While the deal gives Birla access to the most profitable chunk of the fashion retail business, the debt ridden Future Group can now get rid its burden over an expectedly short period. For Biyani, weighed down by Rs 5,800 crores debt, and with limited avenues to raise fresh equity from foreign investors, the deal brings immediate cash of Rs 800 crores in the BSE-listed flagship Pantaloon Retail (PRIL). It will also be able to transfer an equivalent Rs 800 crores of debt to the demerged entity, helping PRIL to cut debt to Rs 4,200 crores.

Explaining that Pantaloons and Aditya Birla have different reasons to get into the deal, Ankur Bisen, Associate Director-Retail, Technopak Advisors says, “It is a great deleveraging opportunity for evolution of Future Group. Though it started with Pantaloons, over the last 15 to 20 years, it has actually evolved as a retailer operating in various retail formats. Even though Pantaloons was probably the jewel in the crown, but it is to some extent a non-core activity for the Future Group. Realizing that they would like to grow as a retailer and not as an apparel brand owner, the Group must have gone ahead with this deal.” And goes on to add “If you look at the kind of debt pressure the Future Group has, it stands to gain in the short term with this deal.”

But experts feel, the deal goes more in favor of the AV Birla Group, since Biyani loses a large chunk of the high-margin, fast- growing fashion retail business. Aditya Birla Nuvo, which through its subsidiary Madura Fashion & Lifestyle, controls apparel brands such as Allen Solly, Louis Philippe, Van Heusen and Peter England, and the acquisition of majority stake in Pantaloon, will enable it to cater to customers at the lower segment in the value chain. With its bouquet of brands, Madura can not only attract the young it also gets to more than double the Group’s retail space from 1.6 million sq. ft. to 3.65 million sq. ft. And the combined entity’s turnover will go up by almost 80 per cent. Pantaloons’ Rs 1,700 crores turnover will add to Madura’s Rs 2,145 crores top line.

“The Aditya Birla group gains significant control over one of the largest modern large-format chains in the country. Since Madura Garments is also one of the largest branded suppliers in the market, a better integrated value-chain may provide it some margin advantage. However, it is likely to be also careful not to sour its position as a supplier to the other large format retailers through anti-competitive practices,” opines Devangshu Dutta, Chief Executive, Third Eyesight, a consulting organization for retail and consumer goods sector.

However, it would be interesting to see how competitors Shoppers Stop and Lifestyle react to this move. Further it would be also interesting to see whether the $35 billion (over Rs 180,000 crores) Aditya Birla Group, which has yet to stop losses in its food and grocery chain ‘More’, now sell it off to a potentially more viable food and grocery chain, in the same manner as Biyani.

(This story was published in Fashion United.)

Roudra Bhattacharya, Priyanka Pani, The Hindu Businessline

Mumbai, 9 May, 2012

What really went wrong with the way Reebok was run? According to a top North India-based distributor, the franchisee model running for the last few years was flawed.

“Some stores were picked on very high rental, so the sales were lower than the cost of running the outlet,” says a distributor, who preferred anonymity.

Reebok’s contract with the franchisees worked on a minimum guarantee (MG) basis, which meant that to encourage network expansion, a certain income was guaranteed to each outlet, regardless of sales.

However, this model had the sorry effect of the franchisees getting lazy as they knew that a certain revenue was guaranteed, sources in the distribution chain say.

The more profitable stores ended up cross-subsidising the larger number of loss-making outlets.

As a result of the minimum guarantee deal, the company still has to pay these franchisees dues in crores of rupees nationwide, which Reebok was holding back due to under performance. “Since the last year, the management was trying to change this business model by taking back the MG deal from loss-making outlets, or asking them to close for inability to meet targets. Unfortunately, the accumulated losses of the outlets had become too large, and the European HQ had to take note,” the distributor said.

Last week, Adidas AG had said that commercial irregularities at Reebok brand in India had led to a pre-tax hit of Rs 870 crore, while a restructuring would cost a further Rs 488 crore this year.

The Group had said that a third of the 1,000 Reebok outlets in India would likely be shut, while reports have additionally claimed that a further 200 Adidas outlets may also face the same fate.

EXPANSION SPREE

A franchisee owner invests anywhere between Rs 40 lakh and Rs 1 crore, depending on the value of the real estate. Noida itself has five Reebok outlets, apart from stores in two malls. In comparison, a shopping area such as New Delhi’s Connaught Place has three outlets within a distance of half a kilometre from each other.

Mr Devangshu Dutta, CEO, Third Eyesight, a retail consultant firm, says most global brands went on an expansion spree during 2004-08.

Several brands were quite optimistic of the Indian growth story and went on to open stores at places they shouldn’t have, he adds.

However, from 2009 onwards several of the stores had started either resizing, closing down or stalling expansion. “Most of the expansion was done keeping in mind the competition in the Indian market and not the demand,” Mr Dutta said.

The Indian market for sports footwear is still largely dominated by unorganised players.

“Franchisees in India are not retailers and know little about retail strategies; they want immediate return on investments and when they don’t get it, they try to cut costs, inventory, working capital and also don’t invest in manpower. This impacts the brand,” he said.

NOTHING OFFICIAL

Five Reebok store owners Business Line spoke to around the NCR said that the company is yet to communicate to them officially.

However, the understanding is that the stores operating as ‘factory outlets’ and offering year-long discounts are expected to be closed first.

These stores, which generally sell older stock (from previous seasons), are believed to be leading to a “brand dilution” of Reebok.

“Reebok is positioned as a premium brand, and these stores are affecting the business of the bigger stores which pay high rentals for operating out of the top shopping arcades.

As per our contract, the company is expected to take care of any losses we suffer if our stores close,” said a Reebok store owner in Noida.

Vishal Krishna, Businessworld

Bangalore, 5 May, 2012

It is not just a marriage of convenience; there could be love involved, too. Aditya Birla Nuvo (ABN), with annual revenues of $4 billion, a mini-conglomerate within the $35-billion Aditya Birla Group, has acquired a portion of Pantaloon Retail India’s (PRIL) lifestyle business.

Eighty-six Pantaloon fashion retail stores will form part of a new entity, controlled by ABN, which will be automatically listed on the BSE and the NSE. A Future Group official says that ABN has acquired a minority stake by subscribing to Rs 800 crore worth of convertible debentures, which will be converted into equity when the new entity is formed. ABN will make an open offer to PRIL’s shareholders; ABN will eventually have 50.1 per cent stake in the new firm.

ABN has also paid another Rs 800 crore to service the debt of PRIL. Both groups have yet to decide the swap ratio (JM Financial acted as advisors to the deal) that will determine the shareholding pattern in the new entity. The word on the street is that PRIL will own 25 per cent in the new entity and will manage the operations of the 86 stores whose revenue is expected to reach Rs 1,700 crore for the financial year ending 30 June 2012.

For the Future Group, the happy marriage means that Rs 1,600 crore out of the Rs 5,256-crore debt will be wiped off PRIL’s balance sheet, giving Future Group chairman Kishore Biyani a breather. “This is the first of the many steps to reduce the debt of the Future Group,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy.

But is the union good for ABN, too? ABN’s business generates $4 billion in revenue, but its lifestyle business makes only $400 million. The new entity should change that for the better. ABN’s Madura Fashion is the largest premium-branded apparel player in India, with brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England as part of its stable, and retails through 1,082 exclusive brand outlets, apart from being sold in more than 1,250 departmental stores and multi-brand outlets.

ABN has a distributorship tie-up with leading brand Esprit and it retails international brands under ‘The Collective’, a luxury store. Access to PRIL’s network will double ABN’s revenues and make it the single largest chain in India. The combined revenue of rivals Shoppers Stop (50 stores) and Lifestyle (40 stores) will be about that of the new ABN/Pantaloon entity.

The buyout will give ABN access to markets where it has no presence: tier-II and tier-III towns, where the future exponential growth of the retail sector is expected to come from. So why did PRIL sell a stake in a venture that was highly profitable for the Future Group? “The rising debt levels of Pantaloon have been affecting the growth of the group,” says D.K. Aggarwal, CMD of SMC Investments and Advisors. “They have been paying about 60 per cent of their revenues as interest costs.”

Other analysts call this a clever move by ‘Mr Retail’. PRIL’s Rakesh Biyani and Kailash Bhatia will continue to run operations; a “Fashion Council” with the best talent from Madura Fashion and Future Group will advise the new firm on leveraging its strengths. And with the financial muscle of Aditya Birla Group behind him, Kishore Biyani’s legacy remains intact.

(This story was published in Businessworld Issue Dated 14-05-2012)