After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.
On the last Sunday of January, Vedanta boss Anil Agarwal played host to old friends at his house in London’s Mayfair neighbourhood. There were the Mittal brothers (Rajan and Sunil) of Bharti Enterprises who had made a stop on their way to the World Economic Forum at Davos. Also present was Kishore Biyani (related to Agarwal through marriage) of Future Group. The meeting had been called by Agarwal who had wanted to bring them together to discuss the possibility of doing business.
The Mittals and Biyani began to talk about how their retail companies could work together. Talks were preliminary and revolved around how the retail sector was shaping up in India, as well as the threat from ecommerce, which is flush with private equity money. Discussions lasted the entire day. “I came away thinking this could result in a deal,” says Biyani, who runs the Rs 15,000-crore Future Group, India’s largest retail chain.
Not surprisingly, when you meet the 54-year-old Biyani, there is a discernible spring in his step. But there is no complacence. Instead, he is focussed on the sales target of Rs 1 lakh crore by 2020 that he has set for his company. With the Bharti deal, this target has become a lot easier to meet, he admits.
When Forbes India spoke to him in December 2014, he had spoken about his plans to double down on a brick-and-mortar-cum-ecommerce strategy: The 5,000 sq ft neighbourhood store would be his next engine of growth, buttressing the 50,000 sq ft-plus hypermarkets. Future Group plans to set up 4,000 of the smaller store in various parts of India in the next five years; they have 500 at present. It also intends to adopt a cluster approach—setting up stores region-wise—in order to manage supply chain costs.
The deal with Bharti Retail takes Future Group closer to each of these targets. And though it is being termed a merger, the deal is essentially a takeover.
Let’s run through the numbers first. Here’s what Future Group acquires: 20 Easyday hypermarkets that will be rebranded Big Bazaar, taking the total Big Bazaar count to 200 across India; smaller format Easyday stores—in Punjab, western Uttar Pradesh and Delhi, where Future Group has few neighbourhood stores—will retain their branding. The two formats combined will add Rs 2,500 crore to Future Group’s top line.
Bharti Retail and Future Retail will be combined, with Bharti getting a 9 to 10 percent stake in the two new entities created—one to manage the front-end in the stores and the other to handle the logistics and back-end. Bharti will also be issued Rs 250 crore of optionally convertible debentures, with the option of converting them into equity in 18 months, for the front-end company. Bharti will also get a seat on the boards of both the companies.
While there was little doubt about the sense in joining forces, it was during the three months leading up to the announcement of the deal that Biyani received some well-intentioned advice from the Mittals. “The telecom business showed us that it is best to keep the infrastructure out of the main company,” says Rajan. Applying that analogy to retail, they suggested that the back-end be hived off into a separate company. “Our idea was to put the back-end into a company that specialises in, and creates, world class infrastructure.”
This was also a sound call from a financial perspective.
Biyani has proven that his margin model is world class: Higher-margin apparels constitute 55 percent of sales, the balance accounted for by lower-margin food products. Globally, higher-margin apparels contribute no more than 40 percent to sales.
Despite that, working capital availability can often pose a problem in the retail business as credit periods from suppliers are often not long enough. In the new structure, the front-end company will have a much lighter debt load of about Rs 1,000 crore. With lesser money going towards interest costs, the front-end business should find it easier to be profitable. In the past, Future Group found it difficult to raise low-cost debt as the business had few assets to show as collateral. Now, most of the debt—around Rs 3,000 crore—will reside with the back-end company, which will have all the infrastructure and assets on its books, as well as a more stable and predictable margin and business model. In time, Biyani could even throw its services open to other retailers. “This gives us the opportunity to bring in two different sets of investors into the company,” he says.
In addition, the smaller stores acquired by Future Group are more efficient in per-square-feet sales. This is partly achieved by ensuring better on-shelf availability in stores. Bharti’s and Nilgiris’s small stores have average sales of Rs 2,500 per square feet; Future Group’s average is Rs 1,800 per square feet. “Bharti Easyday stores are created on a perfect planogram. They have 93 percent on-shelf availability, which is higher than ours,” says Biyani.
In Bharti, he also has a trusted ally whose business model and culture he looks up to. Future Group executives were surprised to see that many of the systems and processes—for instance, the focus on on-shelf availability—that Walmart left behind are still followed diligently. Biyani is looking to inculcate that culture within his team.
Biyani believes he’s got the building blocks in place for the next decade of growth. Sure, the last couple of years have been tough; some of his trusted lieutenants have left him for rivals, but he scoffs at the notion that he’s lost significant talent. “If you don’t change your company how will you evolve, how will your thoughts change?” he asks. And, in a way, he is following his own advice.