A month and a half ago - on March 30 to be precise - Kishore Biyani gathered 1,000 of his senior employees at The Mariott in Hyderabad. He asked all of them to write down on a banana leaf what they saw as the future of the Future Group. In an emotionally charged - and somewhat theatrical - ceremony, he then sprinkled Ganga jal, brought all the way from Varanasi, on all of them. The gesture, he explained, was to mark the death of the old Future Group - and the birth of a new one.
Biyani then took stage to make a presentation 'Re-born', drawing an analogy of the symbolic 'Ganga Snan' to rebirth. To starting a new life after forgiving and forgetting. "The event was unbelievably emotional. But if we have to sell our own brands and build our own FMCG (fast-moving consumer goods) company, we have to think big," says Biyani, Group CEO of the Rs 18,000-crore Future Group.
The reborn Future group is banking on two big breaks from the past to power ahead of all rivals. One, it will depend heavily on white-label FMCG, produced under Future Consumer Enterprises, to offer the cheapest and best groceries in his shops. While he will continue stocking FMCG products made by others like ITC and Hindustan Unilever (HUL), his own labels will allow him to offer the highest value proposition while simultaneously protecting his margins. FMCG, Biyani thinks, will become a huge revenue and profit generator, and the most crucial part of his strategy.
The second, and perhaps nearly as important part, of his strategy involves allowing his customers to shop from anywhere and take deliveries anywhere as well. In a month from now, shoppers at Big Bazaar's select stores in Mumbai will experience the re-born retail chain. They could order online (website or app) and ship it home; they could order at store and ship the product home; they could order online and pick up goods at a store nearby; they could order at one store and pick up at another store. Big Bazaar will offer these and many other permutations and combinations in its new avatar. The same will be gradually replicated in the other formats of the group like KB's Fairprice, Nilgiris and Easy Day.
In the retail world, this strategy is popularly dubbed as omni-channel, though Biyani prefers to call it 'multi-channel'. Globally, omni-channel has emerged as THE big hope for beleaguered corporate retail chains against the brutal onslaught of e-tail, which has already captured up to 15 per cent - and rising - of the retail market in many parts of the world. Having made several half-hearted attempts at e-tail (futurebazaar.com, BigBazaar.com and Big Bazaar Direct, in addition to beta versions), and failed at almost all of them, Biyani is banking on this new strategy to counter e-tailers - his latest tormentors-in-chief - as well as rival retailers such as Reliance Retail, Aditya Birla Retail and Spencer's Retail.
Biyani, the pioneer of India's big retail, has been under attack from all quarters. First, in the mid-2000s, in the race to match the financial firepower of new entrants such as Reliance, Aditya Birla and Bharti-Walmart, Biyani borrowed up to Rs 12,000 crore at one point to keep ahead of the pack. He had to pay the price for his adventurism when he needed to sell off his fashion business Pantaloon Retail and financial services business Future Capital to pay off part of his debt. And while he still continued growing after that, some of his deep pocketed rivals - especially Reliance Retail - have grown even faster. Also, the Aditya Birla Group is consolidating its retail business, especially the high-margin fashion business, a big chunk of which, ironically, was built by Biyani before he had to sell it off. Last month, it also acquired Jubilant's four hypermarkets in Bangalore for an undisclosed amount.
Meanwhile, after 2010, the meteoric rise of e-tailers such as Flipkart, Snapdeal, Amazon, among others, on the back of convenience and discounts is posing an enormous threat to the growth prospects of big, organised physical retailers. In 2014/15, e-tailers had collectively cornered $6 billion (Rs 38,167 crore) of the $40-billion organised retail market (excluding kirana stores).Footfalls at most brick-and-mortar retailers, including the likes of Big Bazaar and Central, fell up to 12 per cent during the festival season in October-November, 2014. "The malls looked frighteningly desolate during this festival season," said Subrata Dutta, CEO, Fabindia, in an earlier interview with Business Today. While Future Group's own profit margin has been dwindling, India's fledgling e-tail business is estimated to grow from strength to strength from Rs 22,270 crore ($3.5 billion) in 2014 to Rs 38,167 crore ($6 billion) in 2015, according to Gartner. What is worrying retailers is that while they need to make money to remain in business, e-tailers can continue losing money to gain market share because they are backed by venture capitalists with deep pockets.
Property consultant Knight Frank India and the Retailers Association of India say that by 2019, e-tail may be as large as organised retail. While e-tail's share is projected to rise from two per cent to 11 per cent of the Indian retail market, the latter's share could drop from 17 per cent to 13 per cent.
That sentiment reflects in their valuations, too. While India's biggest e-tailer Flipkart was valued at $11 billion (Rs 70,000 crore) in its last round of funding, India's biggest retailer Future Group's three listed companies are collectively valued at Rs 8,000 crore only. Second-largest e-tailer Snapdeal, which is barely five years old and has the backing of marquee investors such as Ratan Tata and Azim Premji, is already valued at $1.85 billion (about Rs 11,700 crore) and is now looking at raising funds at a valuation of $7 billion (about Rs 44,000 crore).
As Biyani battles e-tailers on one hand, the rise of Reliance Retail poses yet another headache. Launched five years after Big Bazaar, Reliance Retail has grown organically to Rs 17,640 crore in 2014/15, almost on a par with Biyani's Future Group.
So Biyani is egging on his group to grow to a retail business worth Rs 60,000 crore (currently about Rs 15,000 crore) by 2020, an FMCG business worth Rs 10,000 crore (currently Rs 1,500 crore) and a growth rate of 26 per cent year-on-year. He wants to increase the number of stores to 4,000 from the present 1,300 and a total retail space of 30 million sq.ft. He will need a one lakh strong workforce (at present 40,000) to manage the business. He has even hired 51 graduates from the Indian Institutes of Management and 300 designers for his fashion business.
Biyani says that when he opened his first store in Kolkata in 2001, India was learning to consume and a lot has changed since then. He says three big changes impact consumption in India - the rise of millenials (those who are born after 1982 and would account for more than half the population by 2025), increasing dependence on technology for consumption and the fact that India would be a $3-trillion economy by 2020 and 5.8 per cent of global consumer spending would happen in India as opposed to 2.6 per cent today. "For that we need to be re-born, have no baggage from the past, be it success or failure, we need to have new ideas to serve the customers of tomorrow and create a new relevance in the hearts and minds of customers," he says.
THE GREAT FMCG PUSH
In Biyani's target of Rs 75,000 crore of revenue for the Future Group, which also includes other businesses such as insurance, FMCG is expected to contribute Rs 10,000 crore. He is probably the first retailer in India who is looking at creating brands not just for his own stores, but is also planning to retail them outside of his stores. "The ambition of being a large FMCG company is right, especially since he owns the most complicated segment of an FMCG supply chain, which is retail outlets," says B.S. Nagesh, founder, Trust For Retailers and Retail Association of India. "However, executing his FMCG business outside his stores could pose an entirely different challenge."
Biyani's biggest USP, though, would be the food parks (essentially large food processing factories) that he is building himself. Rivals such as Reliance Retail and Spencer's too have major FMCG dreams but they have instead outsourced processing and manufacturing of foods to smaller firms. Biyani, however, believes that for product differentiation and consumer stickiness, investing in food parks is a must. Not to mention a few percentage points higher margins than his rivals. Initially, most of his FMCG brands will be produced at the Rs 1,000-crore food park outside Bangalore. He is also planning to set up two more, one in central India and the other in the east.
Unlike other retailers, who have created private brands only for commodity-based products such as rice, flour and sugar, for some time, the Future Group has been focusing on brand-building: From the Tasty Treat range of biscuits, noodles and sauces to Sach personal care products, almost 25 to 30 per cent of Big Bazaar's revenue comes from its private labels. Rival Reliance earns 25 per cent and Spencer's 12 per cent from own FMCG brands. Harminder Sahni, MD of retail consultancy Wazir Advisors, believes this makes a lot of sense. "He has realised that brands will give him better margins (as high as even 40 per cent vis-a-vis the 10 to 14 per cent he makes by selling other brands)." "FMCG brands will be a huge differentiator," says Debashish Mukherjee, who leads the consumer industries and retail practice of A.T. Kearney in India.
But Biyani's FMCG vision is not restricted to earning 25 to 30 per cent margin, but to be in the league of HUL, Nestle and Britannia, aiming for margins as high as 40 per cent on premium offerings.
In line with his mission of catering to the millennial consumers, he is rolling out a host of new-age products such as frozen snacks and vegetables under the brand names of Tasty Treat and Veg Affaire, respectively; 25 types of enriched flour under the brand name Desi Atta; Sandy's Kitchen, a brand of sauces and dips; and a range of personal care brands under the name of Think Skin. While Future Group already distributes and markets the Sunkist brand of juice in India, the plan is also to get into ice-creams. It also has a range of dairy and bakery products under Nilgiris. The company has set up an oats factory in Sri Lanka and would be soon launching its own brand of oats. "We are not looking at mass, it will be masstige and premium. We are not launching ordinary noodles where people are already there. We will not do simple biscuits, we will do cookies and something else. We need to have some competitive advantage."
Biyani says his food and FMCG business will be similar to that of ITC Foods. "We are trying to do virtually the same as ITC. They are into flour, biscuits, juices and snacks. We are into dairy and bakery, which they are not into."
If Biyani is looking at FMCG brands to spur his next phase of growth, Sahni of Wazir Advisors is surprised why he hasn't been as active with Big Bazaar Direct (his assisted commerce platform where he has signed up with kirana stores to sell Big Bazaar, FBB and E-Zone merchandise), which he announced with a lot of pomp and show early last year. "Creating an offline store network is a great idea. This would be a great platform to sell his own brands and keep FMCG competition at bay."
In fact, Big Bazaar Direct was Biyani's maiden initiative post the sale of Pantaloon in 2012. Biyani claims that it reports a business of Rs 25-30 lakh a day, with a network of 600-700 franchisees in Rajasthan and parts of Maharashtra. However, Big Bazaar Direct, he says, is still a work in progress. "Our dream is to have franchisee-assisted commerce in every pin code area in India. We sell 150,000 SKUs (stock keeping units), once we are able to create a master data on that and layer it up, then we want to have agents in every pin code area. What is taking time is to list 150,000 products and create that eco-system of master data management. Once we are ready, the whole thing becomes much easier."
In 2014, Biyani even tied up with Amazon to sell his privately-owned apparel brands through Amazon India. He plans to extend it to other categories. "The partnership with Amazon, which obsesses about being the earth's most customer-centric company, will enable us to leverage their strengths, investments, and innovations in technology to reach out to a wider set of consumers across India," Biyani said in a statement.
Arvind Singhal, Chairman, Technopak Advisors, says pulling off a consumer brands business will be a huge challenge. "However, in the recent past a lot of new brands like Paper Boat (juices), Fogg (deos) and Cremica Foods have done a decent job of fighting competition from seasoned players. Biyani will have a fair chance if he gets his branding, packaging and pricing strategies right," says Singhal.
Biyani admits that his FMCG focus will be an acid test. "The consumer has to accept our product. The execution has to be top-class. Product quality has to be impeccable. We have to get everything right like the Friday release of a movie. In the consumer goods business, nothing will work if you are at fault."
He also admits that he doesn't have the experience of consumer goods companies in the country in terms of product development, but he hopes to plug this gap by partnering with experts in various fields. "We don't know everything. So we will have to get into JVs. We have taken technological knowhow from Swiss company Buhler, the largest technology provider in food processing."
THE PROMISE OF OMNI-CHANNEL
Of late, whenever Biyani attends a corporate gathering or even travels in an airplane, the most obvious question he is asked by the person sitting next to him is about the future of e-commerce in India. "My standard reply is that they occupy mind space, but it is multi-channel which will do more than pure online."
Omni-channel - big retail's own answer to e-tail - has been conceived around the idea of leveraging the strengths of brick-and-mortar retailers and their assets on the ground as well as the weaknesses of e-tailers, who not so long ago appeared completely invincible.The most obvious advantage for Biyani is distribution. He already has 188 Big Bazaar stores, 19 Food Bazaars, 11 Foodhalls and 125 KB's Fairprice shops in addition to 150 Nilgiris stores, 188 Easy Day supermarkets and 15 Easy Day hypermarkets, where he can retail all his FMCG products. But for a retailer to pull off a consumer brands business will never be a cakewalk. Biyani says that he is spending Rs 100 crore initially and building the omni-channel mindset in his organisation. Once it's done, he hopes at least 10 per cent of his retail revenue will come from omni-channel. "If you order from Mumbai and you live in Bandra, our nearest store will deliver to you. You can order through an app, mobile phone, web, whichever way you want. We will start with one-hour delivery and then come to 30-minute delivery."
If he is able to offer between 30,000 and 40,000 items at his biggest stores to the consumer today, omni-channel will allow him to offer his entire inventory of 1.5 lakh items at all his 1,300 stores to the consumer at any point in time. Home Depot, for instance, offers more than five lakh products on its omni-channel platform as against just 35,000 units at a store.
The biggest difference that his omni-channel model would have from a pure-play e-commerce company is that his stores would act as his warehouse, unlike e-commerce companies that have to invest in warehouses to cater to multiple locations. "We have 27 locations in Mumbai and they can become 27 warehouses," he explains. But half hour delivery may only work when the customer and the store stocking the product are at the same location. Where they are in different cities, it may not be possible and may take as long to reach a customer as an e-tailer does.
As far as reach goes, e-tail has deeper reach: Flipkart, Snapdeal and Amazon deliver to thousands of PIN codes in India, including smaller towns. And Future's omni-channel will have to at least match that to be competitive.
But simple as it may sound, omni-channel retail is not just another moniker. It's a way of life - a completely different architecture of retail. Several global and domestic retailers have multiple channels but typically they all function in silos. The moment such silos are connected, they become omni-channel. It's easier said than done, though.
After all, the omni-channel strategy throws the organisation into a vortex of permutations and combinations. It requires significant inter-departmental cooperation, right from supply chain management, suppliers, stores and merchandising as well as logistics and technology.
But when it works, it's nothing short of magic. Walmart generates $8-$9 billion of its $486 billion revenue from omni-channel. For Tesco, nearly 8-10 per cent of business comes from omni-channel. In Australia, omni-channel retailers such as Woolworths, Coles, David Jones and Myer account for half of the e-tail market and are growing nearly as fast as any e-tail firm.
One of the biggest draws of omni-channel is instant gratification through store pick-ups. Nearly 50 per cent of Best Buy's online buyers prefer to pick up from stores they choose. From the money it saves in shipping, Best Buy even throws in a surprise when such customers arrive for the pick-up, giving them free batteries, possibly a memory card or a pack of soaps, etc.
It's something that's forced rival Amazon.com to match tactic for tactic. First, it launched same-day delivery pilots in multiple cities. Then, under the Amazon Locker programme, customers can ship their online orders to be picked up from a 7-11 or a Staples store nearby. Interestingly, the 157-year-old Macy's has now redefined itself as "one of the nation's premier omni-channel retailers".
But why is it so hard to master? Because it requires greater predictability through use of Big Data and analytics. But most importantly, the algorithm must be robust enough to make sure the company makes a profit in the end because omni-channel supplies will play havoc with the landed cost of the product at the customer's doorstep, or when it's handed over to him. Macy's, for instance, kicked off omni-channel implementation as far back as 2009. But by the end of 2013, it had only managed to put about 500 of its 850 stores fulfilling online orders.
"Just because multi-channel hasn't started in India, people think the pure-play online retailers are the only ones who are going to do this business. They don't have any products, they don't have brands, they don't have their supply chain, so how will they work? It's a very expensive model. I have my own brands, products, supply chain, data base. What else do I want?"He believes that he is best poised to serve his customers both though his physical stores as well as online. Govind Shrikhande, MD, Shoppers Stop, agrees with Biyani that physical retailers have an edge over pure-play online retailers. "A pure online player can never be an omni-channel retailer as they don't have a physical presence. A customer can go into a physical store, shop the physical store merchandise, and they can also use a kiosk or an iPad within the store to order online in the store, get it delivered in the same store next day or get it delivered to their home or any other place."
According to Singhal of Technopak, with global retailers such as Macy's and Sainsbury making a success of omni-channel, there is no reason why Biyani's omni-channel plunge will not work. Nevertheless, he has his doubts whether it will do well in the supermarket business, which comprises a bulk of Biyani's business. "With India being a country of diverse tastes and preferences, most Big Bazaar stores cater to the local needs of a people of a certain geography. If a consumer living in Shillong will want to buy a food product which is not available in the store close to her home, reaching it to her may become a challenge."
But does that mean that e-grocers such as Local Banya or Big Basket will have an advantage over Big Bazaar? Certainly not, says Singhal. "The biggest cost of most e-grocers is supply chain and logistics and Future has a clear edge thanks to Future Supply Chain." Big Bazaar, says Singhal, also has the advantage of having its own brands, and the e-grocers in order to succeed have to invest in backward integration such as working with farmers and creating their own private labels.
It's not just Big Bazaar that is re-born. Biyani says he himself is a person different from his past life. "Earlier I was focused on growth and doing new things all the time. Now I am doing 10 days of rigorous review of businesses in a month. Allocation of capital and resources has become the new priority. We will not sign for any new store if we don't see profitability at each store. It was not the same case earlier. Now, the return on capital employed is important. So my role has changed big time."
Another change is that Biyani recruits more women in the organisation for gender diversity. He already has his two daughters - Ashni (head of Future Ideas, the innovation and incubation cell) and Avni (head of Food Hall) - ready for taking over bigger roles in the group.
Biyani considers these his learnings from past mistakes. When he began in 2000, his mantra was to have a share of Indian consumer's wallet in every possible way. So right from restaurants, beauty salons and gyms to consumer finance, Biyani made sure he had a presence everywhere. He also tried his luck in film production. However, with debts piling up, he slowly got rid of all these businesses, and focused on three verticals - food, fashion and home. While the food business is a work in progress and the next few months will see a slew of new brands being launched, fashion under FBB is available at 240 selling points, and as many as 11 crore garments would be sold this year. In five years' time Biyani expects to sell 50 crore garments.
Biyani looks much calmer and under control of things today, from what he was in 2010-2011, angry and agitated. He often responded in monosyllables whenever he was quizzed about his Rs 12,000-crore debt. Four years down the line, he has sold Pantaloon to Aditya Birla Retail and has exited from Future Capital. With the exit from financial services business, the Rs 4,000-crore loan book, which is counted as debt, has been taken away from the group's debt. The debt now stands at Rs 4,500 crore.
Biyani says he has well past the debt pain and doesn't need incremental capital to grow. "Pure retail companies have Rs 12,000 crore of debt with Rs 1,000 crore EBITDA. We have moved past that era. We have not expanded less than a million square feet any year till date. So, where has there been a problem? Even during the financial crisis we were growing by not less than one million sq.ft. per year."
He claims that it was during the financial crisis that he created FBB and redesigned - code named KB 2.0 - his entire business. "We thought that to survive in the business, we have to convert ourselves into a value departmental store. Selling grocery alone will not take us to where we want to be. We took a big bet, and the bet was fashion. We changed the look and feel of each and every store, and that has paid off."
COURTING BHARTI RETAIL
Future Group's acquisition of Bharti Retail in an all-stock deal values the latter at Rs 500 crore in equity after adjusting for accumulated losses of Rs 1,800 crore. The Mittals will get a nine per cent stake each in the BSE-listed Future Retail and Future Enterprises. In addition, Bharti Enterprises will also receive Rs 250 crore worth of milestone-linked convertible debentures, which can be converted into equity in future, eventually taking the Mittals' stake in both the entities to about 15 per cent. They will get a board seat in Future Retail as well.
Future's merger with Bharti Retail, says Biyani, is in sync with his ambition to expand his business. It has made him stronger in northern markets where Bharti was largely present. With this deal along with the acquisition of the south-focused retail chain, Nilgiris, which they acquired last year, Future has a presence in 244 cities.
Prior to the signing of the Bharti deal, the buzz was Mittals were looking at exiting the business after Bharti ended its relationship with Walmart in 2013. However, Rajan Bharti Mittal, Vice Chairman, Bharti Enterprises, says he has always been bullish about organised retail in India. "For Bharti, it was an opportunity to be part of a larger, national scale retail business and build a world-class retail chain out of India. There was a compelling case for the merger given the scale, cost and sourcing synergies that were on offer. In addition, geographically and in terms of formats, both businesses complemented each other well," he says.
Bharti has multiple businesses like Del Monte, their agri business, telecom and data business, which are quite synergistic, says Biyani. "There are multiple opportunities that exist. Whether we have thought about something, I would say no."
Mukesh Ambani's Reliance Retail has already found the synergy with Reliance Jio, the yet-to-be launched broadband business, in finance, human resources, customer care, and sales and distribution. In Biyani's case, the departmental synergy will not be practical since Bharti and Future Group are independent firms.
Bharti Airtel has 226 million subscribers in India (as of March 2015) that Biyani looks to tap, in addition to capital for expansion. "It will be difficult to find synergies between the two independent entities. Biyani would be looking for the capital for expansion from the co-promoters, Mittals," says an executive with Reliance Retail.
Analysts think that Biyani's recent deals are a master-stroke. "Future Group is clearly emerging as one of the leading retailers in India on the back of its acquisitions," says Rajat Wahi, Partner and Head (Retail), KPMG India.
Bala Deshpande of New Enterprise Associates expects more such consolidations happening in organised retail. "India Inc is going to see consolidation for convergence and capital efficiency. Bharti and Future complement well in terms of footprint and consumer efficiency. As the GDP grows and companies' healthy balance sheets become healthier, one will see more acquisitions happening."
While the advantages of the Bharti deal are yet to unfold, Biyani claims Nilgiris is one of his finest buys till date, for which he paid Rs 300 crore. For a north-based company to make inroads into the south is not an easy task. "We now have a 105-year-old brand with strong customer base in dairy and bakery. People are ready to pay 10 per cent premium for Nilgiris products," says Biyani. "We believe the power of compounding comes into play now. In five years' time we can grow exponentially," he adds.
THE DISCOUNTS MENACE
A bulk of the e-tailing today happens on the back of discounts, and Biyani is clear that he doesn't want to get into the discounting trap. In fact, the biggest disadvantage a brick and mortar retailer wanting to go online would face is price arbitrage, says Nandini Chopra, MD of consultancy Alvarez and Marsel. "If there is a dress that is hanging for Rs 1,000, a physical retailer can't deep-discount the same product on his website because if he does so, he at once kills his brick-and-mortar business. The online retailer is using private equity money to pay such huge discounts to fund it. The big funds are paying to fund my clothes. A brick-and-mortar retailer doesn't have that luxury."
In order to tackle the deep discounts offered by most online players, he has also created a 'price match' mobile application, which will be launched in the next 30 days. "If anybody sells cheaper than us, the additional price charged for the product will be credited back to customer's account. The consumer will get an SMS saying the amount has been credited."
But won't that hurt margins further? "It's all calculated. The price perception will change. I am guaranteeing that your prices will be lower. Now it's competition who should be worried," explains Biyani.
Biyani is optimistic about the success of his omni-channel plunge, and is even more excited about his FMCG business. "We have shown the guts to get into dairy, bakery and juices. Indians believe that only HULs, P&Gs and ITCs can do it. People are not taking us seriously and that's good for us, as we have a point to prove."
(Follow the authors on Twitter: @ajitashashidhar, @nevinjl)