Month: November 2014

Looking Beyond Tobacco

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November 28, 2014

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)

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Burger King eyes a big slice of the Indian market

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November 28, 2014

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.

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)

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Alibaba’s Jack Ma needs India as much as India needs him

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November 27, 2014

Devjyot Ghoshal, Quartz India
27 November 2014

The founder of e-commerce giant Alibaba and China’s richest man, Jack Ma, is in India after apparently being swayed by the persuasive powers of prime minister Narendra Modi to come and do business in the subcontinent.

And expectedly, his visit to New Delhi has got India’s fledgling e-commerce industry rather excited. Alibaba, after all, is one of the world’s largest internet companies and raised an astounding $25 billion in its initial public offering (IPO) this September.

Yet, Ma and Alibaba need India just as much as India need the Chinese e-commerce behemoth.

For one, India has been a strong sourcing destination for Alibaba for some years now. The company established a customer service operation (PDF) in Mumbai in 2010, when it was adding over 30,000 new users to its Indian base of 1.45 million small businesses (as of June 2010).

In 2010, India was the largest supplier market outside of mainland China for Alibaba.com and the second largest buyer market.

“Indian small businesses are savvy and they understand the advantages that the internet can bring to them both in domestic and foreign trade,” David Wei, the CEO of Alibaba.com had said.

Four years on, Indian vendors on Alibaba still comprise the second largest group of sellers after the Chinese.

Size does matter

After its record IPO, “Alibaba is looking for growth opportunities across the globe,” said Arvind Singhal, chairman of retail advisory firm Technopak.

For Ma, India’s geographical proximity to China, a sprawling manufacturing sector and unorganized distribution make it an ideal market to expand Alibaba’s core business-to-business (B2B) model, said Singhal

India already permits 100% foreign direct investment in B2B e-commerce—but the fastest growing e-commerce market in Asia is being led by business-to-consumer (B2C) focused firms.

With the country’s e-commerce market projected to grow to $6 billion in 2015, a 70% increase over 2014 revenues, according to Gartner, the size of India’s marketplace makes it important for Alibaba. “The sheer numbers do create a momentum,” said Devangshu Dutta of Third Eyesight, a retail consulting firm.

India’s interest

Indian e-commerce firms could have an interest in Alibaba’s arrival for one of three possible reasons, according to Singhal.
First, as a potential joint venture partner to benefit from Alibaba’s size, expertise and financial clout. India’s largest e-commerce companies are still only a fraction of Alibaba’s size, and there is much to learn from a company that can sell goods worth $1.8 billion in 60 minutes.

Second, domestic firms may be seeking a strategic investment from Alibaba, along the lines of what Softbank has been doing in India lately. Masayoshi Son—Softbank chief, Japan’s richest man and an early investor in Alibaba—poured in over $600 million in Snapdeal late last month.

And finally, investors in Indian e-commerce companies might want to pull out as the marketplace heats up and look to sell their stakes to the likes of Alibaba. “The competitive intensity might get too much,” said Singhal.

(Published in Quartz India )

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Golden Triangle

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November 26, 2014

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Now over the hill, a Future for Nilgiris

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November 24, 2014

Raghavendra Kamath, Business Standard

Mumbai, 24 November 2014

When quizzed on whether Nilgiris, the south India-based supermarket chain recently bought over by Future Consumer Enterprise, would be rebranded or not, Future Group chief executive and founder Kishore Biyani says, "Not at all, we bought it for the brand." There had been speculation, with the acquisition in the works from earlier this year, that the chain might be rebranded as KB’s FairPrice, which is a small grocery chain.

In a way, Biyani would relate to Nilgiris. If he was an apparel manufacturer who made it big in retail, the Nilgiris-founder, Muthuswami Mudaliar, was a milk supplier who went on to set up one of India’s earliest modern retail chains.

Today it has 140, mostly-franchisee stores in Karnataka, Tamil Nadu, Kerala and Andhra Pradesh. Though Mudaliyar used to supply milk and other dairy products since 1905, the first store of the chain was set up in Brigade Road in Bengaluru in 1936. Intially, the chain started by selling milk and bakery products that the women of the owner-family would pack and decorate themselves. But once Mudaliar’s son, Chenniappan Mudaliar, came back from the US after studying its supermarkets, the look and feel of the stores, from merchandise to supply chain, changed. Groceries and vegetables were added to the spread and Nilgiris became the first self-service supermarket in the country.

Susil Dungarwal, founder of the mall management consultancy, Beyond Squarefeet, and a customer of Nilgiris since childhood, says it was the first chain to import cook and bakeware and Indianise them: "It invested a lot of money in standardising the supply chain and cooking styles in its merchandise spread". Nilgiris is also credited for being the first supermarket chain to import point of sale machines for billing, when it was still unheard of.

Need for Actis

It is said that the fourth generation of the promoter family was unwilling to take up the supermarket business, when the earlier generation, comprising Chenniappan, would arrive at their flagship Bengaluru store in the wee hours of morning and leave only after the last customer stepped out. By the time Reliance Retail and Bharti stepped into the field, the family was sorely lacking in the management bandwidth required to match their scale, despite the headstart it had in India’s strongest region for modern trade. What was earlier a progressive chain, found itself without the professional touch and systems to attract the right talent.

The Nilgiris’ promoter family sold off 65 per cent of its stake in the holding company, Nilgiri Dairy Farm, to UK-based private equity (PE) firm, Actis, in 2006 for $65 million (Rs 300 crore). Nilgiris had 30 stores.

The PE firm brought in a professional management, expanded the stores with new plans for store and shelf lay-outs and inventory management systems. To contemporise and freshen up the chain, Actis brought in health foods such as flavoured yogurt and increased other product variety such as eight different kinds of bread from just white bread earlier.

Feuding partners

But within a year, the tie went sour. Actis started looking for offloading some of its stake through an IPO. When it did not happen, it started looking for buyers in other PE funds and retailers. It eventually held talks with international retailers such as 7-Eleven and Tesco in late-2012, but they were spooked by the lack of clarity in FDI norms, valuation and the reluctance of the founder family to sell any more shares. There were also disagreements over expansion plans, with the family opposing large-format stores measuring 2,000-3,000 sq-ft. The latter went to the Company Law Board when Actis floated a Rs 35-crore rights issue and withdrew it only after Actis acceded to reverting to the smaller stores of not more than 1,000 sq-ft and promised to bolster its private-label bakery and dairy business (the original product lines of the chain). So, the scalabilty was shot for a lucrative PE exit.

Advantage lost

Bijou Kurien, former chief executive of Reliance Retail, says the contemporisation was not enough, "When others were already selling masala milk and smoothies at supermarkets, Nilgiris stuck to plain assortments in a category it began with." Biyani says that he would launch new dairy products and explore how best to cross-sell products from other chains of the acquiring company, Future Consumer Enterprise (such as Green Apple, KB’s Fairprice ) in Nilgiris and vice-versa.

Before Biyani bought Nilgiris for Rs 300 crore, it was on the block for almost two years with a price-tag of Rs 600 crore. The obvious benefit of Nilgiris, which clocked Rs 765 crore in FY-14, would be to expand Future Group’s negligible southern presence. Though it runs around 230 Big Bazaar and Food Bazaars, south India houses only a fifth of the count.

Devangshu Dutta, CEO of retail consultancy, Third Eyesight, says, "India’s practices in modern retail evolution began in south India with Spencer’s in its first avatar and Nilgiris. The control of bakery and dairy by retail chains (in-house brands) was learnt from Nilgiris. It still has the trust of old-timers, but newcomers to southern cities have been won over by its competition."

Nilgiris still stocks nearly 6,000 products with low supply chain costs and a robust franchisee model. With its own manufacturing in dairy and bakery, around 26 to 27 per cent of its revenues come from private labels, that could prove profitable if Biyani can turn around the chain.

(Published in Business Standard )