Mumbai: Diversified Essar Group plans to bring in a new foreign partner in its mobile retailing business under The Mobile Store brand after a tie-up with British businessman Richard Branson’s Virgin Group came to an end in April.
While the earlier collaboration wasn’t an equity partnership, the new one is likely to be a strategic investment, once the Indian government paves the way for hiking the limit of foreign direct investment (FDI) allowed in multi-brand retail to 51%.
Alok Gupta, chief executive officer of Essar Retail, a newly created business vertical that overlooks the conglomerate’s oil, steel and mobile phone retailing operations, said the group will be keen to offer equity participation in The Mobile Store to a foreign company that can bring in best practices to improve efficiency.
Essar, with interests ranging from oil production to retailing mobile handsets, had roped in Virgin in 2007 to open stores selling cellular phones and associated accessories.
Virgin, which has major mobile phone retailing operations in the UK, was paid a fixed consideration for using the brand and utilizing its expertise on selling the product.
The arrangement ended on 30 April and wasn’t renewed.
“As we move forward, we believe there will be synergies with a foreign partner who brings in better processes...” Gupta said in an interview last week. “In a low-margin and high-volume business (like mobile phone retailing), it is all about unlocking value through efficiency.”
The prospective foreign partner should ideally bring processes-related intellectual property that can help in better inventory management, especially since the lifespan of mobile phones is very short, Gupta said.
The Mobile Store sells mobile phones and associated accessories of various brands through 900 stores in 200 towns. It has a 50% market share of organized retailing of mobile phones in India.
Multi-brand retailers like The Mobile Store are looking at prospective foreign partners since a committee of central government secretaries recently approved a proposal to allow FDI in multi-brand retail up to 51%.
The committee’s recommendation will be taken up next by the cabinet committee on economic affairs that will decide on the terms and conditions of the policy.
At present, 51% FDI is allowed only in single-brand retail, but up to 100% FDI is allowed in wholesale.
Ramesh Srinivas, executive director at consulting firm KPMG in India, said Indian retailers can learn a number of lessons from their overseas counterparts in areas where they may have gone wrong in the past.
“Some of these areas are getting the right format, location, and supply chain management,” Srinivas said. What benefits a global mobile phone retailer can bring to its Indian partner remains to be seen, according to Srinivas, as the Indian market has different dynamics.
A major portion of mobile phone buyers in India—the second largest market in the world—hail from semi-urban and rural areas, who opt for low-cost phones with basic functions.
“One of the benefits may lie in gaining leverage by buying in a larger bulk after joining hands and consolidating the procurement needs of the two partners,”Srinivas said.
As Essar aims to achieve a 20% year-on-year growth in revenue to $1.6 billion (Rs 7,120 crore) by the end of the current fiscal across its retail operations, the next phase of growth will be driven by an ecosystem of existing entrepreneurs.
The model that Essar Retail plans to follow is on the lines of Amul, the milk and milk products brand owned by the Gujarat Cooperative Milk Marketing Federation, Gupta said. The federation’s initiatives, driven by former chairman Verghese Kurien, are to empower milk producers by collectively marketing them.
Essar Retail aims to convert small steel retail shops into its own franchisees under the Hardware Depot brand.
The objective is to increase sales of products made with steel produced by Essar and using new designs provided by the conglomerate, while helping local retailers improve revenue by selling better quality goods.
Similarly, Essar is setting up kiosks selling mobile phones at local establishments like stationery shops and pharmacy stores.
“We will look to collaborate with those who have their own real estate and help improve their topline from existing customers,” Gupta said.
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