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August 29, 2006
MUMBAI: The Rs 39,000-crore Aditya Birla Group has appointed global consulting firm, McKinsey & Co to chalk out the company’s retail rollout plans. Sources suggest that McKinsey has been given the responsibility to strategise on the entry strategy for the group. McKinsey is to study the opportunities in the sector and advise on plans to launch a chain of fashion-led outlets and hypermarkets.
The Aditya Birla Group recently became the third major business house to announce its foray into organised retail. Mukesh Ambani’s RIL and Sunil Mittal’s Bharti Enterprises have also joined the bandwagon to enter this lucrative and fast-growing sector.
Analysts suggest that new and existing Indian companies are planning to scale up at a fast pace before the imminent entry of foreign players is allowed in the sector.
McKinsey has already built a strong retail practice and is also working with Future Group (formerly Pantaloon Group), while KSA Technopak is working closely with Reliance. Other consultants like, AT Kearney, Ernst & Young, PwC and Third Eyesight are also said to be working with new and incumbent players.
Aditya Birla Group has also formed a senior management team that is exploring these opportunities. Sources suggest that the group plans to invest more than $1bn in the sector and Group CFO, Sumant Sinha has been given the responsibility to raise funds for this foray.
The company is also actively hiring people from sectors like retail and FMCG. Apart from recruiting some key people from ITC and Godrej, the company is said to have roped in Shoppers Stop’s head of HR, Vijay Kashyap and head of operations, Sanjay Badhe. The company spokesperson however declined to comment on anything related to its retail plans.
Sources said that the group’s retail plans will be led through the company’s apparels and textile subsidiary, Madura Garments. The Rs 620-crore Madura Garments owns and markets Louis Philippe, Van Heusen, Allen Solly and Peter England through company franchisees and third-party outlets.
It also runs an exclusive chain of stores selling products of German fashion major Esprit. It is expected that these operations will be further scaled up in the first phase. Madura Garments also supplies to international brands like Marks & Spencer’s, Tommy Hilfiger, Polo and Ralph Lauren.
It has recently passed a shareholder resolution to transfer this export contract business out of the company.
“The group is already present in telecom, IT and IteS and the entry into organised retail is part of the group’s strategy to further expand into sunrise sectors. Historically, the group business portfolio has been loaded in favour of the commodities businesses,” said an industry analyst.
By Shuchi Vyas, The Economic Times – August 29, 2006
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June 30, 2006
By VISHAL KRISHNA
Businessworld
Issue Dated 30 June-06 July 2009
If you were hoping to see a Wal-Mart store in your locality soon, you may be disappointed. The government has made it clear that it is against the idea of 100 per cent Foreign Direct Investment (FDI) in front-end multi-brand retailing. “The Congress government has come to power by supporting the farmer, the middleman in mandis and the kirana store. Now aiding modern retail will be the last thing on their mind,” says a Mumbai-based retail analyst, who did not want to be named.
Even if front-end retail stays domestic, most companies are struggling to become profitable. And it is not just about the money. For the moment, the retail industry continues its search for cash and hopes to keep expansion plans going despite heavy losses. Kishore Biyani’s Pantaloon Retail hopes to add 2 million sq. ft by the end of this year. Similarly, Aditya Birla Retail has just announced plans to add another 150 stores.
“The quandary lies in getting FDI, which is needed to service a large presence through an efficient supply chain strategy,” says Ajay D’Souza, head of Crisil Research in Mumbai.
For suppliers such as fast moving consumer goods (FMCG) companies, only 5 per cent of their sales is through organised retail, the rest is through kirana stores.
“The distribution system in India is largely built by FMCG companies to support the kirana network, where wholesalers remain strong,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy firm in New Delhi.
Modern retailers also burnt their fingers trying to source fresh food directly from farmers. “People can go to (their neighbourhood) kiranas and get their vegetables at the same price as that offered in a retail store, so food did not become a driver in retail stores,” says Pinakiranjan Mishra, partner and national leader for retail at Ernst & Young in Mumbai.
Building a supply chain has not been a strength among organised retail players, and so it is back to sourcing from the vegetable mandi.
And that is perhaps what FDI in retail can do: bring in outside expertise on building and integrating supply chains with the attendant quality and pricing that will persuade consumers to go into supermarkets.
But politics intervenes. The inability to source directly from farmers is constrained by land ownership laws that stand in the way of farm aggregation. “Firms cannot aggregate land from farmers to create a farm-to-fork connect,” says a finance ministry official who did not wish to be named. “The government fears that if companies own large tracts of farm land, then they would be able to command food prices and production.” And let us not forget the voter base that mandis and kirana stores represent.
For the moment, the FDI hopes of organised retailers seem to be quashed.
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June 22, 2006
BHANU PANDE
The Economic Times, DELHI, 22 June 2006
For a man from Dehradun who ran a family-owned bookstore called English Book Depot, it’s been quite a journey to the point where his Book Café chain now has tie-ups with retailers like Café Coffee Day, Nirula’s, Barista and Subway. Sandeep Dutt, who’s effectively used co-branding and co-location strategic tie-ups to set up a 20-store book retail chain, says, “We are in the business of brewing knowledge.”
He’s observed that there are many consumers – aged anywhere from 15 to 40 – whose need for leisure and a great place to browse through books, isn’t being met adequately in the existing book retail scenario. “They find it difficult to get good books, and look for a place to spend their leisure hours if they do find them,” he explains.
That’s the need gap Book Café wants to fill. Dutt is certain that by concentrating on this single segment in various locations, his chain will be able to deliver a significantly superior experience. “Selling within espresso bars and other such co-locations that have a footfall of over 100-plus customers in a day will help achieve growth in book sales,” adds Dutt.
As a first move, he set out to sell a tempting retail model of sharing common premises with a co-retailer, while building nationwide franchise operations. What began as an experiment in Dehradun with Barista is now being replicated in Ludhiana, Chandigarh, Jaipur, Delhi, Lucknow, Kanpur, Agra and other cities in North India.
At every meeting, Dutt highlights the fact that sharing common retail space (with clearly demarcated sales areas) reduces expenses considerably in terms of cost of search, negotiation and property development. “It offers tremendous leeway to pick up strategically-placed properties, which single retailers would otherwise find prohibitively expensive,” says Dutt.
And it helps that co-retailers tap a common audience. For instance, a tie-up with Café Coffee Day helps Book Café dip into the pockets of those who walk in for coffee. In return, a bookshop adds value to the customer’s plain vanilla coffee experience. “Café reports sale growth of 50-100% by adding a book shop,” beams Dutt. Besides, existing book shops with a café added have reported sales zooming up by 200%.
It seems to be an attractive proposition: “We are opening at six more locations in four months,” declares Dutt. But some warn that this strategy might lead to the dilution of the Book Café brand. According to Devangshu Dutta, CEO, Third Eyesight, a Delhi-based retail consultancy, placing the book store at the back of the food store may not be a smart move. “There’s no Book Café branding upfront,” he adds.
“The brand may be subsuming itself with that of its co-retailer and that may not be a good idea in the long run.”
To counter that secondary status, EBD is simultaneously rolling out standalone Book Cafés, through franchisees. “The co-locational strategy has not only given us a quick and cost effective entry, but also the confidence of going it alone,” says Dutt.
Dutt has also chalked out plans to satisfy partners who want exclusivity or brand sync – while willing to share location. For instance, two coffee chains (let’s say, Barista and Café Coffee Day) may want to share premises with a bookstore, but not necessarily the same brand. The company is working on a portfolio of book retailing brands – such as Kitab Café, along with the current Book Café.
So far, even though many stores are yet to break-even, the chain has logged a turnover of Rs 2.5 crore for the year 2004-05. Dutt says that the average break-even time frame is about 18 months. Each outlet is doing about Rs 1.5 lakh per month, with a few even touching Rs 4 lakh. Book Café wants to hit some 330 small format stores (300-500 sq ft) in five years and 20 large format (1,000-1,500 sq ft) stores in four years.
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May 18, 2006
By Devangshu Dutta (Coulmn in The Financial Express on 18 May 2006)
When I am at the receiving end of expectations, business plans and such like, of companies that are looking to ride the current retail boom in India, one thing stands out, and scares me the most: the opening slides, paragraphs or pages that are devoted to the “opportunity presented by India’s booming middle class and its rising income”.
In the previous part to this column (“The Case of the Missing Millions”, 27 April 2006), we concluded that for most international companies looking at India, the potential target market was in the region of 18-19 million people, or over 3 million households. When international companies look at the “middle class” they may be looking at annual household incomes adjusted for PPP in the region of US$ 40,000 (Rs. 5 Lakhs, in absolute terms, not adjusted for PPP), and this population number is what appears on the radar.
Clearly, this less than a tenth of the figures around which many new businesses are being launched in the hottest retail market globally (as global comparative studies are stating). 200 million, 300 million – take your pick – they’re all in the mythical range!
So is it time to put out a missing persons alert for the hundreds of millions of so-called “middle class consumers”, on whose back the current retail boom is to be built?
Hang on – the trick is in changing the frame of reference. Let’s first define what the characteristics of the middle class should be.
In my opinion a good starting point is a simple one – look for a segment that is on the middle of the income scale.
Most marketers and their reference guides live in a high-income urban India paradigm (read, Mumbai, Delhi, Bangalore). Passing out of even a second-tier business school today, starting salaries can easily be over Rs. 20,000 a month. When you get into the middle-management segment, metropolitan salaries in the private sector can easily be Rs. 35,000 – 50,000 a month. This may not sound like much money when you live life from the Delhi-Mumbai-Bangalore paradigm, but trust me, it is still a very large sum of money as you go further down the list of cities and towns in India. In those towns and in semi-urban and rural India, the rupee goes a much longer way.
However, the income scale can be defined subjectively by different people.
So, to this evaluation I would add one other important attribute – this middle segment should be a substantial proportion of the total population. Clearly, a population that is only 2 to 3 per cent of the total is still very much at the narrow tip of the pyramid. We definitely need to move further down the income scale to find the real middle class.
The next annual household income range defined by NCAER is Rs. 2 Lakhs to Rs. 5 Lakhs. Now it starts to get interesting. In this income segment we are talking about approximately 9 million households or a little under 50 million people. An income of Rs. 2 Lakhs (US$ 4,500 in absolute terms) is equivalent to a little over US$ 16,000 by PPP, which is well below middle-class standards in developed economies. However, in India an income of Rs. 16,700 per month brings a number of aspirational and discretionary purchases within reach. This size of population is about the same, or larger, than many countries in Europe and will grow to 70-80 million by the end of the decade.
However, as far as my criterion of significant proportion is concerned, this still doesn’t cut it – we’re still only in the range of 6 per cent of the total population. We need to move further down the income scale, to the Rs. 90,000-200,000 annual household income range.
Bingo!
NCAER identifies this segment as having over 41 million households – that is over 225 million people – about 22 per cent of the total population. Large towns (population of over 500,000) have about 30 per cent of this population, while rural India has about half of this income group.
Earning between Rs. 7,500 a month to over Rs. 16,000 a month, this is the population that, in my opinion, is the real growth engine for the great Indian retail dream. This population has discretionary income, and yet it spends with discretion, if you will pardon the pun. It is a population that is only just beginning to be touched by cashless spending, a population that is beginning to appreciate the comforts and conveniences of modern retail, and its power as a driver of markets. It is possibly more firmly rooted in Indian traditions than aspiring to move to western standards. It is a population that is probably discovering the benefits of investing as much as it is the joys of spending thus reducing the free cash available.
Many brands are ending up planning for the 150-200 million real middle class population, while offering products and prices that are more appropriate for the ersatz “middle-class” of 15-20 million.
Consumer markets are structured around obsolescence, replacement and repeat purchases. If your product fits well within the price-value equation for repeat purchases, you have a winner. If you don’t, then what you get is a bunch of occasional purchases from most of your consumers, with long replacement cycles (or even, no repurchase).
The end result is the sales plateau that is the characteristic of so many brands in India.
If you want to volumes, prepare a product and price offer that makes sense to the real Indian middle class. The small shampoo packs make sense, the “chhota recharge” on the mobile phones makes sense. Does your product?
The missing millions aren’t really missing – they’re just
invisible through our Delhi-Mumbai-Bangalore upper income blinkers.
It’s time to take off the blinkers.
The author is chief executive of Third Eyesight. (
www.thirdeyesight.in
)
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May 5, 2006
By Devangshu Dutta (Full version of a Guest Article that appeared in The Financial Express on 5 May 2006)
With the possibility of 51% foreign direct investment (FDI) in India opened up to foreign retailers, one of the questions arising frequently is whether this means the death (or at least a slow-down) of franchising in India.
After all franchising, in most people’s mind, has these alternate images of unscrupulous franchisers ripping-off the life-savings of the small retailer on the one hand, and shady landlords in the guise of retail franchisees gouging at the pockets honest businessmen who are trying to build national brands. There also haven’t been too many sustained success models in India where both franchiser and franchisees have consistently won.
Surely, with FDI opening up gradually, foreign retailers would want to set up joint ventures in which they have control, rather than go through the franchise route, where their brand is “at the mercy of another company”? So it is a legitimate question, whether FDI sounds the death knell for franchising.
However, jumping to that conclusion would be to ignore the fundamentals of franchising as a business. If the barrier to FDI was the only factor in the growth of franchising, there would be no franchise businesses in countries such as the USA (the largest retail market) or Australia (again one of the most dynamic albeit small markets for franchising in the world), which have negligible barriers against foreign retailers or service providers setting up their own outlets.
At its most basic, a franchise is an authorisation, granted to an individual or company by another company, to sell its goods or services in a specific territory. The motivations for entering such a relationship are as varied as the individuals involved in the business, but typically cover some common points.
For the franchiser, franchising offers increase in the business footprint and scale that can help to reduce costs per unit of sales, improve business visibility and the brand, and make the business a more likely candidate for investment or listing. Franchisees become a source of finance and additional management to grow the business, which otherwise would need to be provided by the franchiser himself. Franchisers also gain from the franchisee’s local market knowledge, existing infrastructure and real estate, which they would otherwise take time, money and effort to build. What’s more, each franchisee is an entrepreneur and “business partner” who directly gains from helping the franchiser grow, unlike employee managers – thus, potentially there is more energy and enthusiasm available to drive the business.
The big trade-offs for the franchisee are that the local (or regional) business ownership, topline (sales) and a chunk of the margin, are passed on to the franchisee.
The biggest motivator from the franchisee’s point of view is that, despite operating under another company’s brand and selling another company’s products, he is not an employee but an independent business owner. This is as important to an individual store franchisee as to a regional or national master franchisee. The franchise relationship also offers the umbrella of a brand under which to operate his own outlet(s) – the time, efforts and investment put into the brand across the various territories all converge to the benefit of the individual franchisee when the customer walks in with a prior knowledge and confidence in the brand. The franchisee also benefits from previously defined processes and systems, as well as structured training and business coaching.
However, if I were to identify two major hurdles in the path of growth of franchising, they would be the immaturity of the business model on the franchiser’s part, and lack of compliance on the franchisee’s.
The franchiser must approach the market with a well-structured model that makes money and can be replicated across locations, and with a system of training and transferring knowledge to the franchisees.
The franchiser must also have a clear control on the product stream, intellectual property or other key success factors without which the franchise reduces to a generic outlet. Given the overloaded courts in the country, litigation to stop a franchisee from misusing the Brand’s rights is only a very very remote last resort!
There are no hard and fast rules that can be generalised about whether franchising, joint-venture or direct investment is the correct model to follow – each situation is unique to the specific companies involved, and it comes down to previous experience with franchising, the feasibility of franchising in that specific product or service mix, and the business attractiveness (risk and investment versus the return). Franchising offers an attractive model of business growth, certainly a more collaborative one which is in keeping with the changing and entrepreneurial environment. Now that both models, direct investment and franchise, are available, companies can actually make decisions based on a balanced analysis.
India has literally millions of individuals who would prefer to be their own boss and run a business, rather than being an employee. There are joint-families, where resources may be available in the form of some real-estate and family members who can be part of the business. Personal loans are available from family and friends, in the close social fabric of our communities. Ideal ground for franchising to grow.
To close, I must quote a conversation with an international Brand about 30 months ago. I put across the premise that given India’s potential size and strategic importance as a market, surely the brand would consider setting up its own company rather than a franchise relationship. The Brand’s head of internationalisation looked ambivalent because at that time FDI in retail was nowhere on the horizon, but thought that they might consider it if government regulations changed. Well, the government allowed FDI earlier this year. And yet, this brand recently launched in India through a franchise relationship, for many of the reasons listed above.
Franchising lives!
The author is chief executive of Third Eyesight. (
www.thirdeyesight.in
)
