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MAGAZINE | NOV 12, 2011

FUTURE GROUP

The Future Of Future

Kishore Biyanis Future Group expanded across the country at blinding speed. But the slowdown hit sales, some ventures failed and meanwhile, colossal debt piled up. Now what?
AJITHA SHASHIDHAR

ishore Biyani never tires of talking about the opening of his first Big Bazaar store on VIP Road in Kolkata 10 years ago. The

memories of the astounding customer response the store got on September 1, 2001, the launch day, are still fresh in his mind. So overwhelming was the turnout that the air-conditioning finally gave in, unable to take the load. It was a sign of the immense popularity Biyanis retail business would go on to build across the country. In the past decade, the CEO of Future Group has built an over-Rs 12,000 crore empire, spread over a sprawling 15.5 million sq ft of space, and is the undisputed czar of organised retail in India. In comparison, listed competitor K Rahejas Shoppers Stop is a Rs 1,716-crore entity with nine formats (such as Shoppers Stop, HyperCity and Crossword) that have taken up 2.9 million sq ft; and the Tata Groups Trent has a turnover of Rs 1,628 crore, with five formats (including Westside and Star Bazaar) and retail space of 2 million sq ft. We were playing a blind game as there were hardly any precedents for us to follow

. The challenge was to give customers the comfort of shopping in a traditional bazaar, but in a modern environment, recalls Biyani. A customer such as Mohan Jadhav may have never walked into a Big Bazaar store, had it had the look and feel of an international chainstore. But the sugarcane farmer did travel 40 km from his village to the Big Bazaar store in Sangli, Maharashtra, with his entire family in tow. Over the next few hours, the family bought utensils, groceries, saris, shoes, toys and who knows what else. The 14-foot long bill totalled over Rs 1.37 lakh, which Jadhav paid in cash.
But that was back in 2006

We have many new stores that have also started throwing cash back into the business. The debt situation is not that bad."

. Now, all is not well with Biyanis behemoth. His mad rush to straddle the organised retail space has left the Future Group in a precarious financial

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With higher disposable incomes, the Indian customer is willing to upgrade. Big Bazaar also needed to change."

position. On a topline of over Rs 12,000 crore, the flagship Pantaloon Retail had a measly Rs 144 crore profit last year; the comparative figures for Shoppers Stop and Trent, which are a tenth the size: Rs 75 crore and Rs 7 crore, respectively. If thats not bad enough, the group has also racked up massive debt of close to Rs 8,000 crore. Somewhere on the journey to become Indias biggest retailer, the 50-year-old Biyani appears to have lost his way. As things stand, the air-conditionings the least of his worries.

Unbridled Expansion Riding on the initial success and popularity of his stores, Biyani embarked on an ambitious growth plan, raising equity capital cheaply from the stock markets

. The going was absolutely smooth until 2006. Turnover had touched Rs 1,900 crore, although profits were a meagre Rs 64 crore. There were 40 Big Bazaar stores and 20-odd Pantaloon stores and year-on-year same-store sales growth was as high as 25%. When Biyani launched Big Bazaar in 2001, he had set himself a target of making Pantaloon Retail a Rs 1,000-crore company by 2005, and did so. A lot of us thought he was mad and being over-ambitious, recollects Rajan Malhotra, Head, Retail Strategy, Future Group.
The ambitions only grew bigger with Biyani deciding to scale up his business further and add more verticalsthe idea being to capture as much of the consumer s wallet as possible. The urgency to expand was palpablecompetition was lurking with big industrial houses like Reliance, Aditya Birla Group and Bharti hopping on to the retail bandwagon

There has been a 28% year-on-year rise in the inventory cost per sq ft at Future Group, indicating a decline in sales volumes.

. Biyanis idea to preempt competition was perhaps understandable. But in pursuit of scale, he also decided to straddle multiple retail formatsan unusual

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Now, the product reaches the market two-three weeks earlier and supply chain costs are down 40% too."

strategy for any retail company globally.

And he didnt stop at retail. Biyani also got into a number of non-core businesses, like financial services and media, which failed to take off. In 2005, the group went beyond retail for the first time by acquiring a stake in Galaxy Entertainment and setting up Kshitij, Indias first real estate investment fund. The following year, it set up Future Capital Holdings, while expanding its retail portfolio. It launched Home Town, e-Zone and Furniture Bazaar and signed joint ventures with Staples and Italian insurance major Generali. Through financial services company Future Ventures, Biyani has also invested in the businesses of a number of his suppliers such as Biba,

Capital Foods and Anita Dongre

. The year 2009 saw the launch of Future Innoversity to offer degree programmes through a tieup with Ignou. From 2007, Biyani began adding close to 4 million sq ft of space year-on-year. At the time, the big daddies such as Reliance and Aditya Birla Group had announced their plans to enter organised retail. The only way to fight them was by scaling up, says Malhotra, explaining the rationale.

Biyani is taking a very pragmatic view of selling out businesses and doesnt rule out the possibility of even selling out lock, stock and barrel.

Rising Debt Trouble is, retail is a deep-pocket business, and when Biyani decided to add 40 Big Bazaar stores in a span of just one year (2007-08), and more stores in the other formats as well, he had to make huge borrowings. Banks and investors were only too willing to lend, looking at his impressive growth trajectory. The consequences of that borrowing have now put question marks over the future of the Future Group

The next six to eight months are going to be crucial for the company.

. Its debt, which was in the region of Rs 700 crore until 2006, had shot up to over Rs 7,656 crore by 2010, and is currently at Rs 7,846 crore.
The humongous debt is only part of the problem. Things began to go wrong in 2007, when Biyani commenced his aggressive expansion. The slowdown of 2008 came soon after and consumption fell sharply, crippling growth. The company registered a loss of Rs 7 crore in 2009-10. Its debt-equity ratio stood at an uncomfortable 1:3. Several of the new formats, such

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But even as Biyani very sensibly got out of some of these failing businesses, he continued to sign up more properties and launch new stores. I had to choose whether to sacrifice growth or go ahead and sign up properties by taking debt, he says, defending strategy. Today, Biyani stares at a host of businesses that have become a drag on profitability and are amplifying the financial pain for the group

They have huge debt."

as aLL, Fashion Station and Blue Sky, were failures.

. The biggest difference between Future and Shoppers Stop is that the latter was very cautious in its expansion plans and didnt overburden itself with too many loss-making businesses, points out the CEO of a competing retailer. Now Biyani is desperately seeking buyers for many of his loss-making ventures. Even so, it seems adding floor space has become a habit for the group. Or perhaps it still believes in preempting competitionat any cost. Despite the financial stress, Biyani has maintained he will continue to add another 2.5 million sq ft this year too. I dont see any properties being available after two to three years. Of course, the question remains: will his financial situation now allow him to do so?
Overambitious Growth?

None of our Big Bazaar stores has a cut-copy-paste [format] of similar merchandise."

It would be easy to dismiss the issues facing Future as just the fallout of Biyanis aggressive expansion strategy. But that isnt the only reason. It had a lot to do with lack of processes also, points out the CEO of a leading retail company. In the last 10 years the group has not only used debt to expand their business, it has also used it to fund loss-making ventures, he explains. He refers especially to the loss-making e-Zone, which has been a cash guzzler. The consumer durables retailer, which has a network of 42 stores across the country, registered a sales turnover of just Rs 500 crore in 2011 vis--vis Croma, which has a sales turnover of Rs 1,500 crore with 61 stores. The business model of consumer durable retail is extremely tough. It has wafer-thin margins and is capital intensive. To go ahead with a rapid expansion strategy for a model like this was not prudent, says Nikhil Vora, Managing Director, IDFC. e-Zones biggest mistake was that it positioned itself on the value platform, just like Big Bazaar. Too much of value doesnt work in the consumer durables business, says Rajeev Karwal, CEO of retail consultancy Milagrow. Almost 20-25% of e-Zones merchandise is made up of its own private brands, Koryo and Sensei. When it comes to buying consumer durables, consumers want the best brands, explains Karwal. Location has also been an issue. Where Croma, for instance, has stuck to big cities, e-Zone, perhaps inspired by the success of Big Bazaar, made its way to smaller towns like Indore. Without much success. Biyani has no qualms in admitting that he failed in consumer durable retail and openly says that he plans to exit it. How do we learn if we dont make mistakes? By not entering the consumer durable business, my balance sheet may have looked better, but I dont regret burning my fingers, he insists. Like e-Zone, there are other businesses that havent worked for Biyani, including Future Convergence, which focused on the mobile retail business. It didnt take off, but in this instance, he had the wisdom to get out early, even before others such as Subhiksha and Spencer s entered the space. aLL and Fashion Station, too, have proved duds.

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Rising Inventories The blind break-neck expansion and lack of focus is now hurting the company from all ends. For a retailer, inventory level is the real barometer of how well the store is selling. Whats worrying at Future Group is that there has also been a 28% year-on-year rise in the inventory cost per sq ft, indicating a decline in sales volumes. According to a report by MF Global Sify Securities, inventory per sq ft, which was at Rs 2,248 per sq ft in the third quarter of FY11, went up by 4% to Rs 2,323 in the fourth. The rise in inventory has largely been due to the increase in the number of stores as well as formats such as e-Zone making losses. To fuel its aggressive expansion strategy, the company bought excessive inventory to fill up new stores long before they were opened. Over the last couple of years, it has also imported a lot of products for its consumer durables and home businesses, which have not done particularly well, hence the idle inventory. (Apparently, in the first year of launching private label air-conditioners, there were over 40,000 unsold units in the warehouse.) Vora says that against an ideal average inventory turnaround of less than 40 days, the figure for Pantaloon is over 100 days. On the other hand, rival Shoppers Stop has kept its inventory cycle under 40 days by focusing on consignment merchandise rather than purchased merchandise. For instance, if it gets 20 pieces of white shirts from Louis Philippe and manages to sell only 15, it pays Louis Philippe only for 15 shirts and returns the rest. Today, more than 50% of Shoppers Stop inventory is consignment merchandise. This helps in reducing idle inventory to a large extent and ensures better working capital efficiency, says Abhishek Ranganathan, Research Analyst (Retail and Real Estate), MF Global Sify Securities. One of the reasons Pantaloon is unable to adopt a consignment merchandise strategy is its dependence on private brands (its own labels). Almost 80% of its merchandise in Pantaloon stores is private brands, while 8-30% of the merchandise in Big Bazaar and Food Bazaar are its own labels. The advantages of this allows the retailer to enjoy at least a 20% margin. On its part, Shoppers Stop, which earlier had more than 20% of its merchandise as private brands, has consciously reduced its dependence to 10%. A fundamental reason for rising inventories is that the retailer is unable to push products. Across the retail industry, same-store sales growth is down to 7-8% from 12-15% just two or three years ago. The result: higher inventories and, therefore, higher working capital costs. Pantaloons same-store sales have seen a sharper fall; Q4 results show Home Towns same-store sales growth at -4.5%, while the figure for the value segment is 7.5%. Thats disheartening because its lower than the 8% average inflation rate of last year, which means the company is seeing a fall in sales in real terms. If the same store sales is lower than inflation, it means trouble and the retailer needs to relook his strategy, says Harminder Sahni, Managing Director of retail consultancy Wazir & Co. Significantly, even as Pantaloons value retail formats dropped in same-store sales growth, competitors like HyperCity and Shoppers Stop have raced ahead (12%). The implication: the merchandise mix isnt working. Not surprisingly, Biyani and his team doesnt agree. None of the Big Bazaars has a cut-copy-paste [format] of similar merchandise. Assortment is a function of catchment studies of the communities that live and shop near each store, says Devendra Chawla, President, Food and FMCG Category, Future Group. But as things stand, Futures retail formats dont have a unique brand propositionwhere once these formats pioneered organised retail in India, now theres no pull factor. Lower prices? Aditya Birla Groups More offers deeper

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discounts. Hypermarket format? HyperCitys got the formula right. Private label apparel? Max, Westside and Shoppers Stop all offer the same. It does try, with community-specific products under the Ekta brand as well as Disney merchandise and the like. But aspiration levels have increased tremendously in the past decade. Big Bazaar s claim to fame was the bazaar-like environment in a modern store. But the consumer has upgraded. She doesnt want to shop in a cluttered, bazaar-like environment anymore, points out Sahni. Karwal of Milagrow echoes that thinking. Big Bazaar needs to come out of that sabse sasta sabse accha mindset, points out Karwal of Milagrow. It needs to upgrade stores, he adds. Damage Control Alls not lost for Biyani. Indeed, if he can rejig his strategy to substantially increase same-store sales, he may well emerge the winner in the retail race. And, to be fair, Biyani and the Future Group is in a phase of consolidation and correction, exiting bad businesses and focusing on core strengths. In order to ensure better inventory and supply-chain efficiencies, Future Group launched Future Supply Chain in 2007. While the front end had grown fast, the back-end was not able to keep pace. Only 60% of the goods reached the stores on timesome never reached the store at all, says Anshuman Singh, MD, Future Supply Chain. In 2009, Hong Kong-based supply chain company Li & Fung bought a 26% stake in the company for $30 million. Singh claims that fill rates have now improved by close to 90%. Not only has the total time for a product to reach the market or store been reduced by two-three weeks, our supply chain costs have reduced by 40%, Singh boasts. He hopes that the Rs 291-crore Future Supply Chain will be profitable this year. But an efficient supply chain system should ideally ensure that inventory costs are low. Vora doesnt see that happening. Future Supply Chain has not mitigated the high inventory per square foot, he points out. Meanwhile, the group has become serious about exiting unprofitable businesses. For starters, its winding up Future Capital Holdings and e-Zone. Biyani had been talking of converting e-Zone into an e-commerce business, which will mean lower overheads and inventories and better working capital efficiency. It may also be easier to attract buyers for an online venture rather than a brick-and-mortar business. More significantly, perhaps, Biyani is taking a very pragmatic view of selling out businesses and doesnt rule out the possibility of even selling out lock, stock and barrel. Indeed, while theres been a buzz for a while that Biyani is open to diluting equity in Pantaloon and Future Value Retail, the grapevine now has it that French retailer Carrefour is looking to buy a stake in Big Bazaar. Biyani neither confirms nor denies the rumour but, tellingly, says he is open to any options , including a complete sell out. We cant be emotional about business, he declares. But he may have to wait a while before hes likely to get a decent price for his business. At the peak, in 2006, Biyanis business was valued at four times its turnover; now, it has a market cap of around Rs 4,000 crore. A format like Big Bazaar would have been ideal for a foreign partner to invest in, had FDI been allowed. But I dont see FDI in retail happening in the near future, says Vora of IDFC. Also no foreign partner may want to invest unless the group manages to move out of its non-core and non-performing businesses and brings down its debt. The markets no longer seem convinced about Biyanis winning formula. Pantaloon Retails share price is down from its peak of Rs 505 in 2010 to Rs 183 now. High inflation and ever-rising interest rates have made investors jittery. They believe that the going could get increasingly difficult unless the debt-equity ratio is below one. The next six to eight months are going to be crucial for the company, points out MF Globals Ranganathan. They have huge debt. Inventory per sq ft has also gone up significantly. They have to bring down the debt ratio to below one in order to be able to grow. In comparison, rival Shoppers Stop has a debt of Rs 148.72 crore, on a turnover of Rs 1,716.19 crore. Predictably, both Biyani and Malhotra say that investors are unnecessarily blowing up the debt issue, although at 1.6, the ratio is at its highest in five years. The ratio is still comfortable. I wonder why people are making a fuss? asks a peeved Biyani. A lot of work is being done to reduce debt. We have lot of new stores that have also started throwing cash back into the business. The debt situation is not that bad, argues Malhotra. Though Biyani may claim that the current situation is not alarming, people in the know admit hes worried. He is determined to reduce the debts in the next 12-18 months, says a company insider. The company recently announced plans to raise Rs 1,500 crore in Pantaloon Retail by issuing equity-linked securities. Should that happen, it would amount to a 15% stake dilution. According to an Edelweiss Report, Biyani has invested Rs 1,200 crore in Future Capital, Future Supply Chain and the insurance business. The valuation for these entities would be in the region of Rs 3,000-4,000 crore. The company plans to progressively dilute its stakes in its non-core investments and focus more on core retail, the report adds. A Bridge Too Far? Biyani asserts that from now on he will focus only on those businesses that are doing well: Pantaloons, Big Bazaar, Central and KBs Fair Price. Growth with conservation is what we want, he says. But he still isnt shying away from adding more retail space, although Biyani does not elaborate on how this will be funded; presumably, he is counting on some transactions to materialise quickly to enable him to expand further. The group also plans to take the number of Big Bazaar stores to 350 and KBs Fair Price stores to 900 and has launched Big Bazaar Family Centres, in Chennai, Delhi and Raipur. These are not only bigger stores (around 100,000 sq ft, as opposed to the usual 60,000-70,000 sq ft stores), but are slightly more premium in terms

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of appearance as well as merchandise. With higher disposable incomes, the Indian customer is willing to upgrade. Therefore, the 10-year-old Big Bazaar also needed to change and take offerings to the next level, points out Damodar Mall, Group Customer Director, Future Group. Mall says that the newer Big Bazaar Family Centres will have a substantially wider offering in the ready-to-eat and ready-to-cook food category as well as in the fashion category. You will find shirts not only at the Rs 500 price-point, but also at the Rs 999 price point, adds Malhotra. The company also plans to revamp KBs Fair Price (which competes with kirana stores) model by adding more SKUs. It currently has around 500 SKUs, but going forward we will look at adding more SKUs from the modern food category such as cereals and soups. We see a growth in aspirations there too, observes Malhotra. Biyani has also recently ventured into the premium gourmet food space with Food Hall, which offers an array of international delicacies such as gourmet cheese, sauces and condiments. The first such store opened at the upmarket Palladium Mall in Mumbai. The idea is to open around 11 such stores over the next year. Mall says the aim is to serve emerging customers. But is Biyani once again taking on too much? No retailer has straddled both the value and premium segments to date. By his own admission, Biyani doesnt understand the premium and luxury segment. He was flummoxed by how people could spend lakhs on a Louis Vuitton bag or a pair of Jimmy Choos. Biyani has to redefine his focus. I think he should focus only on value formats such as Big Bazaar and Pantaloon, rather than straddle both value and premium. If he wants to compete with both a Reliance Fresh [budget segment] as well as Godrej Natures Basket [premium segment], he will be in serious trouble, declares Sahni of Wazir. Biyani, however, believes straddling different segments is a good way to de-risk the business. As long as I can burn the candle from both ends, I will do so. I have to keep testing the waters and see whether the consumer is ready to adapt to new things. Otherwise how will I grow? Click here to see the article in its standard web format

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