabharwal, he visited local markets across the country and arrived at three key conclusions.

First, Indians like their food spicy. Second, it must be crunchy. But it was the last insight that surprised him the most: Customers, especially in the South, liked their food juicy. He also realised that the North has a higher proportion of vegetarians than the South. On some days, the percentage of vegetarian food sold in a restaurant can be as high as 70 percent.

Varman knew that he would have to adapt the menu a fair bit for India. He decided to keep his single-minded focus on that job, and is confident that Burger King has got the right formula, one that will appeal to Indians. The menu promises to be juicy, crunchy and spicy.

The proof of the pudding, it would follow, was in the eating. But those were early days in July and Burger King was not ready to share its menu. Three months and many phone calls and follow-ups later, Varman offered to take Forbes India through an exclusive tasting session in October, barely a fortnight before the opening of its first outlet in Saket.

Even before it started designing the India menu, Burger King knew that its USP wouldn’t change. Flame grilling is what the chain is known for worldwide and in India there is no competitor that flame grills its patties. Sure, the Whopper (pronounced ‘Wau-per’) won’t have a beef patty but chicken and mutton patties will be flame grilled and offered to customers. As it stands, the Whopper will be the largest burger in the Indian market, bigger than the Maharaja Mac by McDonald’s.

At the tasting session, we experienced what Varman meant by juicy. (The mutton burger was the tastiest I have eaten in the Indian market.) And if Burger King can get the quality and consistency of the supply right, it has little reason to worry.

In its initial years, McDonald’s had launched a mutton burger, but discontinued it citing supply chain issues. In a March 2011 conversation with Forbes India, Vikram Bakshi, who had led McDonald’s in the North and East before exiting the joint venture, said that the fast-food chain dropped mutton from the menu because of customer preference. Undeterred, Burger King will be offering a mutton option on the menu.

There’s also no mistaking the fact that Burger King is not a me-too brand. Small, but subtle differences pepper its offerings. For instance, unlike the seven-mm French fries its competitors offer, the chain has a thicker nine-mm variety.

Burger King eyes a big slice of the Indian market

One place where it has left no stone unturned is the vegetarian menu. “In India, at times, people are vegetarian due to its lower price, and we wanted to make sure we give them enough reasons to come to the store,” says Sudhir Tamne, vice president, new product development, at Burger King India. The Crispy Veg and Paneer King Burgers seem to be a step up from the competition. And of course, they have the juiciness that Indians crave.

While Burger King has kept its pricing under wraps, it did indicate that there will be four burgers available for Rs 25 each. These are most likely from the crispy series—patties with a hint of spice that is unmistakably Indian.

Another key learning for Varman during his travels across India was the fact that customers want complete meals and that portion sizes must be large. He’s made sure that Burger King’s buns and patties are larger than those offered by competing brands. With its burgers hitting all the right spots, pricing and efficient service delivery levels are key areas that can make or break Burger King.

Scaling Up

India’s QSR market has tripped up many formidable competitors. Contrast Starbucks and Dunkin’ Donuts: Both entered India two years ago, but while Starbucks has had a successful run to date, Dunkin’ Donuts has been struggling to understand what Indian consumers want.

Starbucks, which had a clearly differentiated product and an efficient supply chain, has been able to expand across India with 58 outlets spread through Delhi, Mumbai, Bangalore, Pune, Hyderabad and Chennai. Dunkin’ Donuts, which has 35 outlets across India, has now added burgers to the menu. This, however, has led to considerable brand dissonance among consumers.

Burger King, on the other hand, has a differentiated offering and promises a slow and steady ramp-up. Case in point: The company plans to build the brand only through social media and word-of-mouth publicity; it will not be investing in expensive full-page print or TV advertisements. Varman has kept the corporate office as lean as possible with only 27 employees. The Everstone team guides him on real estate locations and other compliance matters. For now, his sole aim is to get a dozen outlets up and running by the end of the calendar year. Being owned by two private equity companies also means that the clock is ticking. “If we don’t have an outlet that is EBITDA (earnings before interest, taxes, depreciation and amortisation) positive in three to six months, then we know that something is wrong,” says Sabharwal of Everstone. He is unwilling to let this be a slow burn business.

Profitability Matters

In a conversation with Forbes India last year, Amit Jatia, who runs McDonald’s in West and South India, had mentioned that it took the fast-food chain nearly a decade to become profitable in India. Varman (and Burger King) does not have that luxury.

Varman, who eats thrice a week at a Burger King outlet, though his tall athletic frame belies this, will spend between Rs 2-2.5 crore in setting up a single outlet. It has to have the cash register do Rs 5 crore of business in a year. He’s unwilling to discuss profitability as the chain will be in investment mode for the first few years. But if an outlet does not make money in the first six months, it will be shut down. He believes there is enough cream in the large metros to skim in the first year. “I will only worry about the ability to grow rapidly once I am past, say, 200 outlets. Right now, there is a lot to play with,” he says. As for what the competition thinks of Burger King’s India plans, neither Yum! (which owns brands such as KFC) nor McDonald’s was willing to comment.

As we sign off on our tasting session, Varman, who is fanatical about service delivery, notices that the fries have less salt. He frowns and immediately checks the salt dispenser to see if the salt has coagulated. It hasn’t. And he smiles again.

(Published in Forbes India in the issue dated 28 November 2014)