In a candid conversation with Business Today Editor Chaitanya Kalbag (CK) on May 23, Kishore Biyani (KB) says he aspires to be debt free. This was 13 days before the Future Capital deal was announced.
CK: What situation does the Future Group find itself in right now in terms of its growth?
KB: Actually if you look at our growth we are still growing. This year too we'll add up to two million plus square feet...in terms of growth whatever retail properties have been signed are just coming about.
Business is as usual…there is a media over-hang on debt on us , even an analyst over-hang on debt. I personally decided one day that we'll get rid of debt. So we are working towards it. Our debt-equity ratio is still not bad…the majority of our debt profile is not a challenge.
CK: But if you look at your results your interest payments have shot up to around 90 per cent of your operating profit…
KB: Financial costs have come down to around 70 per cent plus now (in the nine months to March 31, 2012).
When you look at consolidated results a lot of figures get skewed because of the NBFC (non-banking finance company, in this case Future Capital). A lot of people take NBFC debt into consolidated data. It's the NBFC's job to take on debt and lend money.
If you look at our balance sheet, besides retail we are into financial services, we are into logistics, we are into e-commerce, into insurance…we have multiple businesses…in a sense different business exist and whatever investmente we have put into other businesses have not generated that much return so all the burden is coming on retail…so money deployed is not only in retail it is deployed other activities also…It's just not giving returns. So retail is bearing the brunt of that.
SPECIAL: The Biyani way of dealing with debt
CK: You transferred Future Capital to Pantaloons Value Retail...
KB: As a precursor to a sale.
CK: So you said that you want to get rid of both the finance arm and as well as the insurance arm.
KB: Financial services as a business overall, not rid of but divested.
CK: Why have you decided to do that?
KB: Basically it will help us to make our retail business grow. That's our core business.
CK: Do you feel that you've made a mistake going into finance?
KB: I think in hindsight one can say a lot but in terms of investment our NBFC has done well for us. It's a good company.
CK: But you want to get rid of it now.
KB: "Rid" is a very strong word. We can look at divestment of some of our investments.
CK: You were seen to be giving away your crown jewels through your recent sale of a major stake in Pantaloon Retail to the Aditya Birla group.
KB: Actually that's 14-16 per cent of our business and we are still managing that business. As a promoter we'll have a 25 per cent stake which is also a significant stake. You can look at it both ways, we are diluted by 19 per cent in that but we still manage it...we are able to get rid of a lot of debt. So in a sense it's been a good deal.
CK: So the debt was around 8,000 crores or something?
KB: No that's a wrong notion. When you include Future Capital holding the NBFC the debt comes to that number so that's where the challenge is. Unfortunately we have not been able to explain our story well.
CK: Minus the NBFC what do you think the total debt would be?
KB: Last year we were at 4,800 (crore). This year we will be at around 5,500 to 5,700 crore at this moment. After this sale (to Birla) Pantaloon Retail would become debt free and then debt only remains in our Future Value Retaill business (Big Bazaar and Food Bazaar).
CK: And how much would that be would you know?
KB: That is very low...it should not be a challenge.
CK: There is a feeling that one of the big things that has gone against all retailers in India and perhaps you in particular has been the refusal of the government to permit foreign FDI in retail…has that been a big blow?
KB: It could have given us some exits much earlier. I have multiple formats, multiple businesses. Any business to hive off could have made me debt-free earlier...It would have helped us.
CK: In general do you think it would have helped the retail industry in India?
KB: Obviously… any industry needs money and cannot grow only on domestic capital. Secondly domestic capital is very expensive so it is a challenge. Everything helps. In business it is like in the Mahabharata…you know how to enter…but there needs to be an exit option also.
So we created many businesses (but) never got an opportunity to exit because we didn't want to run everything.
CK: I'm sure you didn't want to exit when you set them up?
KB: No we wanted to concentrate on food and fashion as the core businesses…so other businesses we could have always exited. Exit doesn't mean you're selling off, it means you are part divesting, getting in a strategic partner. Growth gets taken care of by funding which they bring…so many options emerge. Today there are no options; domestic players are the only option.
CK: You built a retail empire from scratch. That was your dream.
KB: I still believe in that dream.
CK: It's rather sad that you haven't had an easier time of it.
KB: No I don't feel that. I have understood something: in India people are very emotional about business…people feel that if someone is selling there has to be some act of desperation in selling. I don't think so. I think alliances, mergers, partnerships are a way forward and that should not be seen as exit. People are assuming a lot of things.
CK: You are seen as a home-grown brand.
KB: No, should be emotion attached to it. We are very emotional about it. So when we did a deal with Birla also the deal was: we want to be part of this business because we understand this business, we love this business, we have grown this business.
CK: And the brand will remain.
KB: And the brand will remain. In fact if you look at it emotionally also we are quite satisfied. Unfortunately our satisfaction is not being translated into people's understanding. That will take time.
CK: Communication is important
KB: Communication is important plus I think when I look at Indian business and entrepreneurs people don't sell in India. People don't accept this. We have accepted that we have to do something. Once you decide something you do it. Six months ago I said I'd be debt free. People don't believe that and I want to prove that I'll be debt free. So that's a mission. If I can build businesses, I can reduce debt too.
CK: Was being a first mover in retail a disadvantage?
KB: I think that retail is all about location and only the first mover gets the location.
CK: You hear that retail is tough because of hurdles like finding good real estate.
KB: If you want to hear negativity you'll hear negativity throughout but ultimately if you ask any consumer… from a consumer perspective they are happier -- they get choice, they get good prices..
CK: In an ideal world wouldn't you have preferred larger stores, easier access, more floor space, fewer licences?
KB: Business is always full of challenges. We never complained when we were growing so there shouldn't be any complaints now.
CK: So business is not going down?
KB: No way. I think if you look at the malls, the customers…there are two businesses which everybody thinks they know in this country. One is retail and the other is cinema. Everybody shops, everybody watches films and everybody has a right to comment on these businesses. So it is with us too.
CK: Do you do any studies on buyers, the psychology of consumers and what kind of insights have you gained?
KB: Yes a lot. It's unbelievable. We have an arm called Future Ideas that does only this. We have ethnographers, mythologists, social scientists. We track every community of this country -- their habits, their festivals. We have around 12 calendars made out of communities' almanacs...We do a lot of community-wise marketing of products. That's one piece of work which we are very proud of. It's very unique and very different.
CK: In general there is a feeling that people trying to do good business face a lot of problems in our country... India is still a difficult place to do business...do you agree with that?
KB: When we entered we all knew about it. It's gotten a bit more difficult in a sense.
CK: Instead of getting easier it's got more difficult?
KB: I think I'd put it differently. I think first -generation entrepreneurs have to be encouraged in this country. I think that is a point to which I would agree more than anything else. New jobs get created by new entrepreneurs.
220 to 250 million people come in to our stores every year. It is a big thing. It is one of the popular, bigger brands in the country.
CK: The other thing about your group which is noticeable is that there is a conventional wisdom that things like logistics and all that should have been one of the main points early on in your growth trajectory. In your case, it rather came rather late. Do you think it was a mistake?
KB: No. Never ever. I believe that we always had good logistics but we have created a world class logistics division now. We have created something which is unparalleled. We have created one of the most modern consumer logistics companies in the country which is catering to other (clients) too. We have a good partner in Li & Fung. We are very proud of that creation. One of the most modern logistics systems. I think 40 per cent of our business comes from other customers now.
CK: So you don't think that you have a problem on the logistics front?
KB: You have to work on it. It is an investment which you have to make. We have invested in multiple supply chains. Some we invested in earlier, some later. No other retailer has our supply-chain system.
CK: What have you found challenging in supply chain management?
KB: Ultimately, India is feeding 1.2 billion people somehow. So what could we do. When we came into retail our job was to see whatever good is in this country and adapt that. Whatever new is building up, let us build it new. So we thought anything which is value added is good for modern retail. The margins are not much in commoditised selling.
CK: And we are very price conscious.
KB: Very very price conscious. So that continues. So we created a lot of new products, a lot of new categories. Big Bazaar has got in products and created demand for many products like carpets. The number of carpets we sell every year, the bedsheets, the towels, kitchen utensils, the stoves, we have created many categories and I think that is the job of a modern retailer. It is not only a trader, buying and selling, it is about creating demand and making people buy goods and services which they would not have got easily elsewhere. That's what we have done and that's what we continue to do.
CK: In your book It Happened In India you say you want to get at every rupee in every wallet of every Indian.
KB: We lost that plot to be very honest.
CK: You lost that plot?
KB: Earlier we thought that it is good to capture every paisa in the shopping wallet of the customer. But now we are concentrating on food, fashion and home rather than doing everything. Then everything becomes small and too much to manage and it adds to the complexity.
CK: In other ways you are saying that it started getting too big to manage.
KB: Too big to manage and too much of micromanagement. That was not possible.
CK: On the micromanagement front, there is a feeling that you haven't brought in enough professional outsiders.
KB: We have been known to get the best professionals. But nobody knows business so people have to learn business in the country. Every new business, you have to learn by doing it. Nobody can claim I know this business.
CK: But you haven't brought in outside experts.
KB: We have brought in outsiders. Today our home business is run by a Briton... We had many experts. Big Bazaar used to be run by a South African. Unfortunately, I take away the limelight and nobody else gets the limelight. (Laughs)
CK: Do you take personal interest in every location, setting up things, how thing are?
KB: Any new thing which is happening in the organisation, yes we have to take a personal interest. I think we have a passion for every new concept we launch like the Foodhall; personally we are involved in understanding any new thing that is happening. Our business is all about not getting older. We always have to be relevant. I won't be relevant if I am not in touch with my consumers. So being relevant is the most important thing and the biggest fear we live in is becoming extinct.
CK:Your daughters are playing an increasingly important role in the company.
KB: My daughter Ashni is working on the Ideas thing where she tracks the communities and consumer behaviour. And the younger one (Avni) has just joined the food business. She is a political and social science student.
CK: What do you feel about economic conditions in the country. There is a lot of gloom and doom around, in terms of consumer spending.
KB: If you look at one thing which has not been negative it is (consumer) spending, luckily. It has not been in the negative territory. FMCG continues to do well. Fashion, we are not seeing that much of consistency. Demand still is there but consistency is not there. That's the way I will put it. But on the food and the FMCG side and the general merchandise side the demand is still strong. But on home goods it is not consistent and fashion it is not consistent. So pockets of …it is not bad everywhere, in every product category.
CK: Would you say you are the leader in all these categories or some of them?
KB: Except for electronics I think we are the leaders. Food, fashion and home we have been the leader and we still continue to be the leader.
CK: Do you have any plans for different ways of retailing food?
KB: We are trying the KB's Fairprice format. We are expanding that in a very big way. It is like neighbourhood kirana stores. It only operates in clusters. Bombay, Delhi, that's it. And now we are launching a franchisee programme in that and we will be opening 1,000 stores in the next 18 months. So, that's a big one for us.
CK: And what about e-commerce?
KB: E- commerce …we have an e commerce site called futurebazaar.com. Our mission is to be the first profitable e-commerce site in the country. Our internal target is that by June 2013, we would be profitable. By March 2013…it should be ending at 250 -270 crores. We are not there for turnover, the top-line. We want to earn money. By March we should be profitable, hopefully.
CK:What kind of lessons would you have for entrepreneurs who want to get in now in the retail business?
KB: Concentrate on regions. Don't spread everywhere and reduce the number of variables. Bring simplicity in thoughts and business. These are my three big advices.
CK: Have you followed those tips?
KB: I have made mistakes, that's why I am advising. (laughs) You become an expert after you make mistakes.
CK: Besides divesting Future Capital and the insurance business, what other parts do you want to move out of?
KB: We also have a joint venture with Staples. This will end now. Now my biggest ambition is to create a food FMCG company, a large company. We are working on that.
CK: What will be different from now?
KB: We believe that the next big opportunity in India is food, processed food. As a retailer we know the kind of demand that can be generated. Not manufacturing. We are creating facilities to manufacture. We are creating food parks. We are starting our first food park in Bangalore.
We have created a rural wholesale distribution model called Aadhaar. The idea is, this is procurement. We are already doing these activities. (Then) primary processing, secondary processing, distribution and branding and retail..
So retail, we will do through all these formats. Aadhaar, KB's Fairprice, Foodhall, Big Bazaar. These are the companies for processed food. These are our primary processing companies. Grading, sorting, packing of fresh food and materials. So we are into every category. That is where we believe the next big growth opportunity in India is.
We were a vertically integrated fashion player. We have many fashion brands and have achieved a lot of scale, a lot of strength. The next thing is food for us. Fashion will be a huge business for us. We are probably two, two-and-a-half times larger than the next retailer.
And food is something which can grow as much as you want. If you can manage the entire value chain, and look at Indian sensibilities in terms of creating products. I think there is a great market to be…
CK: So what food products are you talking about?
KB: From breakfast cereals to noodles to ketchups to chutneys to breads to biscuits to cookies…in our brands. We have already started our brands. We are going to outsource the manufacturing.
CK: So the sale to Aditya Birla Nuvo will help.
KB: We feel good about it. Whenever you do something, afterwards if the taste is good, you feel good. I think it will help us to grow our retail business significantly. It will help us in our ambition of building our food business. It will also make running business very comfortable for us.
CK: You don't feel that will dilute your standing at the top of the heap in fashion.
KB: Not at all. We are still managing it. That is the first thing. Secondly, whatever square footage we will end up this year, after deducting the (Pantaloons Retail) format, we will still be at the same square feet by next year. We will be one year behind in terms of catching up on (retail) square feet.
Secondly, we also started promoting a big concept. You might have seen the advertisements. Fashion at Big Bazaar. We already have 30 independent stores. We continue to grow fashion as a business.
CK: The research analysts we have spoken to say that the Pantaloon deal is revenue neutral. Reduction of interest cost and the revenue loss would match each other because Pantaloon was a high margin business. So how does the shareholder benefit from that?
KB: The shareholder is getting a vertical demerger... like I am getting a stake, all the shareholders get a stake. Secondly this (Pantaloon Retail) will get listed independently. This will be valued far more than the consolidated value of the business I head. I think whatever action we have taken now will result in growth coming from our own cash flows.
CK: You mean organic.
KB: And some dilution can still keep on happening whenever you want to grow more.
CK: You are not worried about the foreign players moving in? Like Tesco and Walmart?
KB: We are still growing at 16 and 17 million square feet. So we are still significant…Big Bazaar alone is 10 million. That is quite a lot. Other people would be at one million. So in terms of lead, we are significant. We are in 90 cities. We are there. Nothing has got diluted out there!
CK: On your like to like stores there is growth of around 3 per cent. This is lower than the industry average.
KB: Because we are large. We cannibalise our own sales. If you open 10 to 12 stores in one city… we have a seven city strategy. If you look at the seven (largest) cities of India out of 160 stores, around 90 stores are there. When you open a new store in the city, it cannibalises our business also. But that strategy is to prevent competition coming in. Sometimes you are a victim of your own strategy.
Secondly, the business of hypermarkets is also emerging. Earlier in hypermarkets, electronics used to be eight per cent of our total category mix. It has come down to four per cent. Mobile phones used to be three to four per cent of our sales. Now it is one per cent of our sales. So the top line gets lost. So we have to recover these sales through other categories.
CK: You said the KB Fairprice shops are like small size kirana shops. In a way it sorts of puts a new twist in whole argument of foreign retail and big retail displacing the mom and pop stores.
KB: We are asking the current kiranawala to become our franchisee. We are not displacing anyone. In fact we are promoting entrepreneurship.
CK: Do you think that is a model that could be followed by other big players?
KB: I have always believed that one kind of customer will come to the modern store. KB's Fairprice has been created for the urban poor as a format. Big Bazaar and other formats are for the urban rich. For the "mastich" as I call it, anybody who has better aspirations - anybody who has a domestic help at home is a potential customer for a Big Bazaar.