India's largest supermarket operator, Future Group, is having a
clearance sale: its financial service business and flagship clothing
brand are gone, and more deals are in the pipeline.
Six months after the government backtracked on plans to allow foreign
retail giants such as Wal-Mart Stores and Carrefour to form joint
ventures, cash-starved domestic chains are selling assets, shutting
stores, and scaling back expansion plans.
It seems improbable that retailers could be in such trouble in India.
They have the world's second-largest population, increasingly affluent
consumers, and limited competition.
But things are tough for supermarkets, a relatively new business sector
in India, with every major chain losing money. The economy has lost
momentum, compounding problems of high food inflation and low retail
prices, and expensive real estate.
Foreign partners would bring experience, expertise and funds, but many
in the industry do not expect a decision on foreign investment in
supermarkets before elections in 2014.
"These companies have realised there is no point standing still and
bleeding more, waiting for the government to act," said Debashish
Mukherjee, partner and vice-president with consultancy AT Kearney.
Alternative Funding
With foreign investment ruled out, many supermarkets, which account for
70% of organised retail in India, are looking to private equity
investors or hitting up their billionaire owners for more capital as
they continue to bleed.
"Foreign private equity firms are in talks with smaller businesses which
are less capital intensive. So this option is ruled out for the big
boys," said an investment banker who did not wish to be identified.
Last November, after years of delay, the prospect of a foreign partner
appeared tantalisingly close for the domestic chains. India said foreign
supermarket operators would be able to own up to 51% of a joint
venture.
Industry euphoria proved short-lived. Under pressure from ruling
coalition allies, the government backtracked in an embarrassing reversal
that has come to symbolise the inability of Prime Minister Manmohan
Singh's administration to enact reforms.
Indian traders and middlemen vehemently oppose allowing foreign chains
into a USD 450 billion retail industry where 90% of sales are made by
informal "kirana" stores, which are generally family run.
Proponents argue the infrastructure and investment that can be brought
by the likes of Wal-Mart would go far to ease crippling food inflation
and a high rate of food spoilage.
"We are going cautious with our expansion plans," said Mark Ashman,
chief executive of Hypercity, the hypermarket arm of Shoppers Stop ,
which, like many of its rivals, hopes to join forces with an overseas
retailer once the rules change.
"If foreign direct investment was allowed, the appetite for expansion for us would certainly be higher," he said.
A smaller future
Future Group, controlled by Kishore Biyani, known as the father of
Indian retail, recently sold control of its financial services arm
Future Capital to private equity firm Warburg Pincus.
Future , which sells groceries under the Big Bazaar and Food Bazaar
brands, announced the deal days after it sold a controlling stake in its
flagship clothing brand Pantaloon. The two deals will wipe about USD 1
billion in debt from its books.
"Our intention is to exit from non-core businesses and focus on core
retail business," a company spokesman said, adding Future Group aims to
be debt-free by the end of the fiscal year in March 2013.
"Two recent deals are not the last ones from us."
Future is now in talks to sell a stake in its food processing and
manufacturing business to Japan's Lawson Inc, Japan's No.2 convenience
store chain, a source with direct knowledge said, adding a deal would be
finalised soon.
Lawson spokesman Shin Ichikawa said the company was in talks with
several potential partners about entering India, but declined to name
them and said nothing had been decided.
Future Group also plans to exit its insurance joint venture with Italy's
Generali, although a possible deal is further off, said the source with
direct knowledge who declined to be identified.
Scaling down
As well as selling assets, Future Group, which operates more than 1,300
grocery stores covering 16.5 million square feet (1.5 million square
metres) across its different formats, is also scaling down growth plans.
The source said the group will only open 2 million square feet of retail
space this fiscal year, instead of a previously announced 2.5 million
square feet (230,000 square metres).
Future is not alone. Aditya Birla Retail has shut 50 of its More
supermarkets and is closing loss-making outlets in Mumbai, Delhi and
Pune to focus on hypermarkets, a company source said.
The company, part of the Birla conglomerate, has also sought another 3
billion to 4 billion rupees from controlling shareholder Kumar Mangalam
Birla, the source said.
Even mighty Reliance Industries , the conglomerate controlled by Mukesh
Ambani, India's richest man, has been unable to make money in retail
after six years in the business and 1,300 stores.
Still, it has no plans for a foreign partner and is pushing ahead with expansion of its supermarket chains.
"Food and grocery retailers have been suffering in most of the major
markets," said Devangshu Dutta, consultant with Third Eyesight.
"Many believed India to be insulated, but that's not the case."
