Lucrative as it maybe, retail in India is a difficult business to be in. With thin margins and high cost of operations, it needs promoters with deep pockets who can sustain losses in the medium-term to help the business grow to its full potential eventually, backed by volume.
When it comes to food and grocery retail, matters stand complicated further with the advent of e-commerce and well-funded players like BigBasket, Grofers and even Amazon disrupting the category by offering the convenience of digital shopping and home delivery.
As a result, the retail industry, which is estimated to be worth $1.1 trillion by 2020, is passing through a phase of consolidation, with fewer players becoming larger on the back of acquisitions. For instance, last year the Aditya Birla Group decided to sell More, its food and grocery retail chain of 575 stores across India to Samara Capital and Amazon for ₹4,200 crore. In October 2017, the Kishore Biyani-led Future Group acquired HyperCity for ₹655 crore from Shoppers Stop. Even before that, in 2015, the Delhi-based Bharti group, promoters of India’s third largest telco, Airtel, decided to exit the retail business by selling its retail chain, Easyday to the Kishore Biyani-led Future Group.
The latest news of consolidation in this space broke on Friday, May 17 when Spencer’s Retail, the retail arm of the Kolkata-based RP-Sanjiv Goenka Group said that it had agreed to acquire Nature’s Basket from Godrej Industries for an all-cash consideration of ₹300 crore. Though the deal may not be that big, it is significant as it further establishes a move on the part of some diversified business houses in the country who are deciding to exit their retail ventures altogether and focus on other verticals that they consider core.
Operating since 2005, Nature’s Basket is a neighbourhood convenience store format grocery retailer which sells products ranging from fresh fruits and vegetables, fish and meat, artisanal breads, FMCG and staples. The company, which reported a turnover of ₹338 crore in FY2018-19 has never managed to report a profit, and was a small part of the $4.1 billion Godrej group, which has interests ranging from consumer goods to real estate and agro-products.
Despite being a relatively small player, Nature’s Basket enjoys a high share of wallet with affluent customers in premium neighbourhoods like Bandra and Worli in Mumbai, Koregaon Park in Pune, and Banjara Hills in Hyderabad. Its selection of organic vegetables and gourmet food from around the world has helped the brand create a niche for itself.
“The retail industry is consolidating and to flourish in this environment, scale has become increasingly important. Spencer’s Retail is very keen to further strengthen the brand and strongly accelerate the growth of the business,” said Tanya Dubash, executive director and chief brand officer of the Godrej Group. Dubash, who is Godrej group chairman Adi Godrej’s daughter was personally involved in nurturing and growing Nature’s Basket over the years.
While some business houses like Godrej are exiting the retail business altogether, the wave of consolidation in the industry is presenting an opportunity to others like the RP-Sanjiv Goenka group to grow their footprint in this space.
“Nature’s Basket will make Spencer’s a truly national player, giving it access to the West of India through its 36 stores in Mumbai, Pune and Bengaluru. These stores are located in prime residential locations, have a high sales throughput per sq. ft, and will add ₹368 crore of topline to Spencer’s portfolio,” said Shashwat Goenka, sector head – retail and FMCG, RP Sanjiv Goenka Group and Sanjiv Goenka’s son.
Goenka further added that there were synergies that existed between the two entities waiting to be explored, including a strong portfolio of private label brands owned by Nature’s Basket, which could get larger shelf space through Spencer’s comparatively larger format stores.
A few years back Nature’s Basket also decided to rationalise the number of stores is operated and exited markets like Delhi-NCR altogether. Instead, it decided to focus on e-commerce in a big way and this has given Nature’s Basket a strong online platform that Goenka expect will fit well with Spencer’s own omni-channel approach.
Explaining the potential rationale behind the Spencer’s-Nature’s Basket transaction, Abneesh Roy, retail sector analyst at Edelweiss Securities says that high-end grocery in India is “niche, tough and loss-making” and consolidation in retail continues in favour of core retailers.
The $3.7 billion RP-Sanjiv Goenka group, which has interests ranging from power to carbon black production and information technology, has been focusing on reducing dependence on regulated businesses and expanding deeper into non-regulated businesses like retail, FMCG and IT over the last few years.
The group entered the FMCG market with the launch of its Too Yumm! Brand of low-calorie snacks and packaged consumer goods is already a ₹500 crore business for the business house. The RP-Sanjiv Goenka Group is actively looking at getting into newer areas within FMCG, organically and through acquisitions.
Its experience with its retail venture, however, has seen its fair share of challenges in the past. Spencer’s was one of the first players to bring large format retail to India but a rapid expansion strategy led to losses. After taking over as head of the retail business, Goenka scaled down operations at Spencer’s by shuttering a number of profitable stores, exiting markets like West India and scaling down the size of its hypermarkets. In FY2018-19, Spencer’s swung into the black by reporting a net profit of ₹9.73 crore on an operating revenue of ₹2,187 crore. The company’s gross margin expanded to 21.24% from 19.7% in FY2017-18. For Spencer’s, which operates 156 stores across the country, the acquisition of Nature’s Basket presents an opportunity to re-enter the West India market, which it had earlier quit.
The retail market is likely to witness further disruption when Reliance Industries Ltd (RIL) commercially launches its ‘new commerce’ model. A blend of online and offline retail, the venture is likely to combine Jio’s expansive broadband wireless network with Reliance Retail’s own network of stores and add millions of small mom-and-pop stores across India on its digital platform.
Jio’s aggressive entry into the telecom market led by low-cost data led to a consolidation in the space with several telcos either shutting shop or merging with others. It is now a three-way battle between Airtel, Vodafone-Idea and itself. Similarly, the RIL’s massive foray into omni-channel retail is likely to intensify consolidation in this industry as well. And it appears that serious retailers like Spencer’s are looking to add whatever muscle they can through acquisitions before the onslaught begins.