While the deal gives Birla access to the most profitable chunk of the fashion retail business, the debt ridden Future Group can now get rid its burden over an expectedly short period. For Biyani, weighed down by Rs 5,800 crores debt, and with limited avenues to raise fresh equity from foreign investors, the deal brings immediate cash of Rs 800 crores in the BSE-listed flagship Pantaloon Retail (PRIL). It will also be able to transfer an equivalent Rs 800 crores of debt to the demerged entity, helping PRIL to cut debt to Rs 4,200 crores.

Explaining that Pantaloons and Aditya Birla have different reasons to get into the deal, Ankur Bisen, Associate Director-Retail, Technopak Advisors says, “It is a great deleveraging opportunity for evolution of Future Group. Though it started with Pantaloons, over the last 15 to 20 years, it has actually evolved as a retailer operating in various retail formats. Even though Pantaloons was probably the jewel in the crown, but it is to some extent a non-core activity for the Future Group. Realizing that they would like to grow as a retailer and not as an apparel brand owner, the Group must have gone ahead with this deal.” And goes on to add “If you look at the kind of debt pressure the Future Group has, it stands to gain in the short term with this deal.”

But experts feel, the deal goes more in favor of the AV Birla Group, since Biyani loses a large chunk of the high-margin, fast- growing fashion retail business. Aditya Birla Nuvo, which through its subsidiary Madura Fashion & Lifestyle, controls apparel brands such as Allen Solly, Louis Philippe, Van Heusen and Peter England, and the acquisition of majority stake in Pantaloon, will enable it to cater to customers at the lower segment in the value chain. With its bouquet of brands, Madura can not only attract the young it also gets to more than double the Group’s retail space from 1.6 million sq. ft. to 3.65 million sq. ft. And the combined entity’s turnover will go up by almost 80 per cent. Pantaloons’ Rs 1,700 crores turnover will add to Madura’s Rs 2,145 crores top line.

“The Aditya Birla group gains significant control over one of the largest modern large-format chains in the country. Since Madura Garments is also one of the largest branded suppliers in the market, a better integrated value-chain may provide it some margin advantage. However, it is likely to be also careful not to sour its position as a supplier to the other large format retailers through anti-competitive practices,” opines Devangshu Dutta, Chief Executive, Third Eyesight, a consulting organization for retail and consumer goods sector.

However, it would be interesting to see how competitors Shoppers Stop and Lifestyle react to this move. Further it would be also interesting to see whether the $35 billion (over Rs 180,000 crores) Aditya Birla Group, which has yet to stop losses in its food and grocery chain ‘More’, now sell it off to a potentially more viable food and grocery chain, in the same manner as Biyani.

(This story was published in Fashion United.)

Roudra Bhattacharya, Priyanka Pani, The Hindu Businessline

Mumbai, 9 May, 2012

What really went wrong with the way Reebok was run? According to a top North India-based distributor, the franchisee model running for the last few years was flawed.

“Some stores were picked on very high rental, so the sales were lower than the cost of running the outlet,” says a distributor, who preferred anonymity.

Reebok’s contract with the franchisees worked on a minimum guarantee (MG) basis, which meant that to encourage network expansion, a certain income was guaranteed to each outlet, regardless of sales.

However, this model had the sorry effect of the franchisees getting lazy as they knew that a certain revenue was guaranteed, sources in the distribution chain say.

The more profitable stores ended up cross-subsidising the larger number of loss-making outlets.

As a result of the minimum guarantee deal, the company still has to pay these franchisees dues in crores of rupees nationwide, which Reebok was holding back due to under performance. “Since the last year, the management was trying to change this business model by taking back the MG deal from loss-making outlets, or asking them to close for inability to meet targets. Unfortunately, the accumulated losses of the outlets had become too large, and the European HQ had to take note,” the distributor said.

Last week, Adidas AG had said that commercial irregularities at Reebok brand in India had led to a pre-tax hit of Rs 870 crore, while a restructuring would cost a further Rs 488 crore this year.

The Group had said that a third of the 1,000 Reebok outlets in India would likely be shut, while reports have additionally claimed that a further 200 Adidas outlets may also face the same fate.

EXPANSION SPREE

A franchisee owner invests anywhere between Rs 40 lakh and Rs 1 crore, depending on the value of the real estate. Noida itself has five Reebok outlets, apart from stores in two malls. In comparison, a shopping area such as New Delhi’s Connaught Place has three outlets within a distance of half a kilometre from each other.

Mr Devangshu Dutta, CEO, Third Eyesight, a retail consultant firm, says most global brands went on an expansion spree during 2004-08.

Several brands were quite optimistic of the Indian growth story and went on to open stores at places they shouldn’t have, he adds.

However, from 2009 onwards several of the stores had started either resizing, closing down or stalling expansion. “Most of the expansion was done keeping in mind the competition in the Indian market and not the demand,” Mr Dutta said.

The Indian market for sports footwear is still largely dominated by unorganised players.

“Franchisees in India are not retailers and know little about retail strategies; they want immediate return on investments and when they don’t get it, they try to cut costs, inventory, working capital and also don’t invest in manpower. This impacts the brand,” he said.

NOTHING OFFICIAL

Five Reebok store owners Business Line spoke to around the NCR said that the company is yet to communicate to them officially.

However, the understanding is that the stores operating as ‘factory outlets’ and offering year-long discounts are expected to be closed first.

These stores, which generally sell older stock (from previous seasons), are believed to be leading to a “brand dilution” of Reebok.

“Reebok is positioned as a premium brand, and these stores are affecting the business of the bigger stores which pay high rentals for operating out of the top shopping arcades.

As per our contract, the company is expected to take care of any losses we suffer if our stores close,” said a Reebok store owner in Noida.

Vishal Krishna, Businessworld

Bangalore, 5 May, 2012

It is not just a marriage of convenience; there could be love involved, too. Aditya Birla Nuvo (ABN), with annual revenues of $4 billion, a mini-conglomerate within the $35-billion Aditya Birla Group, has acquired a portion of Pantaloon Retail India’s (PRIL) lifestyle business.

Eighty-six Pantaloon fashion retail stores will form part of a new entity, controlled by ABN, which will be automatically listed on the BSE and the NSE. A Future Group official says that ABN has acquired a minority stake by subscribing to Rs 800 crore worth of convertible debentures, which will be converted into equity when the new entity is formed. ABN will make an open offer to PRIL’s shareholders; ABN will eventually have 50.1 per cent stake in the new firm.

ABN has also paid another Rs 800 crore to service the debt of PRIL. Both groups have yet to decide the swap ratio (JM Financial acted as advisors to the deal) that will determine the shareholding pattern in the new entity. The word on the street is that PRIL will own 25 per cent in the new entity and will manage the operations of the 86 stores whose revenue is expected to reach Rs 1,700 crore for the financial year ending 30 June 2012.

For the Future Group, the happy marriage means that Rs 1,600 crore out of the Rs 5,256-crore debt will be wiped off PRIL’s balance sheet, giving Future Group chairman Kishore Biyani a breather. “This is the first of the many steps to reduce the debt of the Future Group,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy.

But is the union good for ABN, too? ABN’s business generates $4 billion in revenue, but its lifestyle business makes only $400 million. The new entity should change that for the better. ABN’s Madura Fashion is the largest premium-branded apparel player in India, with brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England as part of its stable, and retails through 1,082 exclusive brand outlets, apart from being sold in more than 1,250 departmental stores and multi-brand outlets.

ABN has a distributorship tie-up with leading brand Esprit and it retails international brands under ‘The Collective’, a luxury store. Access to PRIL’s network will double ABN’s revenues and make it the single largest chain in India. The combined revenue of rivals Shoppers Stop (50 stores) and Lifestyle (40 stores) will be about that of the new ABN/Pantaloon entity.

The buyout will give ABN access to markets where it has no presence: tier-II and tier-III towns, where the future exponential growth of the retail sector is expected to come from. So why did PRIL sell a stake in a venture that was highly profitable for the Future Group? “The rising debt levels of Pantaloon have been affecting the growth of the group,” says D.K. Aggarwal, CMD of SMC Investments and Advisors. “They have been paying about 60 per cent of their revenues as interest costs.”

Other analysts call this a clever move by ‘Mr Retail’. PRIL’s Rakesh Biyani and Kailash Bhatia will continue to run operations; a “Fashion Council” with the best talent from Madura Fashion and Future Group will advise the new firm on leveraging its strengths. And with the financial muscle of Aditya Birla Group behind him, Kishore Biyani’s legacy remains intact.

(This story was published in Businessworld Issue Dated 14-05-2012)

Vishal Krishna, Businessworld

Bangalore, May 3, 2012

Walmart may be the largest company in the world in terms of revenues, but its global e-commerce websites are lagging far behind. Walmart e-commerce is facing tough competition from local e-commerce firms as well as Amazon, the largest e-commerce website in the world. Walmart’s websites in China, UK, Brazil, Mexico, Canada and the USA are all sitting isolated and need a focused strategy to deliver a global view for Walmart. Consolidating all that data of shoppers is becoming more complicated and is not giving Walmart a full view of what its customers want on an e-commerce site. “We are creating a global platform so that these e-commerce websites can be integrated, there will be one world view for all our shoppers and we will cater to local needs too,” says Anand Rajaraman, Senior Vice President Walmart Global E-commerce. He says that this strategy was to enable better consumer experience and ensure real time knowledge sharing with different countries.

This platform is going to be built from scratch in Bangalore and is going to have over 200 people working on it by the end of the financial year 2012-13. This will also be the first time that Walmart is ramping up its R&D operations through Walmart Labs. This is a clear signal to take on Amazon because not only has Amazon entered Indian operations in the form of a market place called junglee.com, but its R&D centre in India has over 500 employees. “This should not be a problem for Walmart because they have all the experience for the last three years by working with Bharti,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy.

Coincidentally, Anand Rajaraman sold junglee.com to Amazon in the late 1990s for $250 million and is now involved with Walmart after it acquired his analytics company called Kosmix for $300 million.

Why a global platform? “The global platform is going to be created because we can easily ramp up in emerging markets as part of our new strategy,” says Jeremy King,” Chief Technology officer of global e- commerce.

Analysts say that Walmart’s e-commerce revenues are small because the numbers add up to less than 3 per cent for a $425-billion company. This new strategy is being created for taking on the likes of Amazon which is the largest online retailer with revenues of $34 billion, and other home grown e-commerce retailers in emerging economies. Walmart’s e-commerce revenues are $10 billion, which is larger than any retail business in India. FDI rules do not permit Walmart’s e-commerce unit to come in to the Indian market, but its global platform can be ready because Walmart’s back-end work of tying up with suppliers is already on through the cash and carry business. It has a 50:50 JV with Bharti retail, although 100 per cent FDI is allowed in B2B operations.

Walmart has created a business unit called Global.com to study and understand how its products could be bought online globally like Amazon. “We will focus on mobile apps because shopping is becoming social and people are collaborating real time. Our apps are in the top twenty lifestyle app downloads on the Apple store,” says King. He adds that new platform will help Walmart analyze inventory, in shop research and allow shoppers to access Walmart anywhere, anytime. Cloud computing to scale up operations is being implemented at Walmart’s own private cloud; it runs its own data centre.

“In any e-commerce business it is important to offer a large assortment of products at the right price and deliver it efficiently,” says Pinakiranjan Mishra, Partner at Ernst and Young. He says that e-commerce was becoming firmly rooted in India as a big business and when FDI opened up, big global brands will be eager to set shop in India. Today Indiaplaza.com and junglee.com are market places that have tied up with 1000s of vendors. “India has so many vendors that one can tie up with for the e-commerce business, global brands will wait for FDI to open up while they develop their local sourcing arms,” says K Vaitheeswaran, CEO of indiaplaza.com.

Analysts estimate the e-commerce business in India to be around $7 billion and growing at 50 per cent year on year, but markets like the USA and Europe have an e-commerce market of over $200 billion each. Therefore for a Walmart with only $10 billion revenues from its online business, it is important to scale up, as brick and mortar retail is showing only single digit growth. “India is going to be helping the global R&D business for e-commerce,” says King of Walmart.com. While Walmart closely watches emerging markets and the way local businesses function, they would be treading carefully.

The homegrown online businesses in China have given American brands such as Amazon a run for their money. Similarly, India seems to have the likes of flipkart.com use the Amazon model to become big in India. But Walmart has the cash in an age when countries struggle to repay foreign debt. It would certainly take on the likes of Amazon, may be the battle for India could be the one to watch out for.