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Thinking Small

Vishal Krishna
BusinessWorld, 28 July 2012

When you have Rs 7,846 crore in debt, that takes centrestage and everything else is pushed to the sidelines. And that is exactly what was happening at Kishore Biyani’s Future Group over the past few years. However, after selling a majority stake in Pantaloon Retail to the Aditya Birla Group, managing a private placement with Bennett, Coleman & Company (BCCL), and getting private equity giant Warburg Pincus to acquire a majority stake in Future Capital Holdings (FCH) resulted in Biyani raising nearly Rs 2,500 crore in the last couple of months. Further, with Warburg Pincus taking over the Rs 3,800-crore debt of FCH, nearly Rs 6,000 crore in debt has been wiped off Biyani’s balance sheet.

Improved financials have left Biyani free to concentrate on his retail business. And first on his to-do list is Central — the group’s large format retail store which is like a series of shop-in-shops. “The Central store format is going to be our major revenue driver in the lifestyle segment in the coming years. We are targeting revenues of Rs 3,000 crore from Central in 2012-13,” says Biyani, chairman of the Future Group. In 2010-11, Pantaloons contributed to at least 50 per cent of the Rs 4,325.57 crore revenues generated by the group’s lifestyle arms; Central and Brand Factory (selling branded products at discounted rates) contributed to the other half.

After Big Bazaar, Central is the only marquee outfit big enough to generate the revenues. “Central is a successful and scalable business as it helps the landlord, the brand and the retailer share the upside of the business,” says Biyani.

Central’s business model is simple: Brands enter into an agreement with Central whereby they pay a minimum guarantee or rent per sq. ft (which may be upwards of Rs 75 per sq. ft), plus 10 per cent of the revenue. In case of the absence of rent, it will be 30 per cent of the revenues. Thanks to this model — Apple is attempting a similar arrangement with Walmart and Target — it covers itself during a slowdown while it shares the revenues of the brand when the going is good.

“Central is a marketplace and works well with Indian mindsets; retailers fight for the best spaces,” says Biyani. While K. Raheja promoted Shoppers Stop and Micky Jagtiani-owned Landmark Group’s Lifestyle stores also have shop-in-shops, they do not have a marketplace model for their stores.

“Not all brands work in every city when they are on a business model of minimum guarantee plus percentage of sales because the brands are under stress to perform,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy. Large retailers operate on this model in the West where space is given to brands and they have to ‘perform or perish’. “If a brand succeeds then Central benefits,” says Dutta. However, it is the duty of Central to draw in traffic. “Since we have footfalls of two million every month, there is no reason why a brand should complain about why they have not translated into sales,” says Vishnu Prasad, CEO of Central. The model works best in metropolitan cities as it banks on high footfalls.

But globally, the model of leasing out a shop floor to a brand works only in the case of FMCG companies, which want to test a new product line. This model is not very popular as the brand not only has to pay a rent but also share the sale proceeds with the retailer.

Evolving Business

In the eight years since its inception, Central has grown significantly. It has 22 stores covering 2.7 million sq. ft of retail space — 13 per cent of the Future Group’s total of 17 million sq. ft across the country. By the end of the year, Central will occupy 20 per cent of the group’s total retail space. Another 10 stores at a cost of Rs 125 crore are expected to be opened this year. Revenues have increased by nearly 30 per cent year on year between 2009 and 2012 and Central is expected to close its financial year in June with revenues of Rs 1,500 crore.

So what works in Central’s favour? Upfront it is its inventory model. Most brands work on a mutual agreement of a minimum shelf life of 90 days, after which the product is sent back to the manufacturer. Hence, very little inventory sits on the books of Central.

Further, Central has also been able to gather a lot of data on buyer behaviour and shopping preferences. While other stores use loyalty cards to gather data, Central’s data is based on the categories that people shop for and their preferences. “In the first five years of our growth, we brought in brands and it was a model where we drove consumption and left the selling to the brand,” says Biyani. However, between 2008 and now, it has been about collecting data on customers and telling brands what to sell and what to avoid in their space.

Prasad and his 14-member team have crunched six years’ data on what customers shopped for at Central. “We began to speak the language of what the data told us, the brands could not ignore our findings,” he says.

The data provides specific information such as a gender-wise break-up of customers’ preferences. “We collect data in-house. With the data in hand, we make sure a customer in Central gets what he wants,” says Prasad. Data collection has helped other retailers too. “Data is the key to the success of every retail business; 70 per cent of our revenues come from the 2.5 million customers who form our database,” says Govind Shirkande, CEO of Shoppers Stop.

Central has tied up with nearly 1,000 brands and ensures that they introduce their new collections a month before they release it in the market. “Analytics gives you an edge and very often our collections are different to the ones you get in the market,” says Prasad.

Even inventory management is done differently in Central. The inventory risk is on the manufacturer, where 40 per cent of the stock is contracted to be returned if not sold. But because Central sells most of the goods in store, only around 10 per cent of the stock is returned at the end of season.

According to analysts from E&Y, only 6 per cent of the $450 billion retail industry is organised. Of the 6 per cent, 45 per cent of the organised retail business comes from apparel retailers. “The apparel business has seen very few glitches over the last couple of years. It is in this context that some formats have done very well,” says Pinakiranjan Mishra, partner and national leader of consumer markets, E&Y.

In many ways Central is a seamless mall, at least that was the branding that shoppers became used to. It’s a place where they can shop, eat and watch movies. “We are often referred to as a mall and it is difficult to do away with that reference,” says Prasad. But all that is changing now and Prasad and his team are working on a business plan for a new format for the next three years. This has been prompted by some external issues such as the slowing economy. Plus, the large format itself is becoming a burden to replicate across India. “It is very difficult to get large properties across Indian cities as rentals are very high,” says Dutta of Third Eyesight.

Currently, nearly 40 per cent of the properties are on a revenue-share model with a minimum guarantee. During the first six years of operation, it was the high rentals (of nearly Rs 150 per sq. ft) which resulted in low margins of only 5-7 per cent. In 2010, all that changed when the management adopted a revenue-share model, increasing margins to 10 per cent. The net margin of the competition is between 10-12 per cent.

What has differentiated Central from the likes of Shoppers Stop and Lifestyle is its sheer size. While Central operates large-format stores — at least 100,000 sq. ft in size — located in independent properties that have been leased for a period of eight years, the other two operate stores with an average size of 45,000 sq. ft. But all that is set to change.

Next Move

Biyani now plans to open smaller formats of Central that will compete directly with Shoppers Stop, Westside, Lifestyle and the like. The first store is set to open soon at the Brigade Orion Mall in Bangalore. “This format fits well in our mall and is well positioned because of its multi-brand presence,” says Vishal Mirchandani, CEO of Brigade Orion Mall.

“We have realised that the large format has its limitations, but we will have the best of Central in the smaller formats and that is our differentiation,” says Prasad.

Analysts estimate that the new model can be scaled up to over 50 stores in the next five years. But the quality of the malls that they sign up with will be crucial to their success. In India, only about 15 malls of the 255 in operation seem to be bringing in revenues for retailers; the rest are still struggling.

Homing in on the right property is essential. Explains Kabir Lumba, managing director of Lifestyle India: “Our expansion strategy has always been to sign on good properties and not scale up to locations where we will not grow. That is why Lifestyle has been a success. We try to do more with the current set of properties.”

With a large number of retailers failing, there is a surfeit of properties up for grabs. This may work in Central’s favour. It needs to scale up its operations by opening more stores in the years to come to take on competition. “We are growing and have targets; Central is the best kept secret of the Future Group,” says Prasad.

(This story was published in Businessworld Issue dated 06 August 2012.)

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