India’s economy is in focus globally, and is also at an inflection point.
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It was a contentious plan to repay overseas bondholders in full that brought what would have been India’s biggest retail deal to a grinding halt.
Debt-laden Future Retail Ltd.’s offshore bondholders — a relatively smaller part of the creditor pool — were promised 100% payment in the rescue offer from billionaire Mukesh Ambani, according to people with knowledge of the matter. Indian lenders were asked to take a haircut of as much as 66%, the people added, asking not to be identified discussing confidential information.
The unequal treatment led to the move last week, when the local banks rebuffed the $3.2 billion offer from Ambani’s conglomerate. Reliance Industries Ltd. announced the purchase plan in August 2020 but struggled to complete the transaction in the face of legal challenges mounted by Amazon.com Inc., which argued it had the first right of refusal contractually.
Bank of India and State Bank of India, the main bankers to Future Retail, didn’t immediately respond to emails seeking comment on reasons for voting down the deal. Representatives for Future Group and Reliance also didn’t immediately comment.
State-run lenders risked probes from federal agencies if they accepted these discriminatory terms, they said, explaining their preference now for a court-mediated insolvency process where bids are called in and there’s no risk of them being accused of cutting a bad deal. Bank of India has already requested an Indian court to initiate the process.
The hard-nosed decision by Indian banks has pushed the teetering Future Retail, which ran one of the nation’s largest retail grocery chains before the pandemic struck, one step closer to bankruptcy. Future Retail is almost certain to default on its $500 million bond coupon payment due July 22, S&P Global Ratings said Tuesday, while downgrading the company’s ratings deeper into junk territory.
The lenders’ action has also taken the wind out of a tortuous two-year-old litigation between Reliance and Jeff Bezos-owned Amazon — the e-tailer had started arbitration proceedings in Singapore to block the deal — but left the door open for Ambani to snag these retail assets, possibly at an even cheaper price, under the bankruptcy process.
“Reliance and other parties could be eligible to bid for its assets by submitting their resolution plans” even if Future Retail ends up in bankruptcy, according to Satwinder Singh, New Delhi-based partner at law firm Vaish Associates Advocates. “This would also lead to moratorium on any or all ongoing arbitration proceedings against Future.”
While the local lenders were agreeable to the deal when it was first announced, a lot changed in the past year or so, the people said. While the Amazon lawsuit dragged on, the asset value eroded and the pandemic worsened the cash crunch at Future Retail that began defaulting on its debt repayments.
Secured Indian lenders were promised recoveries ranging between 34% to 88% of the total $4 billion in dues and even those payouts were staggered over seven years, the people said.
Reliance dealt a body blow to the Kishore Biyani-led Future Group in February when it quietly began poaching employees and taking over rental leases of hundreds of stores earlier run by Future Retail and Future Lifestyle Fashions Ltd. Ambani’s bloodless coup prompted Amazon to suggest settlement talks on the bitter dispute and alarmed Future’s investors and lenders who worried about asset-stripping.
Reliance’s unexpected takeover of Future’s stores eroded bankers’ confidence in the deal as it stripped off value from the chain and potentially could erode Reliance’s offer terms.
The out-of-court truce talks between Amazon, Future and Reliance collapsed soon after the store-purchases were initiated, the companies informed India’s top court on March 15. Amazon will continue with its arbitration proceedings against Future Group in Singapore, according to a person familiar with the matter, who asked not to be identified as the deliberations are private.
“A major turning point was when Reliance physically took over Future’s stores, which turned it into a no-holds barred situation,” said Devangshu Dutta, head of New Delhi-based retail consultancy Third Eyesight. “Before this the battle was being fought in courts and across the negotiating table. But at this point it moved over to the real business.”
Written By Christina Moniz
D2C brands take the offline route to widen reach
Direct-to-consumer (D2C) brands are fluffing up the Indian mattress category with promises of lower prices, mattress-in-a-box convenience, 10-year warranty and 100-day trials. In a market that is predominantly unorganised, startups such as Wakefit, The Sleep Company, SleepyCat and Flo are aspiring to establish themselves as better alternatives to legacy brands such as Kurlon and Sleepwell, with most of them looking at the offline retail route too, to boost sales.
According to a Research and Markets report, while India’s overall mattress market has grown at a CAGR of over 11% in the last five years, the organised industry has grown at 17%. The mattress category in India is worth `12,000-13,000 crore; of this the organised segment commands 40% share.
New-age mattress brands are able to deliver products at lower price points by taking control of the entire consumer journey – from product discovery to post-sales support. Therefore, these D2C brands save big on distributor and retail margins, says Devangshu Dutta, CEO, Third Eyesight. These savings go towards compensating for higher customer acquisition costs and logistics, he observes. The elimination of the middlemen means that customers get their products at 30-35% less than what traditional players offer.
However, these digital-native companies are aware that they operate in a touch-and-feel category, which is why many offer a 100-day trial period. Priyanka Salot, co-founder, The Sleep Company, says that the product return rate is only 2-3%, and the returned mattresses are donated to charities but never resold. The Sleep Company, which entered the market a little over two years ago, is eyeing a turnover of `1,000 crore in the next five years, and has plans to launch its first offline store in a few months.
Online players also save on logistics, says Chaitanya Ramalingegowda, co-founder and director at Wakefit. “We implemented the roll-pack technology that allows the mattress to fit into a compact box. This lets us ship more products at a time,” he says. Wakefit has only two factories—one in north India and the other in south India—as opposed to older players with 10-12 factories across the country, he points out. The company hopes to close FY22 with a turnover of 630 crore, up from197 crore in FY20. It has one offline experience centre in Bengaluru, with plans to launch 10 more across five cities soon; these centres will not only be experiential, but also double up as booking/ retail sales outlets.
Rajat Wahi, partner, Deloitte India, points out that these new-age mattress brands must establish deeper offline distribution to expand reach. “After all, more than 90% of retail is offline in India,” he notes.
This is why D2C brands are not only taking the offline route, but also foraying into other segments like furniture and sleepwear. Kabir Siddiq, founder and CEO of SleepyCat, says the brand has plans to launch around four experience centres, and aims to become a one-stop shop for all sleep and comfort solutions, offering comforters, pillows and even bedding for pets.
Is the proliferation of D2C players giving legacy brands sleepless nights? Mohanraj J, CEO, Duroflex, says it has been akin to a “wake-up call”. He says the company has poured in investments into the D2C segment in the past few years, and now even has a completely online brand called Sleepyhead, catering to the millennial consumers. “Until recently, about 10% of our company’s growth was from online sales, but we expect that number to change to 30-35% this year,” he adds.
Despite the influx of new-age players, he maintains that Duroflex has doubled its growth in the past two years, with traditional retail registering 25-30% annual growth.
B2B event companies don’t often think about consumer spending as something directly relevant to their business. However, consumer trends can allow industry event and exhibition organizers to get an advance view of where the opportunities can lie in the future. In this Keynote address at UFI’s Asia Open Seminar in Bangalore, Devangshu Dutta shares his views about the key consumer trends in India, and the implications for the events and exhibitions industry.
(This presentation was delivered on 6 March 2014 in Bangalore, India.)
(If you’re in a hurry, go to the Slideshare presentation, and bookmark this post for a complete read later.)
These pages usually focus on the consumer and retail sector, its constituents, its problems and the opportunities therein.
The consumer and retail sector is all about choice, and it is worth noting that we’ve just concluded what was possibly the most massive consumer event in the world. I’m referring, of course, to the Indian elections, where more than 500 “consumers” were bombarded with above-the-line and below-the-line marketing by various organisations pushing their brand, product (candidate) and services (ideology and manifesto).
The sum total of analyses of India’s 2014 election results already exceeds what one sane person can read in a lifetime. The BJP and its allies have won a majority of seats unprecedented among non-Congress alliances, in the first-past-the-post system. While opinions may be fractured, the Parliamentary mandate is clear.
In this context and in this spirit, it is also relevant for us to take the big picture view. Retail is a sector that touches the lives of virtually every citizen of this country on a daily basis. So anything that affects their lives and their aspirations have a direct bearing on the retail business as well.
India’s citizens are creative and entrepreneurial. They are hungry for growth. While they are respectful of heritage, they are also devastated by the decline that has come about over decades, centuries, and are determined to change this situation. What they need is the government to shoulder its responsibilities.
If there is one narrative that can pull diverse, divided strands of opinion together, it is “inclusive growth”. Throughout his campaign Narendra Modi has repeated the mantra: “Sabka Saath, Sabka Vikas” (literally “all together, development for all”). In recent weeks, on more than one occasion he has extended this to mean pulling together the efforts of leaders across the political spectrum as well. At the time of this writing, the Prime Minister elect Modi has already set out to manage expectations. He has positioned himself as “mazdoor (labourer) no. 1”, and is asking the electorate for 10-years, making it amply clear that there is no magic broom to remove the dirt of corruption overnight, nor a magic hand that will conjure out ever-increasing incomes out of bottomless magic pockets.
While there are many problems to be tackled at the macro and the micro-level, I think the “business of government” can be captured broadly in an 8-point agenda, and each of these has a significant bearing on the consumers of this country, and the businesses they transact with:
1. Healthcare: While India’s average life-expectancy has improved steadily since Independence it still hangs in the mid-60s while China’s and Brazil’s is over 73. India offers less than one bed for every thousand of its citizens, while both China and Brazil are well over 2. The United Kingdom, whose National Health Service is constantly lambasted as being “overstretched”, offers about 4 hospital beds per 1000 people, and the average for former British colonies is also around 4. Public healthcare infrastructure in India – from primary to speciality – remains critically under-funded, and the public hospitals that exist are chronically under-equipped and under-staffed. Where equipment exists, it is underutilised, as commission-seeking individuals refer patients to the burgeoning private clinics and hospitals. Over the last decade or so private healthcare providers have achieved prominence in the media and among investors, and concessional access to public infrastructure and assets such as land, but they have proved to be consistently out of reach of the general public. Livelihoods and family savings are routinely destroyed in the search for better-quality healthcare in the new, profit-maximising business models. Health should be every citizen’s fundamental right, as one of the foundation stones of a strong nation. It is a right that is denied daily to hundreds of millions. Providing health support is the core business of the government, and needs urgent attention and substantial investment dispersed nationally.
2. Power: India’s power consumption average is about one-third of the Chinese average and less than a tenth of the USA, and this is not only because Indians have smaller homes or live more frugally, but because hundreds of millions of Indians spend most of their days and nights without electricity. If you think you can get a sense of the deprivation from a household that gets power a few hours a day, you actually have to visit one where power availability has improved due to grid power or micro or off-grid availability through solar or biomass units – the enormous impact that the improved power availability has on the lifestyle, livelihood and quality of life can only be truly gauged then. Across the nation, private participation has been invited into the power sector at different times, but the execution has been mixed. Private companies would also like to serve those areas where population concentration and decent financials allow the private provider to create a profitable business. Large swathes of the Indian population lie outside of such areas, and the onus is upon the government to provide the required electricity for households to live a fuller life, for students to complete their lessons, for healthcare and administrative facilities to run effectively, for small entrepreneurs to be able to grow their businesses.
3. Clean water: Imagine one train crash every day of the year, each killing all passengers on board. Sounds catastrophic, doesn’t it? Wouldn’t that get some serious attention? Well, it is estimated that around 1600 deaths are caused every day by diarrhoea alone (higher than the train wreck fatalities), and that 21% of communicable diseases in India are related to unsafe water. The problem is not only in far flung villages, but acute even in the largest cities of the country. Both those numbers are shamefully high for a nation that wants to see itself as a global superpower. There are no technological gaps for effectively harnessing the existing water resources, and for maintaining cleaning, distribution and recovery systems – only management gaps.
4. Transportation infrastructure: While India has one of the largest rail networks in the world, at about 20 kilometres per 1,000 sq km of land area it compares unfavourably to highly industrialised European countries (Germany: 115 km per thousand sq. km., UK: 65, France: 53) or even the large less densely populated USA (26 km per thousand sq. km.). On road development India’s picture has improved in the last 15 years, but it still trails world-leading economies in terms of length as well as quality. Poor transportation systems cut people off from economic opportunities, and force them to migrate to already overloaded cities, perpetuating problems in both urban and rural areas. Historically, all strong nations, democratic or otherwise, have flourished due to extensive, superior transportation networks. Where people and goods can move quickly and freely, both trade and culture flourish, and build the strongest ties that bind people together.
5. Education: This is another area which has systematically been under-invested in by the government. From pre-schools to universities, the growth of educational institutions for the last 30-40 years has predominantly been in private hands, where affordability is not the prime driver. The number of seats in government-run institutions has not grown in proportion with the population, let alone in correlation with the demand. Access remains a problem, as does the quality. There is no reason why government-run educational institutions need to be bad – there are enough examples around the country within government schools and colleges, where organisational systems and individual intent produces excellence. Without immediate and adequate government focus on education, the massive young population of India will go waste, at worst it would be a ticking time-bomb of under-skilled frustrated underachievers.
6. Environment: This might seem like a strange inclusion in this “development-oriented” list. However, it is essential that the environment should be on a list of core items that the government needs to manage well. The government is usually in the news for either not doing enough (such as not monitoring the systematic encroachment in and destruction of the Aravalli Hills) or, at the other extreme, getting in the way by holding back environmental approvals to development projects. Another term for the environment is “the commons”, reflecting that the natural resources belong to the people, together. The commons need not just protection, but regeneration, resurgence. Defence and political experts around the world list climate change and clashes over natural resources as among the highest conflict risks in coming years, and the evidence is frequently visible. When “growth” is measured only by those activities that extract and deplete the common resources, support and encouragement is provided for those individuals and companies that do this the “best”. It is short-termism and selfishness of the worst sort. Evidence of large scale climate-related changes and the debilitating impact on civilisations exists around the world and across the span of history; the closest might be the Ganga-Saraswati civilisation that is said to have dispersed due to the depletion of one of its greatest rivers. We don’t even need to forecast huge impacts far into the future. Millions of Indians increasingly are born and live with chronic diseases that are related to deteriorating air quality, depleted water resources, polluted soils and disappearing vegetation. Indigenous natural species of plants and animals are declining, mostly invisible to the nation at large. A comprehensive, evolving framework is needed that goes beyond short-term planning and management by knee-jerk reactions.
7. Competition: This is an area which requires little investment, relative to the other items on this list, but a huge amount of intent and follow-through. No economic system is perfect and, indeed, it is the imperfections and discontinuities that provide business opportunities. When the imperfections are exploited by many, competitive forces balance each other out. The need to diversify is well-understood by people who care to think about risks. Concentration of efforts, resources, power behind a few initiatives or organisations can bring about disproportionately good results, but also creates the risk of wipeout. Diversity is a challenge because it creates fragmentation, but it is also an essential source of innovation, combating not just present risks but future threats as well. Self-moderation is too much to expect from even the most enlightened of large business leaders and even the most progressive of industries. Anti-competitive and customer protection frameworks have improved in recent years, but are still understaffed and underequipped. As the economy grows, so does the need to provide oversight against unethical behaviour by large organisations.
8. Accountability: None of the above can truly happen without transparency in governance, and productivity in public service i.e. respect for schedules, budgets and commitments. Measures such as Right to Information (RTI) have moved the country several steps up the transparency ladder, but accountability to “service deliverables” is still missing in a vast number of people employed in government departments. Entry into “government service” is seen as a ticket to a reasonably comfortable employment if you are inclined to not rock the boat. The idea is to not question the status quo as far as possible, and to ensure that the outcomes for the “overclass” are taken care of. This attitude needs to change. In fact a small start could be made by replacing the phrase “government service” with “public service” – the business of government is to serve the public at large, and this needs to be recognised and acknowledged by everyone involved in it. Efforts in all the other areas will fall flat if accountability and productivity are not embedded into the money and efforts invested. (Imagine if we could sign SLAs – service level agreements – with each and every individual hired for public service roles!) The roles that accountability brings with it include “upholding the law” and “enabling an environment where each citizen has a fair chance of success”.
Someone else might come up with a slightly different list – this is mine, the seven pillars and the overarching beam. I’ve not listed the areas in any specific order of priority. Some of them need more government intervention, some need less private intervention, a few (such as education) need both. These are all areas that are the foundation on which everything else is built. These are the areas which, to a very large extent, determine the levels of dignity with which a country’s citizens lead their lives.
In this day and age, the government is not needed to run steel mills, airlines or even handicraft retail stores. But without high quality and high availability ensured by the government in the above areas, even the most capable individual will find it easier to build a life and even the best private enterprise will find it more profitable to do business elsewhere in the world.
A much-followed new-generation business leader recently rhetorically asked in a social media post that, if we have an economy swinging towards services with a large chunk of it being technology, “Why do we need government?”
The reasons above, my friend, are why and where we need government, because business is not delivering on these areas in an equitable manner, and these are areas where technology will not necessarily provide all the answers. We have years of evidence of this, in some cases decades, and it is time we choose to move.
By and large, most people would rather choose to move something, than move somewhere (else). And the retail business will be one of the first to benefit.