Retail Is All About Scale

In the last few years, Pantaloon Retail has emerged as the country's largest retailer and it continues to expand at a breakneck pace. But has this growth been too fast? The company is operating on wafer thin margins and poor cash flows. Now it has announced a fresh bout of corporate restructuring. So what can Pantaloon shareholders expect in future? ET Intelligence Group's Supriya Verma Mishra finds out in a conversation with the company's managing director Kishore Biyani

What was the trigger for the recent restructuring activity? 
The main purpose of this exercise is to create a pure retail play for our shareholders and investors. It will also help in identifying units of growth and make them independent entities. We will separate the retail business and Pantaloon Retail will become pure retail company. Value retail, including Big Bazaar and Food Bazaar, will be housed as a subsidiary of the parent company. Big Bazaar would look at a pan-India reach while Pantaloon will operate in the top 60-70 cities of the country. Financial services and insurance will be hived off into a separate unit. We will see some value unlocking there. 
But industry observers think this exercise is for the benefit of potential institutional investors …? 
As a company we will need capital to grow, so if there are avenues to raise money without dilution, we are open to it. But we are not restructuring the business keeping in mind any particular investor. It is done to create a strategic monetisable asset. There are some investors who think retail is a profitable business and there are some who are betting on financial services. So this new structure will help them to take a call on individual businesses. 
You are currently operating on wafer thin margins. Does that bother you? 
Retail is a long-term play, and it is more about scale. For retail, it is a $200 billion canvas, which is huge. If you look at the US, modern retail started in the late 50's but by the time it got noticed, it was nearing 80s. Modern retail in India is still evolving and its job is to create consumption; to sell new value-added products and categories. Until we came in, there was nobody other than Bombay Dyeing, which sold terry towels in the country. Today Big Bazaar sells 25 lakh pieces every year. Essentially without distribution, no demand can be created. Now we are creating a demand for kitchens. We've just launched our private label brand for cereals, which competes with Kellogg's. We have been able to capture 18% market share (in our store) in this category, which is a great achievement. 
And what were the factors that helped you achieve this? 
Good quality. If the product is not good, it will not sell. You need to understand the customer needs well and do the prelaunch testing to ensure the product is a success. The packaging and the pricing also make a difference. We have launched this cereal under our brand Tasty Treat, which has great customer recall value. We have built a brand, worked on the loyalty of our buyer and we keep launching new products to bring back customers. 
Does this not lead to a controversy with the established FMCG players as organised retail is supposed to be a revenue driver for them as well? 
I don't think there will be any controversy. Today customers do not have much choice. In cereals, there is no option for customers other than Kellogg. Thus there is no conflict. Rather, competition results in a better product for customers. India has very few manufactured brands unlike the international market where buyers are spoilt for choice. 
So going ahead are we likely to see cross-selling of private labels of organised players through different formats? 
It is likely to happen very soon. Being a multi-format player, our products are available across all our stores. If we collaborate with any international player, we would also sell their merchandise through our stores. Precisely for this reason we have created an independent label rather than a store label. In fact we are already in talks with other retailers through whom we will sell our products but there aren't many players with the scale that we operate at. 
What are other initiatives that will help longterm growth? 
We are soon launching Ektaa, which is an ethnic food brand. India lives in communities and we are launching this label in community food. If one of our stores has a dominant community in its catchment area, our product mix will be skewed to suit the needs of that community. This will increase our engagement with customers and also help us fulfill the need met by local kirana store. The brand will also have some non-seasonal products for these communities. 
What will be the investment for this brand? 
It's too early to talk about investments. Our large-scale operations will drive volumes, which will counter any increase in cost. I believe this label will reshape us in a big way. Since we already have a backend, we are anticipating close to Rs 300 crore of sale in the second year of its operation. 
What is your strategy for fashion side merchandise management? 
We are tracking the contribution of full price sales. Last season it was 86%, which was by far the best for us. It shows that we are moving from being just a discount company. Going ahead we are opening more number of stores under the name Central, which will increase our fashion business. We are looking at replicating the merchandise management model of the fashion business in the home and furnishing segment. In film promotions, new private labels in categories like sportswear, innerwear, and bags, are some other growth initiatives. 
Interest cost continues to be high for the business. What is your plan for this? 
Essentially for this reason we are looking at selling the non-core assets of the business. We are expecting to receive Rs 200 crore through sale of some strategic assets. We would raise some more funds with the insurance and financial services business being demerged. We are yet to reach the tipping point for various products, which is when the demand will explode. 
Some of your competitors like D'Mart look geared for a long haul … 
Yes, D'Mart is one of the better retailers. They are expanding business and the fact that they buy properties is their strength. Even though it is not a very well laid out store, its customer connect is better than anyone else in the industry. D'Mart is a very smart operator and we have to recognise that. 
And does that mean a stiff competition for you? 
Big Bazaar is far bigger brand whereas D'Mart is a localised player. They have yet to emerge as a city player and reach a larger scale. However, this is not to say that we do not take note of what they are doing. They almost position themselves very close to Big Bazaar in terms of pricing. They are nimble footed. 
Do you see some kind of consolidation in the sector? 
Actually there are not many retailers for consolidation. Rather people are shutting shops. No two players operate with the same business model to facilitate any consolidation. For instance, More is a super market while we are a hyper market. Reliance Fresh does a lot of fruits and vegetables. 
Given a chance how differently would you run Reliance Fresh or a 'More'? 
    Everyone has its strength and learnings. I believe retail is all about the amount of money involved in setting up the business, how fast you turn around your business, how well you connect with the customer and how efficiently you learn and implement. I will experiment, learn from it, improve and then scale up unlike corporates who come out with a format and a model and then roll it all at once. The other difference is that we think our job is to create demand unlike the others who think supply will create demand. 
    supriya.verma@timesgroup.com 

 

 

Kishore Biyani MD ,Pantaloon Retail

 

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