N Chandrasekaran, Chairman of the Board of Tata Sons; Image: REUTERS/Danish Siddiqui
A necessary purchase. A repeat purchase. An essential purchase. Combine these three and it’s not hard to see why retail businesses make a bold promise. Get a critical mass of consumers (and their data), persuade them to buy regularly and a 25-to-50-percent-a-year growth for the next decade is there for the taking. Few businesses hold such potential.
The latest to be snared into retail’s charms is the 153-year-old Tata Group which plans to make retail businesses and the consumer a key ingredient of its growth strategy over the next decade. It promises steady growth with stable cash flows and, if executed well, a high price-to-earnings multiple. Within Bombay House, work on an app to link all of Tata’s consumer brands is being put in place. Also on the cards, according to media reports, are plans to buy out online grocer BigBasket and pharmacy e-retailer 1mg. In the absence of the deal not going through, an entry into grocery retail is still on the cards, but an organic rollout would take longer to execute.
A large part of Tata Sons’ earnings come from businesses that are cyclical. While Tata Steel and Tata Motors gorge out disproportionate amounts of cash in an upcycle, a downcycle is equally brutal. Both require long investment cycles. In contrast, once consumers are hooked, retail has the potential to generate high returns with low incremental capital. Given this it’s hardly surprising that N Chandrasekaran, who took over as chairman of Tata Sons in February 2017, has chosen to keep the consumer at the core of his new businesses.
India’s retail market is valued at $700 billion, according to the Boston Consulting Group, with organised retail—of which online retail is a subset—accounting for 10 percent and growing at 10 to 12 percent a year. Package-carrying delivery boys have become part of the urban landscape. “What excites the market now is the heavy overlay of tech in these businesses,” says Krishnan Thyagarajan, president and COO of DataWeave, a company that works on data analytics with retailers. According to him, the Tatas have no option but to take a seat at the table.
Also, in the last year, Reliance Industries [owner of Network 18, the publisher of
] had seen its valuation surge as it leveraged the strength of its telecom and retail consumers. The two businesses saw investments of Rs 152,056 crore and Rs 47,265 crore respectively, taking Reliance’s valuation to Rs 12 lakh crore. This, say industry watchers, prompted the Tatas to consider taking a seat at the table. If all works according to plan, the Indian online retail industry could coalesce around Reliance, Amazon, Walmart and the Tatas.
While the heavy overlay of tech makes it quicker to scale retail offerings (there is no need to scout for properties, negotiate with landlords and spend a decade building a national network of stores), it also dramatically increases the complexity and intensity of the competition.
All competition is now national and against competitors who are willing to burn vast sums of money to acquire customers. They can match pricing online on an hour-by-hour basis. However, while competition has increased, there still remains no profitable way of delivering low margin items across urban agglomerations. (New delivery models are being tried in the West and should in time make their way to India.) This is on account of low bill amounts and bulky order sizes. The Indian consumer has proved resistant to being weaned off free delivery.
These are some of the challenges that Chandrasekaran, who—via a spokesperson—declined to be interviewed for this story, will face. In the past, there has been resistance from Tata companies towards group-wide projects. Tata insiders say since Chandrasekaran has put his weight behind this project, they’ll have no option but to fall in line. Add to that the spotty record that the Tatas have in executing new business and they’ll need all the help they can get.
The last time Bombay House made a bold bet with new businesses was in the late 1990s. Tetley’s acquisition had brought Ratan Tata his first flush of success. They were now a household name at our erstwhile colonial masters.
To an impartial observer, there was little that could go wrong. With cash to spare, the Tatas laid claim to two exciting new ventures that would define the group’s aspirations in the businesses of tomorrow—retail and telecom.
Trent, started by Noel Tata, was an entry point into retail. At a time when organised retail was restricted to Shoppers Stop and the soon-to-be-defunct Future Group, Trent—which chose to eschew the discounting route—has seen its private label strategy pay off. Tata Teleservices had set up fixed line services and although the group had been caught napping in the mobile telephony space, its entry into telecom with its vast potential wasn’t seen as late.
Fast forward to 2020 and little seems to have gone according to plan. In the industry, Trent, with a Rs 24,000 crore market cap, is seen mostly as an also-ran. Faster nimbler rivals—Avenue Supermarts, Reliance Retail, Amazon and Flipkart—have raced ahead and captured a larger share of the consumer wallet.
Telecom burnt through an estimated Rs 60,000 crore before the Tatas exited it completely. Now, as the industry—in which the Tatas have no chance of re-entering—consolidates, there is a chance that the incumbents Jio, Bharti Airtel and Vodafone Idea could see healthy profitability in the next decade.
All in all, retail and telecom hold a cautionary tale for Tata Sons on how new-age opportunities can often burn through significant amounts of capital without having anything substantial to show for it. (There is also aviation that Tata Sons plans to increase its bets on with the acquisition of Air India, which has the potential to burn capital.) This is something Tata Sons will have to be extremely careful about as it prepares to roll out its new retail juggernaut. For now, it’s clear that having decided on using an acquisition-led strategy, it is clearly in a hurry.
Getting the Nuts and Bolts in Place
The seeds of India’s retail build-out were sown over the last decade by two very distinct and contrasting forces. Locally, the industry came of age with retailers understanding what it takes to win. The country now has a large warehouse network, consumer companies serve retailers quickly and on time, leading to high inventory turns, and the software for planning systems on how to execute deliveries or stack warehouses efficiently is in place. Anyone setting shop now has the benefit of this infrastructure build-out that has taken place.
Globally, the decline in interest rates has meant that capital is available for long periods of time as companies showcase their value proposition to an Indian consumer who is fickle. After being largely shut out from China, Walmart and Amazon are willing to do whatever it takes to win in India. In effect, the Tatas, who have decided against an organic build-out, would be up against an infinite wall of capital. “In this business, there is no difference between product and prices. So, the only difference is in execution and the ability to support losses longer,” says K Vaitheeswaran, founder of Again Drinks, who had earlier set up Fabmart.
So how do the Tatas plan to go about this? The first step is linking all their consumer brands across an app or super app that is designed to keep consumers within its ecosystem. The problem is that apart from China, nowhere have super apps succeeded. Net neutrality rules require providers to grant the same access to all apps.
Within the app, consumers need to be kept within its confines through a feature like chat or payments. In India, no company has been able to come up with a chat feature to take on WhatsApp. Jio Chat, which was billed as a homegrown alternative, failed to take off. The payments space once dominated by Paytm has now become more democratic with GPay and PhonePe competing furiously for customers. The net result: A consumer willing to move across apps to find the best deal.
In addition, the integration of various businesses is likely to prove to be a problem as well. There is the issue of integrating the various tech aspects and making systems across group companies talk to each other. On a smaller scale, this has been tried before—in 2012, an attempt was made to roll out a common loyalty programme across the group. It ended in failure.
An insider who worked on that project points to the several issues they faced. First, there was a lack of commitment from companies. Second there was a genuine lack of cohesion. What did a person who stayed at the Taj have in common with a person who bought a Nano? Third, sophistication across group companies varied. Technology platforms were different and integrating them was a challenge. Fourth, timing. Not everyone saw it relevant then. “I believe things are different now as everyone realises the need for this and the direction is coming from the top boss. But pulling the tech bit off will be a major challenge,” he says.
Once the technology integration is in place, the biggest challenge is likely to get the customers to the app frequently. In the absence of a chat or payments feature, this is most easily done through a grocery offering on account of the high repeatability of the purchase. Vaitheeswaran, who has spent time in the grocery trade, explains “the biggest inhibitor in ecommerce is free shipping”. Consumers hate to pay for shipping and usually end up stacking their carts in order to get free delivery. Jiomart has changed that game by offering free delivery. Depending on how Jiomart scales it could prompt other companies to also offer free delivery, prolonging and increasing their losses.
Delivery across urban centres is another pain point that for now no one seems to have cracked. Groceries are bulky and orders vary between Rs 600 and Rs 1,500. These are usually low-margin items. In physical stores, while customers walk in to buy groceries, their carts are also stacked with higher margin crockery, linen and electronics. This allows retailers to achieve a blended pre-tax margin of about 8 to 10 percent.
Online, there is no compulsion to shop for higher margin items in the same order. Instead, the customer could easily go to a rival site and buy a set of six plates or a television on account of a price promotion. The chief executive of a large Indian retailer has publicly said “home delivery of groceries is the fastest way to bankruptcy”. As a result, it is the only retailer to have gone slow on an online roll out.
Industry veterans Forbes India
spoke to say they were disappointed that a potential BigBasket deal was being spoken about at a 1 to 1.2 times multiple to sales. It implies a distress valuation. “Look at the delivery companies quoting such high multiples. The low BigBasket multiple is an implicit admission of the fact that the buyer will have to burn capital for many years to come,” says a former employee of a grocery retailer. He estimates an annual cash burn of as much as Rs 2,000 to Rs 2,500 crore for BigBasket on account of its national network.
For now, most players, including Amazon, Flipkart and JioMart, have added delivery staff to cater to this demand. But in the West, several companies have realised that delivery is a specialised skill in itself and tie-ups work better from a financial perspective. Companies like Deliveroo and DoorDash have seen their valuations soar to $7 billion and $60 billion respectively.
“Delivery is a separate discipline—from building logistics to building an efficient pick-up network from stores,” says Thyagarajan of DataWeave.
As the Indian online grocery market evolves, it is likely that retailers—after putting up with years of losses— decide to tie-up with delivery companies. That would change the game overnight.
First, regional grocers and kiranas with access to delivery staff could digitise and deliver quickly across certain urban zones, increasing competition for Amazon, Flipkart, Jiomart and the Tatas. It is a trend seen in some pockets of the US where smaller retailers like Krogers have been able to compete head-to-head with Amazon in the areas they have their stores in. Second, there is nothing stopping a Swiggy or Zomato from accepting orders directly from customers and then picking them up from across grocers and delivering them. Either of these moves could result in the balance of power shifting to the delivery companies and a significant valuation dust-up for online retailers resulting in a write off for the Tatas.
All participants Forbes India
spoke to say a grocery offering is the glue to a super app. Even though the cost of switching is very low for the Indian consumer, not having it on the app would mean the project would never take off. “In effect, the price being paid for BigBasket is for its customer data and network of warehouses and delivery infrastructure, which would otherwise take 18 months to build organically,” says the former employee.
For Indian companies, the cost of acquiring a new customer outweighs profitability. As a result, discounts tend to be high. (In the West, the game has moved to customer retention.) According to DataWeave, the average discount across daily use items like soaps, snacks and edible oils across Amazon, Flipkart, Grofers, Jiomart and BigBasket ranged between 16 and 20 percent. Add free delivery and it becomes a good tool to attract users. The discounts also tend to be sticky. During non-sale periods, BigBasket only tinkered around with prices for one to three percent of products. The number rises to 10 to 14 percent of products during sale periods.
Price and assortment are the key levers to growth and developed markets took long to figure this out. One doesn’t always have to be the lowest price, but the perception that the customer is getting the best deal is important. Avenue Supermarts, which follows an everyday low price strategy, does this well. As a result, consumers believe they are getting the best deal even though that may not be the lowest price across all products. At present, this crucial niche online is up for grabs as consumers regularly switch among retailers based on the deals they are offering.
Lastly, maintaining tight control on the stock keeping units (SKUs) offered is important. Online retailers, with access to more warehouse space, tend to increase the number of SKUs they stock, which leads to an accumulation of slow moving inventory. Across five everyday categories surveyed, DataWeave noticed that BigBasket stocked 1,845 SKUs while JioMart had only 151.
Keep Costs in Check
At one end of the Tata Consumer empire is the process of showing a promising turnaround. Last year, it brought in Sunil D’Souza, an FMCG veteran, to turn around Tata Consumer Products. Saddled with enormous goodwill costs on its balance sheet since the Tetley acquisition, the company had largely been languishing. In the almost-one year that D’Souza has been at the helm, its market cap has doubled to Rs 53,000 crore giving the group the confidence to throw its weight behind other consumer business.
As things stand, Tata Sons would have to put firm guardrails and spending parameters in place for its retail offering. It would also need patient capital, which is now abundantly supplied through its 72 percent stake in Tata Consultancy Services. While the industry holds great promise, corporate India’s record of entrants in sunrise sectors hasn’t been great. Aviation felled several formidable entrepreneurs. Telecom saw a shakeout that from over a dozen five years ago left only three players standing. And while retail makes good operating cash flows after investments in fixed assets, there is very little free cash left to distribute to investors.
With a super app, the Tatas would need to clearly understand how much incremental business can a money-guzzling grocery operation add to, say, Croma or even Westside? Does the customers see them as one common entity and will a common loyalty programme attract them?
Getting unit economics right for the grocery businesses is one key metric industry watchers will be looking at. “Even if you have the most efficient operation, the best sourcing deal and good private label brands… Amazon and Flipkart will always be there to outspend you,” says an industry veteran, who declined to be named. This is a bit like the airline business (Tata Sons has bid for Air India) where success is not always dependent on the strength of the operation alone. Competitors undercutting fares and fuel prices are variants out of one’s control. “It would a good investment if they show operational efficiency and monetise a part of their retail businesses in the next few years,” says Venugopal Garre, managing director at Sanford Bernstein. Media reports of a BigBasket initial public offering in two to three years post the Tatas’ acquisition have suggested this.
As India Inc gets past the pandemic and Chandrasekaran puts in place the buildings blocks for the next decade of growth, he realises that aviation and retail could shape his legacy. Equally, a botched rollout that sucks in a few billion dollars with nothing to show for it could mar the prospects of the group for the next decade and leave it starved of the much-needed growth capital. While looking ahead, it would be best if he keeps a close eye on the rear view mirror as well.