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BW Businessworld

Single And Ambitious

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On a mild winter evening in Bangalore, Vimal Sharma, in the city to discover his roots, decided to take a stroll through the back alleys of a food street. A Fijian of Indian origin, he had grown up hearing about how Indian culture is best savoured through its food. At any rate, says Sharma, the stroll inspired him to set up Bliss Chocolates, which would create and sell chocolates with the distinct taste of Indian spices. “I wanted to create a luxury chocolate brand within India. But I had to be different, and spent the whole of 2008 understanding Indian tastes.”

Today, his stores sell chocolates that combine the taste of cinnamon and other spices. After two years of research and spending about Rs 10 crore, Sharma has set up a small manufacturing unit, which supplies to his seven stores. He is also promoting his chocolates as corporate gifts, and taking orders for birthday parties. Now, he plans to take the brand national; he has tied up with Metro Cash & Carry, which will stock his chocolates in its stores. Sharma is also thinking of selling a minority stake to expand his business.

Small retailers attract less attention than their big, multi-brand peers, but about half a dozen single-brand retailers are working on big plans to create a larger footprint. Some of them are first-generation entrepreneurs while others are rebranding and taking their family businesses national.

The FDI Opportunity
When the government cleared 51 per cent foreign direct investment (FDI) in multi-brand retail and 100 per cent in single-brand retail in 2012, it opened up a world of opportunities. Small family-owned retail business houses could now tie up with any foreign retailer or private equity business and expand to newer markets. They could also take their brands abroad through a joint-venture partner.

Take for example Manyavar, the Kolkata-based men’s ethnic clothing chain, which sells high-end ethnic wedding suits. The 240-store brand that started as a small outlet selling kurtas in Burrabazar in the old part of the city, is now looking to expand across the country. “We have very few discount sales, and retailing is easy for us, because we manufacture our goods and we have been able to offer our own designs to customers,” says Ravi Modi, founder and MD of Manyavar. He adds that Manyavar is looking to expand primarily through the franchisee route, where the investment risk is on the franchisee; and will open more than 350 stores this decade. The company closed the financial year with revenues of Rs 300 crore.

Consulting firm Ernst & Young estimates the Indian retail business to be worth $500 billion, of which only about 7 per cent, or $35 billion, is the share of the organised segment. And, of this, organised apparel retailing is a $15-billion market, while food is another $10 billion; other products make up the rest. Will FDI really change the dynamics of retailing in this country?

In January 2010, BW had written about the emergence of new retailers in a cover story, predicting that many of the upcoming retailers were taking on too much debt and that only a few would survive in the long run. In fact, only two of the 15-odd companies featured then are still around. However, it is also true that for every failure, there is a new retail chain that has popped up, and is expanding.

“There are so many local retailers in our mall that perform so well that any foreign retailer can partner with them for the sheer experience that they have built up,” says Jonathan Yach, CEO of the Mantri Square Mall and PropCare, a mall management firm, in Bangalore. He adds that if a foreign partner has to experience India, it has to be through family-owned retail businesses that have created value over several decades.

Experience On The Table
Take Biba, a women’s Indian wear brand. The now 100-store chain was started by Meena Bindra in a small room in south Mumbai more than 25 years ago. By 1999, clothes from the brand were being featured in Bollywood movies, and were sold in Pantaloons and Shoppers Stop stores. Its first standalone store opened in 2004; the number grew to 10 by 2006. The company now does Rs 350 crore in annual revenues. “India is a product story. You need to understand how to create merchandise and a product that customers will come back for,” says Siddharth Bindra, MD of Biba Apparels, and the founder’s son.

“Retail in the end is a capital-intensive business and you need to target at least 30 per cent EBITA (earnings before interest, tax and amortisation) in apparel retailing to make profits,” he says. A foreign partner can bring competency in supply chain and management through use of technology, he concedes. Biba, which will spend Rs 50 crore to expand to 100 more stores, is also creating a plan to take the brand to other countries by 2015.

But not all are convinced that investments from foreign partners will be forthcoming, or as to what role they will play. “Will foreign partners work with companies that want to expand into smaller cities beyond the top 24,” asks Punit Agarwal, director and CEO of Promart India in Ahmedabad, who believes investing in smaller towns is a winning formula. “We understand the customer in the smallest of towns,” says Agarwal. Promart has a no-warehouse policy, and a buyout model with 100 brands (the inventory cannot be returned). Promart was purchased from debt-strapped Provogue, which sold its value format in 2011 for a little less than Rs 1 crore to Ashish Garg and Agarwal, who were also apparel manufacturers. The two entrepreneurs have scaled up the brand from two stores to 40 stores, and will go up to 100 stores with a franchisee route. They have already planned a Rs 100 crore capital expenditure, and will infuse a further Rs 50 crore if required.
Family Business Tree
Travelling down the same road are small family enterprises. Back in the 1970s, a younger Rafique Malik was in the US trying to get an MBA from an Ivy League university. What startled him during his stay there was the way the country was built on retailing, brand building and service. Malik found his calling in his family’s shoe retailing business, where he decided to use his experience from travelling across the US. The business had started from a small store in Colaba and for a good 20 years, Metro Shoes remained a Mumbai-only brand. “India became brand conscious only 20 years ago. The only way to stay alive was to establish a brand for our stores,” says Malik, who is now the company’s MD. Metro Shoes currently has 235 stores, a number Malik plans to ramp up to 421 by 2015, with an annual investment of Rs 30 crore.

Soch, a women’s ethnic wear brand, was born in 2006 out of a retail shop in Bangalore’s Prestige Forum Mall that was shutting down. It was revived by retailer Manu Chatlani who till then had managed his family retail outlet called Favourite Shop in old Bangalore.  He had realised that brand-building was the future of Indian retailing.
“When we started expanding, the mall owners would ask me who we were,” says Chatlani, MD of Soch. Six years later, Soch is delivering Rs 210 crore in revenues and giving the highest per sq. ft revenue for mall owners. “What I learnt from my father’s business was to keep the cost of the premises, rent and maintenance low,” says Chatlani, who has spent Rs 20 crore on increasing the number of stores to 26 locations across the country.

Analysts believe that some family businesses can form successful partnerships because they have a better connect with customers. “Today’s consumers are demanding convenience not just of products but also of purchase. These retailers are experimenting with mobile (on wheels) stores to reach consumers and even engage them when they are on their way to work or near their residences,” says Prabhu Kannan, director of SapientNitro, a digital commerce consultancy.
“Family retailers need to know what they want to do with their brand when they scout for an investment partner. They should have their finances recorded, which can be difficult to dissect because of their cash management policies,” says Keshav Misra, partner at Baring Capital India, a private equity fund. He says if these companies had value chains that connected manufacturing to front-end, it would be easier to invest in them than if they were just retailers.

In 2006, when private equity fund Actis bought Bangalore-based retailer Nilgiris for $65 million (about Rs 350 crore then), the buyout was mostly for the dairy manufacturing prowess of the brand. The buyout did not make Nilgiris successful as a retailer. Now Actis is turning around Nilgiris by franchising the name to trusted business families that have retail backgrounds.

Makeover Mantra
Another brand on the revival route is Proline, an old apparel retail brand popular with cricketers in the 1980s. It is revamping its 25 stores with a sporty-casual image at a cost of Rs 20 crore over the next three years or so. “The brand has recognition and something that can attract the working young Indian, who is value conscious and wants contemporary designs,” says Sandeep Mukim, CEO of Proline.

While Mukim plans to win over the youth, a young entrepreneur from Coimbatore, Abhishek Tibrewal, is thinking about how to differentiate himself if he is going to be a retailer. He knows that the apparel market is flooded with large- and medium-sized family businesses. The opportunity, according to him, is in the men’s innerwear category, which was dominated by international brands.

Tibrewal has built his flagship stores, which sell the Crusoe brand of innerwear, to resemble a surf board and has painted them in colours that would suit the under-25 age bracket. In just two years, Tibrewal has opened four stores, and plans to spend Rs 10 crore on opening 100 small (600 sq. ft) stores across the country.

Others, such as footwear and accessories maker and retailer Woodland, are looking at venturing into markets abroad, and feel that foreign partners will give them bargaining strength when they want to expand abroad. Woodland has over 350 stores in India and it says it has been scouting for partners in China.

There may be immense value in partnering with small retailers in India, but hurdles abound. The biggest among these is valuation, because the fundamental costs — such as rentals, salaries, supply chain and electricity costs — along with shopping patterns, are difficult to predict.

At present, many Indian retailers pay rentals that are 17-20 per cent of sales. Such high costs could bleed even global retailers with deep pockets. A source says that franchisees are the ones who have burned the most cash.

Analysts add that rentals should be negotiated to about 8 per cent of expected sales, or there should be a revenue share formula with a minimum guarantee. However, with the limited availability of good property in shopping districts, there are too many retailers demanding space, which further leads to rentals becoming exorbitant.

“Before we sign up any retailer into a mall, we ask them why they want so much space and what they expect from the geography that the mall operates in,” says Yach of Mantri Square Mall. He adds that very few retailers pay attention to such basics, and, therefore, end up burning cash.

Hopefully, with FDI allowed into retail, new markets will be created, consumers understood better, and with it will come another big, homegrown retail entrepreneur of the likes of Kishore Biyani.

With inputs from Swati Garg


(This story was published in BW | Businessworld Issue Dated 06-05-2013)