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July 15, 2011
Poornima Kavlekar, The Smart CEO
July 15, 2011
Who doesn’t love to strike a deal, especially if discounts could vary anywhere from 10 per cent to 90 per cent on lifestyle products and services? Exactly the reason why group buying (discount deals) businesses show strong potential for growth in India. But there are many variables that these businesses need to pay attention to in order to succeed in this space. A strong consumer-merchant equation, a clear understanding of each of these interested parties and the capability of bringing them together in the most profitable manner are the foremost parameters. This apart, one needs to be present everywhere, scale up quickly and differentiate itself from competition. Sounds simple? Then again, who said simple was easy?
When I walked into my gymnasium during my routine workout timing,
I was baffled to see a number of people waiting in a queue for
their turn to hit the cardio-machines. This was the first time,
in the 15 months of my membership in the gym that I had to wait
for my turn. I realised then that a good number of faces were
new which made me wonder if June was some auspicious month to
start an exercise regime! And interestingly, the profile of the
gym users was slightly different too – most of them were in the
age group of 18 to 25 years from what used to be 25 years and
above. As a regular gym goer, I was intrigued by this sudden change
in the profile of my co-exercisers.
Well, before I lead you on, this story is not about the business of fitness or gyms in the country. This story is about understanding how the gym managed a sudden spurt in its membership without any offline promotional activities. And my question was answered by the gym instructor who said that they had sold memberships for a day through a popular group buying website. That explains two things: one, the sudden rise in membership in the month of June, and two, the change in the profile of my co-exercisers (those who have grown up with the Internet). This story is to understand the group buying landscape in India, the changing dynamics of the consumer profile and what it takes to succeed in this space.
Understanding the ecosystem
While low Internet penetration and the lack of consumer comfort
with transacting on the Internet (both very critical for group
buying businesses) were two major hurdles for e-commerce growth
in the past, things have changed over the last two to three years.
Internet penetration has improved significantly, particularly
with mobile usage. "Though e-commerce in India is still in
a very nascent stage – save for the travel segment, I believe
that with the exponential growth of smart phones, 3G and 4G, India
is at the cusp of an e-commerce explosion," says John Kuruvilla,
founder-chief executive officer, Taggle, a group buying website.
While using credit cards online is still a challenge, e-commerce
players have so far circumvented this by coming up with different
payment options for the customer. But, Devangshu Dutta, chief-executive,
Third Eyesight, a consulting firm focussed on the retail and consumer
products sector, says, "We are approaching a tipping point,
with more widespread availability of credit cards among younger
users, who have grown up with the Internet during the last decade."
This makes spending on the Internet an option that’s waiting to
take off.
The gradual rise in investments by the venture capital industry
into the e-commerce space in the last three years is a reflection
of this change. According to Venture Intelligence, a company that
provides information and analysis on private equity, venture capital
and mergers and acquisitions in India, the investments in this
space have increased from US $33 million in 2009 to US $83 million
currently.
Group buying or the discount deals business, a model popular in the U.S., adds a whole new dimension to the e-commerce industry. Put it simply, the sector gives offline retailers the opportunity to drive traffic into their stores through the online medium. Some experts even use the term offline-online commerce to describe the sector. This space has also grabbed the attention of the venture capital industry. Battery Ventures and Greylock Partners invested US $8.75 million in Bengaluru-based Taggle in June 2010 and Nexus Ventures and Indo US Ventures invested around US $12 million in January 2011 in New Delhi-based Jasper Infotech, the parent of Snapdeal.com.
The macro picture
In 2010, group buying saw phenomenal success with Groupon in
the U.S. In fact, last August, Forbes magazine crowned Groupon
the ‘fastest growing company ever’. It says Groupon made US $713
million in revenue in 2010, up from US $30 million in 2009. As
of March 31 this year, its subscriber base was 83.1 million, up
from 1.8 million at the end of 2009.
In the U.S., the retail industry is mature and there is already
familiarity with the couponing system. While India is yet to get
there in both these areas, there is no argument over the business
potential in this space with over 20 million active Internet users
(of a total of 90 million Internet users) in the country with
an increasing number of them shopping online. It has already attracted
entrepreneurial interest in India with several group buying sites,
such as Snapdeal, Taggle, Dealivore, Dealsandyou and Vamoosevacations.com
coming up in the last two years. Apart from products and services,
many of these sites offer discounted deals in their city’s spas,
gymnasiums, dance classes, car service centers and restaurants.
The whole model of offline – online discount coupons is based
on a simple fact that everyone loves to strike a deal, to make
a bargain and avail discounts. But, like Kuruvilla shares, there
is no clear road map or trends on what works and what does not
in a very nascent e-commerce space in India. And this means that
you need to constantly try new things and continue experimenting
with novel ideas to arrive at a working formula. He thinks a working
model will evolve over the next 12-18 months with consumers getting
hooked to buying great value online.
"But what’s happening in India is not a Groupon business
clone," clarifies Vani Kola, managing director, IndoUS Venture
Partners. The business model has been adapted to suit the changing
demography of the Indian consumer and the orientation and exposure
of the Indian merchant to the digital world.
Success definers
Companies need to differentiate themselves from their competitors.
It could be based on the target audience, types of deals, brand
positioning, the sectors they target and so on. The idea is to
recognise and capitalise on one’s strengths and leverage on the
scope of e-commerce growth in India. Taggle, for instance, felt
that everyone was playing with bottom of the pyramid deals. So,
it strategised to start at the top. "The move was a necessity
given that by June 2010 many other group buying sites were already
very much around, and it was important to get noticed quickly,"
says Kuruvilla.
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admin
July 11, 2011
By VISHAL KRISHNA
Business World
11 July, 2009
When Martin Dlouhy, managing director of Metro Cash & Carry India – a 100 per cent subsidiary of the German firm – signed a Rs 900-crore agreement with the Punjab government earlier this year to set up six stores in the state over a fiveyear period, it seemed to reinforce the intention of global retailers wanting to penetrate the Indian market. Foreign direct investment (FDI) in multi-brand retailing is not allowed under the current policy regime; besides, most consumers in India still buy the bulk of their retail products from the neighbourhood kirana (mom-and- pop) stores. The cash-and-carry (C&C) business caters to the needs of these store owners.
But in their brief history of five years, C&C players have not been able to generate cash from the business in India. "They continue to bleed not because of the supply chain, but because the kirana store owner has to have a reason to buy from a C&C," says Devangshu Dutta, chief executive officer of Third Eyesight, a consulting firm in Delhi. Ninety-five per cent of the retail trade is dominated by traditional wholesalers, the backbone of India’s fast-moving consumer goods (FMCG) industry. "These wholesalers can give the kirana store the best price," says Ajay D’Souza, head of Crisil Research in Mumbai. He says traditional wholesalers continue to rule the roost because they manage to deliver goods at the doorstep of the kirana stores.
But this is just the beginning. Large global corporations – such as Metro – can burn cash and stay unprofitable for a very long time. They have deep pockets. Bharti Wal-Mart, a joint venture between Bharti Enterprises and US based Wal-Mart, has recently set up its first C&C store with an investment of nearly Rs 30 crore in Amritsar, and hopes to spend Rs 500 crore to set up 15 more stores over the next five years. Metro has invested over Rs 750 crore so far, apart from the Rs 900 crore mentioned earlier. Their plan is simple: to convert 12 million store owners into dedicated customers. This is not an easy task. The capital costs for a C&C are very high. According to Crisil Research, capital costs are close to Rs 3,700 per sq. ft, which is three times higher than that involved in setting up a hypermarket retail store.
The average size of a C&C is 100,000 sq. ft. To top it all, the real estate is owned by the company itself. Therefore, for Metro to turn cash positive is not easy in the short run. It takes at least 15 years to turn profitable and 11 years to generate cash in this sector (see ‘Long Gestation’ and ‘Wait And Watch’). Like any other retail business, it works on a high-volume, low margin basis. Sources in the industry say that Shoprite – a South African firm that has a C&C joint venture with Nirmal Lifestyle in Mumbai – was losing Rs 40 lakh a month at the back end, supplying to just one store in the country. An email sent to Nirmal Lifestyle did not elicit any response. Given the enormous challenges encountered by those trying to make a go of the retail business, will Metro and its brethren be able to survive the cash bleed?
New Avenues
Though kirana stores are the primary target customers for a C&C, business for the moment is coming mostly from others – hotels, restaurants and caterers, who buy in bulk from this wholesale format. A C&C can also gauge the quantity needed by understanding client demand and stock only as much required. Metro’s success has been supplying fruits, vegetables, meat and fish to its hospitality clients based on only demand. "Our strategy is to understand what our customers need, and then provide them a solution which offers quality product, right packaging size, and competitive pricing," says Dlouhy. The supply chain is not a problem for Metro as it worked with consolidators, farmers and fishermen to share knowledge on waste reduction, increase yield and produce high quality.
"The kirana guy will have to travel to a large cash and carry, usually located outside the city, and think twice if his transportation costs negates his margins," says Dutta of Third Eyesight. The other challenge is of scale. Most C&Cs have a bad kirana turnout because they never buy in bulk. More often than not, a kirana store owner will pick up the phone and call his distributor to send in the supplies. Metro or any other C&C does not provide such a service. But they believe their model can be successful, and they are serious about their intent, opening as many stores as they have.
For the kirana store owner, it is about saving on inventory costs. Analysts say that another reason why a C&C could work for a store owner is its ability to avoid stockouts for the customer. Metro serves as a warehouse and offers a selection of over 18,000 products. "We give the kirana guy a choice of products; with traditional retailers a kirana has to buy one product and in bundled quantities," says a spokesperson for Metro. In certain cases, Metro is also trying to specialise by sourcing from local manufacturers and stocking local brands, including an assortment of spices, rice and other food items. "This was earlier a forte of the traditional wholesaler. But we offer these solutions too," he adds.
Such a strategy of sourcing local products is also being employed by Bharti Wal-Mart. The C&Cs have their own private labels, which are selling well with the stores they have tied up with. Fifteen per cent of the sales of Bharti’s front end stores – called Easy Day – are in the form of private labels sourced by their backend partner. Bharti Wal-Mart is also selling honey, pickles, fruits and more under the private label name Great Value, which is also the international private label for Wal-Mart. Metro sells items under its international private label Arro.
"Their processes help reduce operational costs, which are very low, and they also have lesser employee cost per sq. ft," says D’Souza of Crisil Research. This is also why foreign brands such as Tesco and Wal-Mart sense opportunity in the Indian market with their back-end expertise. Tesco has already announced it is investing £60 million (Rs 474 crore) in the Indian market and has tied up with Trent, one of the retail arms of the Tata Group.
"While FDI is held up in the front end, the C&C business allows foreign retailers to sort out supply chain issues," says Pinakiranjan Mishra, partner and national leader for the retail practice in Ernst & Young (E&Y) in Mumbai. "Once that opens up, they will create efficiencies that will set the tone for building modern retail." Raj Jain, managing director of Bharti Wal-Mart agrees: "The whole Wal-Mart business revolves around saving in every aspect of that supply chain," he says. "It is not just about negotiating better prices with the suppliers, but actually about working with suppliers to remove any inefficiency in the supply chain." Bharti Wal-Mart is currently working with suppliers on packaging, stock control and inventory management.
Breakthrough Ideas
So what is eating into C&C margins? Simply put, there are not many kirana store owners walking in on a regular basis. For a C&C to make a dent in the Rs 2 lakh crore FMCG industry, it has to beat the traditional wholesaler who has been around for years. A C&C can help a retailer reduce the problems of dealing with multiple wholesalers, but cannot wipe them out. The distribution system in India has been built by the FMCG companies themselves to get their products off the ground quickly. Analysts say this multi-layered system takes a product to the smallest of stores in a village. "It makes sense for a C&C to find large buyers; they will burn cash if they focus on small businesses," says Dutta of Third Eyesight.
There has also been concern about how C&Cs can sell to their customers. Although a C&C is typically seen as a wholesale trade supporting small businesses which possess a trade licence, many point out that there have been sales to individuals who do not own businesses. The average threshold billing is Rs 1,000, and then it does not matter what you purchase in the C&C, or if it is personal purchases. This flouts the FDI norms that prohibit C&Cs from selling directly to consumers. As Businessworld noticed in a certain C&C recently, a man shopping with his wife had bought many single items. The only items they bought in bulk were brooms.
But Metro and Bharti Wal-Mart maintain that they have checks to avoid such a situation. "It is difficult for C&Cs to monitor every customer who buys because he will be a member who has a trade licence," says Mishra of E&Y. "This implies they are legitimate business owners, but it is not the job of a C&C to check their background." Stopping a customer and questioning him about the particulars of his purchases could create customer service problems that are avoidable.
Bharti Wal-Mart has about 30,000 primary members and about 75,000 total members registered in a particular trade area, around a 30-40 km radius of where its first store is opening in Amritsar. "There has been a very rigorous programme to control processes in our stores. People have to possess a trade licence," says Jain of Bharti Wal-Mart. If they do not have a trading licence, they need to have a trading association licence. "We will continue to renew that licence every year to ensure that only businesses are dealing with us, which is the law," Jain adds. Metro follows similar processes.
These hiccups, however, do not appear to slow down the C&Cs, at least the international ones. Metro Cash & Carry has opened 40 stores across the world in 2008, taking their global store portfolio to 655 wholesale stores. Their focus lay on growth markets such as eastern Europe and Asia. Officials say that group sales rose by 5.8 per cent to €68 billion (Rs 4,62,400 crore) last year. Its bigger rival Wal-Mart has even greater staying power. All of them appear to have enduring faith in the adage that only the strong will survive.
admin
June 28, 2011
Raghavendra
Kamath, Business Standard
Mumbai
June 28, 2011
Trent, the flagship retail arm of Tatas, is in talks with Spanish retailer Inditex group to bring another fashion brand, Massimo Dutti, to India, according to a person close to the development.
However, it is not known whether both parties would enter a joint venture (JV) or go for a franchise agreement. Trent has a JV with Inditex for Zara, wherein the Spanish company owns 51 per cent. The JV runs five stores in India.
If the talks succeed, Trent may set up a couple of stores in metros in the initial years, said the source on condition of anonymity. Massimo Dutti has 542 stores in 50 countries and offers a variety of collections, from high-end fashion to easy-going casual wear.
None of the companies replied to emails on the subject. In a recent interaction, Trent management did mention expanding the scope of its alliance with the marquee Spanish brand house. “We are exploring the possibility of bringing another retail format of the Inditex group to India,” Trent Vice-Chairman Noel N Tata had told Business Standard recently.
The Inditex group, which clocked revenues of ¤12.53 billion (Rs 80,192 crore) in 2010, is made up of more than 100 companies, operating in textile, design, manufacturing and distribution. The group runs over 5,000 stores in 78 countries.
It is one of the world’s largest fashion retailers, which operates different formats such as Zara, Pull & Bear, Massimo Dutti, Bershka, Oysho, Stradivarius, Oysho, Zara Home and Uterque.
Retail consultants say it is logical to bring in more brands from the same partner.
“It is a logical thing to do. If anyone has a joint venture with a particular group, it makes sense to build a portfolio of brands. If you bring in more brands, you can spread your costs. Then cost per brand will be lower and you can reduce risks associated with it,” said Devangshu Dutta, chief executive, Third Eyesight, a retail consultancy.
According to retail consultants, Zara has been a huge hit in India since its launch in May-June last year. Industry sources say Zara stores in Select City Walk and DLF Promenade in Delhi are clocking revenues of Rs 5-6 crore and Rs 4 crore, respectively, per month.
Trent’s plans to open Benetton’s Sisley stores, with
which it has a franchise agreement, have not worked out as planned,
as it had difficulties in matching Sisley supply chain to customer
demand.
admin
June 28, 2011
Pradeep Pandey & Pramugdha Mamgain, The Economic Times
Mumbai/New Delhi, June 28, 2011
Apparel sales in the country have slumped about 20% since March, forcing many brands to start end-of-season discount sales two weeks earlier than usual.
Companies blamed high apparel prices-increased due to the mandatory 10% excise duty on branded garments introduced in the Union budget and soaring cotton prices-for the fall in demand.
"The present trend indicates that the industry will hardly be able to sustain a growth of 10-15% as margins are under tremendous pressure," said Rahul Mehta, president of Clothing Manufacturers Association of India ( CMAI).
Most manufacturers and retailers have reported a 10-20% increase in their inventory levels, the association said in a report submitted to the textile ministry last week, and sought removal of the tax to cut prices and boost demand.
Or, the excise duty be cut to 1%, said the association, which represents 200 garment makers and 60 retailers including Arvind Brands, Aditya Birla, Madura Garments and Pantaloon Retail.
The organised apparel industry, which booked sales of around 40,000 crore last year, is hit by shrinking profit margins because the rise in cost of production-raw material, labour and borrowing costs-have outweighed increase in prices.
The rise in raw material prices was passed on to consumers in tranches earlier, but now it has become difficult to carry forward, Mehta said.Any more increase in prices will impact demand. Already, many consumers, hit by rising food and fuel prices, have already started buying lower-priced brands than their usual favourites.
Reliance Trends Chief Executive Arun Sirdeshmukh said consumers are downtrading to more comfortable price points within national brands. "As a result, volumes of private brands have grown even though prices have increased for that segment too," he said.
"But the real impact on sales will be known in the festive season as cotton price increase will start reflecting then," Sirdeshmukh added.
Retailers are wary about business growth in the coming months. Some have cut their winter garments bookings. "We may see sluggish demand for high-priced garments in the coming months," Pantaloon Retail CEO Kailash Bhatia said.
Although cotton prices have corrected, the component of raw material cost will be high in the stock that will be sold during autumn and winter. So prices will be up for those products, Bhatia said.
Meanwhile, rising inventory costs have forced many brands to advance summer season-ending clearance discount sales two weeks ahead of the normal July first week schedule.
Brands that have already started season discount sales include Reebok, Adidas and Mango.
Organised retail sector’s inventory cost in the last three months stood at around 2,500 crore, while total sales were around 10,000 crore, industry insiders estimated. Arvind Brands-which manages the country’s largest denim manufacturer Arvind Mills’ brands such as Arrow, Lee and Flying Machine-has reported sluggish sales in June. "We need to wait and watch whether this continues in July and August," said J Suresh, MD and CEO of Arvind Lifestyle Brands and Arvind Retail.
He said the company’s sales have grown in the first quarter ended June.
Devangshu Dutta, chief executive of retail and consumer products consultancy firm Third Eyesight, said demand from lower-income group will fall the most because this section will spend most of its income on food, which is getting costlier with continuing inflation. "It is still positive for the middle class and above salaried consumers as increments have grown along with inflation and confidence remain high," he said.
admin
June 11, 2011
Priyanka
Pani, Businessworld
June
11, 2011
Anyone remember Ranger Farms? In 2007, Reliance Industries’ subsidiary Reliance Retail launched its cash-and-carry retail format by that name. A year later, RIL ‘merged’ Ranger Farms into Reliance Fresh, its food and grocery business. Readers may also recall that in 2009, RIL put together a team of top officials it had hired from several wholesale players, including Gwyn Sundhagul, the chief marketing officer and director at Tesco Lotus, Thailand, to spearhead its cash-and-carry plans. But it appears that after a year and a half, that team has been disbanded.
On 3 June, at the 37th annual general meeting of RIL, chairman Mukesh Ambani announced that Reliance Retail would launch its cash-and-carry stores this year. RIL’s past experience in the retail business has not quite had the same success that its other businesses – oil exploration, refining and petrochemicals – have had (see ‘Downturn’).
Reliance’s re-entry into the business assumes significance even as global retailers such as Walmart, Tesco, Metro and Carrefour are expanding their presence in India, and amid anticipation that the government is likely to ease foreign direct investment (FDI) norms in retail. Currently, FDI is allowed only in the cash-and-carry business.
But others think the rationale is different. "Cash-and-carry is, as yet, at a nascent stage in India," says Devangshu Dutta, chief executive at Third Eyesight, a retail consulting firm. "It’s a modernisation and organisation of the wholesale business, and an intermediate step needed in modernising the fragmented retail business." Something that Ambani has said he always believed in, which he called ‘farm-to-fork’.
Most cash and carry operations are targeted at hotels, restaurants and cafeterias – the so-called Horeca market, which accounts for close to 60 per cent of sales. "Package sizes of goods are larger (meaning more per sq. ft sales and greater volume growth); margins are also better," says Anand Ramnathan, manager at KPMG, the global consultancy. Compared to industry standards, Reliance Retail’s per sq. ft revenues have been lower, say industry analysts.
Reliance Retail officials say that the Horeca segment will not be the primary focus of their cash-and-carry business. Rather, their target audience – apart from their own chain of Reliance Fresh stores – will be other retailers, or the kirana stores.
"The cash-and-carry business is an integral part of a retail supply chain in a country like India, where distribution and logistics are major problems," says a Reliance Retail spokesman. "Reliance’s entry into the segment will help improve its other retail formats. Typically, retailers attempt to own the supply chain to give them control and better prices that benefits the end consumer."
The majority of Reliance Retail’s more than 1,000 retail outlets are located in Tier 2 cities, and the company is working to spruce up logistics and transport to better serve those cities. But the officials gave no details on the scale of investment.
At the AGM, Ambani set up an ambitious target of Rs 10,000 crore in revenues from the retail business in three years (of which cash-and-carry is part), or the end of FY14. On current revenues, that translates into a compound annual growth rate of just over 25 per cent. Making that kind of cash will carry Reliance Retail a long way.
(This story was published in the Businessworld Issue dated 20 June 2011.)
