Future Group: The Next Big Idea


January 17, 2013

Vishal Krishna, Business World

Bangalore, January 17, 2013

In February 2010, Future Group founder and group CEO Kishore Biyani delivered a lecture at Coimbatore’s Bharathiar School of Management and Entrepreneur Development. He said his business ideals were driven by LSD (Lakshmi, Saraswati and Durga). Unless we create wealth for all strata of society, learn from experiences and create a strong identity, we will never become an economic superpower, he told the audience.

That lecture echoed in May 2011, at a meeting to discuss a new initiative with select senior executives at the group headquarters in the SOBO Central Mall, Mumbai. At the end of the presentations, Biyani told them in chaste Hindi, “Is mein dhan hi dhan hai.” Translated into English, it means “there is enormous wealth in this”. Translated into reality, it is a Rs 10,000-crore opportunity for the Rs 15,000-crore Future Group; besides having the prospect of creating thousands of livelihoods.

What Biyani was referring to is now taking shape at a 110-acre site 100 km north of Bangalore, in Tumkur. This Rs 500-crore food park — the first of two that he intends to set up by early 2014 —is at the heart of Biyani’s push to backward integrate his group by creating a parallel FMCG business which, he hopes, can be scaled up to be among the biggest in the country.“We want to be one of the top three FMCG players in this country,” he says.

At play here is Biyani’s ingenious instinct: If India is changing, so are eating habits. “The future is in value-added food. We see our customers evolving this decade because of the changing economic conditions,” he says. He
defines value-added food as: TV dinners, frozen foods, ready-to-eat, baked items, packaged fruit and vegetables, food pastes and curries.

With the food park, Biyani is also challenging the current norm in the retail industry where large rivals such as Reliance Retail, Bharti Easyday and Aditya Birla More source white label and private label products from contract manufacturers rather than getting into manufacturing themselves. So why is he going against the grain? Logistics is 13 per cent of the retail cost of food products. If the food park could reduce this to 5-6 per cent, the group stands to create a lot of “dhan” since food business accounts for 50 per cent of Biyani’s Rs 15,000-crore annual revenue. Eventually, like Walmart, Biyani will hope to sell at least 50-55 per cent of his products through white or private labels as against 35 per cent today. Private label food products earn an average net margin of 65 per cent versus 10-15 per cent from branded products. “We have the customer knowledge from our retail stores that allows us to take this bet,” says Biyani.

“For Biyani, an idea can mean not just a business opportunity but a way to bring investors together to make that product scale to potential,” says B.S. Nagesh, Biyani’s friend, and vice-chairman of the Rs 2,000-crore Shoppers Stop.

To Make It Work

These are hectic times for Biyani. He is pacing up and down in one of the Future Group’s conference rooms in Bangalore, even as he makes multiple phone calls and sips green tea. When sitting, he multi-tasks between an iPad, a Samsung smartphone and a BlackBerry. He tells the person on the other end of the phone to not think negatively and to get on with the work as planned. During his conversation with BW, he is mostly on his feet; he takes a break to listen to executives explaining the progress at the Tumkur project. At times, he slips into deep thought. Often, he runs out to acknowledge a business associate, holds a discussion, and then returns to the conference room.

When it goes live in 2014, the Tumkur park will connect farmers spread over a 300-km radius to six agri cooperatives or collection centres. The produce will go from the collection centres to the food park, where it will be sorted and graded. Some of this will reach stores while the rest will go into processing. The food park will also house pulping, milling, flouring, spice and dal (lentil) units. It will have an 80,000 sq. ft cold store to supply fruits and vegetables round the year. Biyani has also planned a manufacturing centre for 60 medium-sized food processing companies that can make ready-to-eat food for group company Future Ventures using raw material supplied by the food park.

“No one in India has created an integrated food park business, and the country needs this to generate employment in manufacturing and to create a new consumption boom for people,” says Biyani. It will be the job of Future Ventures to transport the products to the kirana network across India, and to the group’s 600 stores through Future Logistics.

But this is just the food aspect of the new business. For non-food FMCG, the business plan envisages bringing in manufacturing units of large FMCG majors such as Hindustan Unilever (HUL) and ITC (talks are on with both), as well as large FMCG contract manufacturers. For the latter, Biyani plans to provide ready-to-use infrastructure. If required, the bulk of the responsibility for raw material sourcing and logistics will be taken care of by various Future Group entities.

The plug-and-play infrastructure could be of immense value to foreign retailers as the new FDI policy requires them to spend 50 per cent of their investment in backend infrastructure. With the food park, the foreign retailer need not buy expensive land. Instead, it can sub-lease it and set up manufacturing operations. This move satisfies the backend investment requirement of the FDI policy, and allows foreign retailers to focus on frontend retailing.

Re-Inventing The Group

Biyani has come a long way in planning the park. At the beginning of last year, analysts considered Future Group a sinking ship. Its biggest company, Pantaloon Retail’s revenue was rising but net margins were almost flat — in the 0.5-1 per cent range. The group is yet to file its annual results for 2011-12 because of a restructuring and will file 18 months’ results in February 2013. It had also piled up a massive debt of over Rs 7,600 crore, whose interest burden had been taking a toll on its profits.

Biyani has managed to pare the debt. He hived off equity in various group entities, even selling businesses such as Future Capital Holdings (which carried 50 per cent of Future Group’s debt) and the Pantaloon fashion format. The biggest move came when he raised Rs 1,600 crore by selling 49 per cent stake in the Pantaloon format to the Aditya Birla Group in 2012.

The financial restructuring brought debt down to less than Rs 1,200 crore by November 2012. “It is good to be out of it,” says Biyani. Then he turns around to the presentation board and, after some thought, says, “That era was different. The business environment and opportunities were different. It was Future Capital Holdings and its NBFC debt that created a lot of confusion for us. I am not just back on track, I have been so for some time now.”

Biyani’s eyes are now focused on the Tumkur park. Work is in full swing at the 110-acre parcel of land acquired from the Karnataka Industrial Development Board. Land is being levelled before construction can begin for the fruits and vegetables centre, the cold store and ripening chambers. Amid the chaos and din, Praveen Dwivedi, a former ITC veteran of the farm supply chain initiative and cigarette business, is busy speaking to farmers and contractors on the project’s execution. Since he is solely responsible for the project as the president of Future Ventures, he works with an iron fist.

Dwivedi is used to inadvertent delays. He makes frequent calls to government officials, keen as he is on securing the 10 MW of power required for the food park immediately. He also wants to have everything — from water to drainage lines — ready in eight months. The project report says the park will need 500,000 litres of water, drawn from the Hemavathi river in Tumkur, and for which a reservoir is being readied. A few farmers are threatening to stop the movement of Dwivedi’s trucks. But he is not perturbed. “This project will eventually employ more than 2,500 people. It will change the way food processing is envisioned in this country,” says Dwivedi.

The Unique Selling Point

The idea of a food park is actually borrowed from China. The Chinese industry is 18 times the size of India’s $70-billion food processing business. An average food park in China is 200 acres in size and has investments of close to a billion dollars each. China has over 30,000 large food processing companies that process everything from meat to cheese and from raisins to nuts. China exported over 500 million tonnes of dry milk powder in 2011 alone. The Chinese industry is projected to reach $2 trillion (from $1.2 trillion) by 2018.

In India, Future Group’s Tumkur project is one of the 15 projects to take off from the posse of 30 mega food park schemes floated by the ministry of food processing. These projects are entitled to a government grant of Rs 50 crore and have been floated as a special purpose vehicles, with government representation on the board till they are commissioned.

Projects that have been commissioned include the 147-acre Srini Food Park in Chittoor, Andhra Pradesh, with an investment of Rs 200 crore by five promoters; the 80-acre Patanjali Food Park in Haridwar, Uttarakhand, with Rs 100 crore invested so far; and the 70-acre International Mega Food Park in Chandigarh, with Rs 150 crore from International Farm Fresh. A couple of these projects are for pulping fruit and processing vegetables for export and are betting on revenue from leasing land. The Patanjali Group is also promoting ayurvedic products of Baba Ramdev.

“Reliance, Spencer’s and Aditya Birla (Group) have connections with farmers, and a huge private label play. But no one has done food processing on their own,” says Pinakiranjan Mishra, national leader of consumer markets, Ernst & Young. He adds that low margins in manufacturing will be offset by retail sales.

Reliance Retail’s grocery business is close on Future Group’s heels. It achieved Rs 4,000 crore in food and groceries in under six years of operations from 600-odd stores. The company’s total retail business generated revenues of Rs 7,600 crore. Sources say that the company sources at least 30 per cent of its fruits and vegetables from farmers. That the company is serious about its retail business is evident from the fact that the group has infused Rs 12,000 crore in the retail business and will spend another Rs 13,000 crore over six years.

Similarly, Bharti Retail’s Easyday format has over 200 stores, and is working with 2,000 suppliers to increase its private label content from 25 per cent to 40 per cent by 2015. Its partner Walmart works with 20,000 suppliers in China alone and sources 95 per cent of the products locally. The Bharti group has already committed Rs 9,000 crore for the retail business.

But the competition does not deter Biyani because he already has the retail scale, and the food processing business will focus on value-added products, which will be largely exported; only about 30 per cent will be for domestic use.

“The world is looking to India for food processing with the Chinese food industry under scrutiny for not maintaining quality. Imagine the scale we can build on,” says Dwivedi. And scale is the question that Dwivedi has to find an answer to. He cites the example of an industrial pizza machine that can make 20,000 pizzas an hour, saying there has to be commensurate local consumption, which is unlikely to happen. “Can we use the same machine to make chapattis, parathas, rotis and other baked items, besides pizzas? This will allow us to utilise the machine to the fullest instead of letting it sit idle,” he says. Scale is essential because the food park will eventually have a major portion of its business contributing to exports. “Eventually scale will be possible only through exports,” says Dwivedi.

Getting Retail Into Play

Even though he will rely heavily on exports, Biyani has his entire retail chain of more than 600 supermarket and hypermarket stores backing him in rural, semi-urban and urban regions of the country to utilise the production from the food park. He has 315 Big Bazaar and Food Bazaar stores in major cities; 200 KB’s Fairprice shops; 38 Big Apple Express stores; and 37 Aadhaar stores. “There is a larger opportunity in retailing with KB’s Fairprice shops,” says Biyani.

He adds that he wants to empower the kirana as a franchisee and is identifying 10,000 franchisees to open KB’s Fairprice shops over this decade. Till now KB’s Fairprice shops were limited only to Delhi, Mumbai and Bangalore. “We are also going to acquire or take over many more small retail stores in a couple of years,” says Biyani.

A few years ago, Nilgiris, a retail chain owned by UK-based PE fund Actis in Bangalore, mooted the idea of experimenting with the concept of empowering small entrepreneurs to use its brand name. The project did take off with at least 50 successful small entrepreneurs who understood modern retailing. But it is intrinsically difficult to find local entrepreneurs who can work with corporate processes across every city. Nilgiris’ small entrepreneurs were usually retired executives or businessmen who wanted to experiment with retailing. But it was Nilgiris that provided the backward linkages and supplies. If such a plan is executed by Biyani, he would have the largest network of stores that he can supply to from the food park.

And this is something that other food parks do not have access to. Along with subsidiary companies like Future Supply Chain and Future Logistics, he hopes to complete the farm-to-fork loop. “India is a fascinating country to do business in. And with such a young population, it is only the beginning of what we as a group can achieve,” says Biyani.

Between The Cup And The Lip

Despite enormous planning, Biyani still has a few issues to grapple with. More than integrating farmers into the food park, it would be a challenge to convince large FMCG players such as PepsiCo, Dabur, HUL and Britannia to set up shop in the park.

“There needs to be commonality in a food park, much like in an automobile cluster, which has a large anchor, if the project has to succeed,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy. He adds that there is a business case if the Future Group can create an ecosystem in the food park where each entity works towards a common benefit.

About seven years ago, various state governments had asked individual entrepreneurs to set up food parks with a subsidy of Rs 4 crore. Many local businesses bought the land, but failed to open food parks. In Karnataka, small mango pulping units (30 tonnes-a-day capacity) started but remained operational only for about six months of the year. Similarly, textile parks became a real estate play. In many cases, the units set up functioned in silos rather than with a unified vision.

“These businesses were set up without market linkages, so they didn’t take off,” says Biyani. He says that Capital Foods, in which he has a 43 per cent stake, will be one of the larger private food processing companies in the park, and will act as anchor with a 100,000 sq. ft factory.

“Since the Future Group is back to pure-play retailing, it can focus on new businesses such as food processing that can supply food products to its retail formats and also create new markets with exports,” says Harminder Sahni, managing director of Wazir Advisors, a retail consultancy.

Perhaps, this is the beginning of the emancipation of Biyani the entrepreneur. Always a risk-taker, he is now ready to take bigger risks in a journey that will determine whether he is as successful in FMCG as he has been in retail.