FMCG: Bright Future

Kishore Biyani has made some mistakes in the past and is candid about it too. As his favourite one-liner “A manager always fears making a mistake and that is where he differs from an entrepreneur,” – suggests, each of those mistakes were great learning experiences for him, of which the best was learning what not to do.

Since inception in 1989, Biyani’s Future Group has undergone many changes, involving both large-scale expansion and pruning, acquisitions and divestments, diversification and streamlining, debt creation and reduction. But this time around, when the country’s retail and e-tail businesses are on the verge of convergence, the group’s moves are both steady and cautious.

The never-say-die retailer is focused on the most imminent change in the retail industry large-scale consolidation, just when the world’s e-commerce giants are seriously exploring big bang entry into India. The retail industry is rumoured to be readying for the most strategic offline-online synergy.

Focused on the Future
The Future Group is now focused on the fast growing segments of food, fashion and home, in which it plans to grow and build up scale. The group’s first ever acquisition was in 2008, when it snapped up the rural retail chain, Aadhar. A series of acquisitions followed in 2014. Future Consumer Enterprise, the group’s sourcing-to-supermarket food retail arm, acquired the iconic southern supermarket chain Nilgiris, in November 2014.

Its operating company, Nilgiri Dairy Farm, which has now become a subsidiary of Future Consumer Enterprise, helped expand the Future Group’s footprint in the food and personal care business substantially in Kerala, Karnataka, Andhra Pradesh, Telangana and Tamil Nadu, where it had lacked a broader presence.

A bigger merger deal with Bharti Retail, made the group the country’s biggest supermarket chain, with sales of around Rs 15,000 crore. It took the group’s total retail space close to 20 million square feet and its total number of stores to about 750. In April 2016, the Future Group acquired its first e-tail format, Rocket Internet’s online furniture platform, FabFurnish.com. This was also the group’s first step to leverage its brick-and-mortar retail platform on the online space. The Future Group has recently set a target to increase the number of its physical stores to 4,000 by 2021, demonstrating a determination to broaden its horizon.

“We are open to more acquisitions both in the offline and online space if that has the potential to enhance value creation,” Sanjay Jain, Chief Financial Officer, Future Group, told BW Businessworld, recently. “The group’s balance sheet also looks healthy to accommodate such opportunities if that can make better synergies,” he said, adding that the group had been quite active in the capital market, raising capital through the equity route, such as a rights issue. The debt position of the group companies was consequently, quite comfortable now.

More & More
Market rumours suggest that the Future Group, which had sold about 51 per cent stake in its fashion retail chain Pantaloons to the Aditya Birla Group in 2012 to reduce debt, may be considering a reverse deal now. Industry sources say it may snap up the Aditya Birla Group’s food and grocery supermarket chain More, and consider merging it with the Future Group’s food and grocery supermarket chains, Big Bazaar and Food Bazaar.

“This will certainly help build the Furture Group’s network of supermarkets for not only establishing its leadership in the brick-and-mortar retail space, but also to leverage this large-scale operation in the emerging e-tail convergence,” the sources said. Aditya Birla Retail, the fourth-largest supermarket chain in the country after the Future Group, Reliance Retail and D’Mart, currently operates at least 500 stores across the country.

“The valuation in the retail consolidation front seems favourable, as there are assets available and many of the leading brands are still non-core businesses for some of the big groups and the margin they make in the food and grocery segment is thin,” said an industry analyst. Sanjay Jain pointed out, though, that the “Future Group would still go cautiously over a deal as it would not want to exceed its comfortable 3:1 debt/EBIDTA ratio in the books.” Analysts say a takeover or merger with Aditya Birla Retail, could substantially increase the Future Group’s debt burden.

Aditya Birla Retail had a net loss of Rs 571 crore in the 2014-15 financial year and a total debt of Rs 5,232 crore. The acquisition could bring greater economies of scale, though, in terms of procurement and other operational synergies. “A potential merger could also enable the Future Group to significantly increase its presence in the Southern States, where the More supermarket chain has a strong footprint,” said an industry consultant.

“While a large brick-and–mortar store network will continue to be the best model for India considering the predominant touch-and-feel purchase taste of the local consumers, it could very well be leveraged by the Future Group if it is keen to tap the fast emerging multichannel play,” said an industry expert.

In the years ahead, multichannel retail will be a winning proposition for large players. They could use the vast offline network of sourcing, logistics and supply chain for e-tail business and also enhance the catchment for physical stores through online capabilities. The average catchment of an offline store is estimated to be within a radius of about three kilometres, which could extend to 12 kilometres, should the stores adapt to the online format as well.
Kishore Biyani, who sees consolidation in the Indian e-commerce space, is looking at more online acquisitions. “The existing e-commerce marketplace model is not sustainable, but it will change with new policies and emerging market dynamics,” said Biyani, who believes that his newly acquired e-tail venture, FabFurnish.com, will turn profitable soon.

“It appears that Biyani is not averse to the newly emerging multichannel game,” said the industry expert, pointing out that Biyani could leverage on his scale should foreign e-tailers come prowling. Business scholars of international repute predict that India’s e-commerce revolution would see a lot of small players emerging with similar or differentiated business features, but that ultimately, just one or two large integrated organisations would survive.

“These large organisations would certainly follow a fully-integrated model comprising much better customer interface, efficient distribution network, dedicated payment system and moreover, a perfectly consistent technology backup,” Stefen Bradely, William Ziegler Professor of Business Administration and Emeritus at the Harvard Business School, had told BW Businessworld some time ago.

Bradely had said that every market was different and that the success of any business model would depend on its adaptability with the culture of that market. “I won’t be surprised if large-scale Indian retailers, who already own efficient supply management systems, emerge as e-commerce giants in a short span of time, should they be able to build strong technology platforms,” he had said.

An alternative scenario, Bradely had said, could be large-scale consolidation, with strong international or even local e-commerce players buying out the fit targets in different areas of strength, like customer interface, payment tools, supply and distribution and best brand partnerships to build a single integrated e-commerce mammoth.

unni@businessworld.in