The reorganization of Future Group

“We are always reorganizing", Biyani said at his office in Tardeo, south Mumbai, one of two that the company operates out of in the city. The other is in Vikhroli. “The consumer is constantly changing, we have to change too. We reorganize every three-four years."

But this reorganization has been under way for almost a decade.

The trademark of Biyani’s company is rapid, inorganic growth. In the last decade, Future Group has mutated considerably through a stream of acquisitions, sales and spin-offs. Year-on-year comparisons have become so difficult that most analysts tracking the group’s five listed entities have stopped coverage.

Consider the events of the last few months.

In May, Biyani announced he was taking fbb, the group’s mass fashion retail chain, to Oman, through a joint venture. In the same month the two arms of his furniture retail business, HomeTown and FabFurnish, were demerged into a separate entity, and he transferred ownership of Lee Cooper, one of Future Group’s biggest fashion brands, to a separate entity. Only a couple of months before this, Biyani had announced a joint venture with American organic food firm Hain Celestial that would sell vegetable chips and other snacks in India. Meanwhile, he has finally finished reorganizing his retail arm, Future Retail Ltd, after acquiring Sunil Mittal’s Bharti Retail and south Indian retail chain Heritage.

Despite Biyani’s attempts to downplay the constant business restructuring, the group is undergoing a major reorientation, from being primarily a retail business to a consumer goods company. “I’m a consumer goods company," he said. “I’m not a retailer anymore. Retail is the distribution part of my consumer business." Future Consumer Ltd already has close to 30 brands in food, beverage, home and personal care, all part of the group’s listed company.

While there is plenty of movement within the Future Group, there is little clarity on how Biyani’s mainstay retail business, Future Retail, will look. Analysts are waiting to see how Future Consumer manages to integrate with the group’s retail focus. In addition, while Biyani has said he wants to consolidate all his retail offerings under Future Retail, his apparel brands firm, Future Lifestyle and Fashion Ltd (FLFL), and owns and operates two apparel retail chains, Brand Factory and Central.

What will the Future Group of the future look like? Is the latest move one restructuring exercise too many? The jury is still out.

Rise of the small store

In 2012, Biyani sold Pantaloons, his first successful retail chain, to Aditya Birla Nuvo Ltd to defray some of the Rs5,800 crore debt the parent company had. Since then, Future Retail has changed beyond recognition through acquisitions, mergers and restructuring.

In 2016, Bharti Retail became part of the group. Bengaluru-based retail chain Heritage, previously owned by Andhra Pradesh chief minister N. Chandrababu Naidu, was added to the business in November 2016. Biyani spent nearly Rs800 crore on these acquisitions. The group now operates in seven retail formats: the large gourmet store chain Foodhall, smaller ones including BigBazaar and Easyday, along with the furniture and fashion store chains. Its largest retail brand is BigBazaar, with 235 stores in 124 cities covering 10.18 million square feet of retail space, as per data from the Future Retail annual report for fiscal year 2017 (FY17).

Now Biyani wants to focus on smaller stores.

“Our next round of growth will come from the small store," said Biyani. “We visualize it from a very different angle. We call it the Pados ki Dukaan, your neighbourhood store." The group’s small stores, Easyday, Heritage Fresh and Nilgiris, will cover most of India, under brand names known to those regions locally, he said.

“It will be like your Dubeyji," said Biyani. “You can get everything that you want. We want to open maybe 7-8-10,000 small stores." He believes it does not matter what name a small store operates under, as long as it is well-planned and functions smoothly.

After acquiring the Easyday chain of convenience stores, Biyani began merging his own small store format, KB Fair Price, with the rest of the chain. “Easyday stores, Heritage Fresh and Nilgiris will all be small stores," Biyani said. “We will touch 1,000 stores this year. That’s huge."

Biyani’s strategy is built squarely on his acquisitions from the past fiscal year. First was Heritage, then Nilgiris, another southern Indian grocery store chain. Finally came Easyday, with stores heavily concentrated in north India. He is clear he wants to concentrate on the small store format.

Biyani plans for these stores to operate on a subscription model. “It’s a membership programme," he said. “For every neighbourhood store we want to have 1,500 members, not more. We will serve these 1,500 members the way they want to be served. You tell me what you want and we will get it, at 10% less than market price."

“It will be more technology-driven than one can imagine", he said. Data analytics will help each store monitor consumer behaviour and manage inventory.

Retail analysts say investing in setting up a small store network in India will pay off in the long term, particularly in newer urban centres. “Organized retail is now growing at double-digits in India," said Pankaj Renjhen, managing director of retail services at real estate consultancy JLL India, in an interview. “With the introduction of hypermarkets, consumers are getting smarter. They are open to the idea of shopping in a better environment, and the market is set because consumption is growing fast in India as well. Now if retail chains move to the hub and spoke model (a pared-down network in which smaller centres are connected to large distribution stations), you take the experience of the big stores to the consumer’s doorstep."

While this may not replace the traditional kirana store for consumers everywhere, Renjhen said organized small stores like the one Biyani is setting up can work best in “new" urban areas, where mom-and-pop stores are not omnipresent. These include cities like Gurugram and Noida in the National Capital Region, and newly developed urban fringes of cities like Pune.

“The story is set for small format stores, especially in mature markets," said Renjhen. “In some cases, if mom-and-pop stores are able to compete and differentiate, they will (survive). In some cases, they can even do better, because they can align to their local market: they might be able to customize better because they know what sells best in that neighbourhood, or can give their customers a better experience."

One example of where kirana stores score over organized retail is that they are willing to make sales on small lines of credit to loyal, local customers. Biyani’s subscription model seems an attempt at emulating this.

Unfinished business

So where does Future Group’s iconic Big Bazaar, the large supermarket chain, fit in this new push? Biyani has not thought that aspect through.

“We will work that out," he said. “We’ll take our customers’ opinions into consideration, but not in the first phase (of reorganization). In the second phase (of reorganization), yes."

This does not mean the group will refrain from expanding. Biyani says he will open between 25 and 30 Big Bazaar stores every year. “It’s in a great position," he said. But Biyani is also shifting Big Bazaar’s positioning, moving from the “cheap and best" monthly-visit supermarket slot to a “lifestyle departmental store chain".

Big Bazaar’s closest rival also relies on this image of “cheap and best". D-Mart, the chain run by the recently listed Avenue Supermarts Ltd, now has a higher market capitalization than Future Retail. But Biyani doesn’t think much of the comparison. Hence the repositioning of Big Bazaar, from the go-to cheap supermarket to the aspirational all-American department store.

“The Indian market can take a lot of other models," he said. “D-Mart is a discount-led retail chain. That is a deep-discounting model. They have been very focused and very consistent. We are moving more towards a lifestyle, departmental store chain. We are a kind of a variety departmental value store." Biyani explains that one of his earliest inspirations was upmarket Manhattan drugstore and convenience store chain Duane Reade (a subsidiary of Walgreens Boots Alliance).

In truth, D-Mart does not offer discounts, but instead has an “Every Day Low Price" scheme that enables it to sell certain categories at a lower price than other vendors.

“I am happy where I am," Biyani said. “India doesn’t have a convenience store, India doesn’t have a neighbourhood store. India needs a lot of models."

Shares of Future Retail have soared as urban consumers spend more. Future Retail’s stock price rose 309.61% in calendar year 2017 till date. Analysts tracking the stock said the shares are in demand because the company was at the forefront of all the M&A (mergers and acquisitions) action in the grocery retail space.

Stocks of other group companies Future Consumer and FLFL also rose 199% and 162.9%, respectively, until September, primarily because of the overall rise in urban discretionary expenditure, as per analysts tracking the stocks.

Online experience

One of the models Biyani experimented with early is e-commerce. He set up BigBazaar.com in the mid-2000s, but it wound up quickly.

In April last year, he acquired online furniture retailer FabFurnish for Rs15-20 crore in cash. The investment complemented his furniture retail business HomeTown. The Economic Times (ET) reported in May last year that Biyani planned to spin both off into a merged entity. HomeTown is the largest retailer on FabFurnish.com. Just over a year later, Biyani is looking to exit both businesses, quitting specialty retail entirely.

When Mint spoke to Biyani in February, he said, “We are working on how to look at speciality retail outside our system. We might look at demerging it, we might look at selling it."

However, in April this year, Biyani demerged the business into a separate entity, Praxis Home Retail Pvt. Ltd, a little less than a year after buying FabFurnish.com from Rocket Internet for Rs20 crore.

Though he was an early proponent of e-commerce, Biyani is now seen as a physical retail business owner, someone who does not believe in e-commerce. He resents this, arguing that his considerations are purely practical.

“The cost of doing business is unsustainable," he said. “It’s not about e-commerce as a business. 20% cost of customer acquisition, 20% cost of delivery, 8% technology cost. You can’t sustain any business on this basis. Of course great enterprises have been created, but in the long term it’s the model that you build that works. We have also suffered a lot. You have to build a sustainable model."

Biyani now believes retailers should not have an e-commerce strategy at all. In an interview published by ET on 26 June, he said, “It is stupid to be in the online space…having burnt our fingers, we have decided to take a break of at least two years before even thinking remotely about online."

This from the father of modern Indian retail, at a time when the world’s largest retailer Wal-Mart Stores Inc. is investing heavily in its e-commerce operations to catch up with online retail giant Amazon.com Inc. Amazon, in turn, is investing in offline retail networks. In June this year, Amazon acquired American grocery chain Whole Foods for $13.7 billion in an all-cash deal. Wal-Mart is building a formidable online presence. It acquired online menswear retailer Bonobos for $310 million in June, along with other apparel e-companies like Moosejaw and ModCloth. It seems clear that Amazon and Wal-Mart are on a collision course.

Globally, online and offline retailers are rapidly converging in each other’s territories, as retail margins shrink for companies following both business models. Closer home, offline retailers including Tata group’s Trent Ltd and Godrej Group’s Godrej Nature’s Basket have acquired small online app-based retailers to set up their online sales operations as part of their “omnichannel" strategy. But Biyani is firm, saying his group will not invest in an omnichannel strategy for its physical stores for now.

The spectre of debt

Biyani started restructuring his company in 2012 because of the debt it had incurred. This debt has long been a dampener on his plans, but he says Future Group will be debt-free in the next four or five years. He declined to share details.

“We don’t have too much of debt in any case," he said. “You have seen Future Lifestyle and Fashion. We’re halving our debt in the next couple of months."

Future Lifestyle is a repository of all the apparel brands Biyani owns, formerly grouped under Pantaloons Retail Technologies Ltd. Now some of the group’s apparel retail chains are also on this company’s books, including Brand Factory and Central. fbb, the apparel fashion chain that Biyani is betting heavily on, is part of Future Retail.

In an analyst presentation for the December quarter of FY17, Future Lifestyle said it had a network of 380 stores over 5.5 million sq. ft in more than 90 cities in India. This included the Central and Brand Factory chains of apparel retail stores, as well as exclusive brand outlets.

In FY16, Future Lifestyle had debt worth Rs2,358.31 crore, with a debt-equity ratio of 1.45, as per the company’s latest annual report. But Biyani isn’t slowing down expansion plans. The overall debt of the group is falling, and Biyani says he will expand the company’s retail footprint with internal accruals alone. “We are financing through cash flows," he said. “We have developed a model that means we don’t need to worry about expansion."

That plans seems fairly ambitious, judging by the debt records of Future Group’s holding company.

In December 2010, Kishore Biyani took the first steps towards making ownership of the Future Group companies more transparent. He transferred his family holdings in the many group companies to a single holding entity called Future Corporate Resources Ltd (FCRL). For FY16, FCRL reported its net worth as Rs2,446.30 crore, in filings with the Registrar of Companies.

The company’s total debt for FY16 stood at Rs2,339.85 crore, a little less than its actual net worth, as per data from a private placement letter it circulated on 31 March 2017. This translates to a gross debt/equity ratio of 0.96. Debt has risen 17.2% year-on-year from FY15. In the last three fiscal years, gross debt/equity ratio has been between 0.6 and 0.96. The letter also noted that FCRL’s annual interest expenditure had risen a whopping 55% year-on-year in FY16, to Rs154.53 crore.

Credit rating agency Icra Ltd is the lead agency that rates debt issued by FCRL. As of 16 January this year, it had ratings for five debt instruments issued by the company, amounting to a total of Rs1,400 crores. All of them are rated BBB-, meaning they carry a “moderate degree of risk" of defaulting on outstanding obligations. The outlook on this rating is stable as per the January report. Each tranche of FCRL’s long-term loans has remained at a BBB- rating since June 2012.

Icra’s commentary on FCRL epitomizes the present situation at Future Group. In a report published in January 2017, Icra said the rating also takes into account the currently weak financial profile of the company “on account of high borrowing levels and consequently high interest costs. Further, the market value of FCRL’s listed investments, though improved in the current year, continues to remain lower than the book value, impacting the market value buffer, though the difference between the book and market value has currently narrowed since FY15 levels".

But Biyani is undaunted. Alongside the rapid Big Bazaar expansion, he wants to grow his fashion brands as well.

“I think Cover Story (a new fashion brand catering to younger women) has done phenomenally well," he said. “People are comparing our products to Zara and H&M, and rating them much higher. We will gradually increase the size of the stores." Currently, Cover Story stores are 1,000-1,200 sq. ft each. Foreign competitors—fast-fashion pioneers like Zara, H&M and Forever 21—typically operate much larger stores.

He is also planning another fast-fashion brand. “There will be a new brand," said Biyani. “It is currently on the drawing board. It will be done by the same team (that designed Cover Story)." He would not share more details.

Biyani also would not give details of the total investment he has planned for the fiscal year. But he says he will invest money across all his listed entities, retail, fashion and consumer. On 28 August, another of Biyani’s companies, Future Supply Chain Solutions Ltd, filed draft papers with the market regulator for an initial public offering. This is the group’s logistics arm, for which a majority of sales come from other Future Group companies. Mint reported in August this year that the issue will be worth nearly Rs700 crore, citing two people aware of the development who had requested anonymity.

Biyani ended FY17 by setting up two new wholly owned subsidiaries under Future Lifestyle: FLFL Lifestyle Brands Ltd and FLFL Business Services Ltd. Once the Competition Commission of India cleared the deal, Biyani completed the transfer of his largest brand, Lee Cooper, to another subsidiary, Future Speciality Retail Ltd. Despite this restructuring, Biyani’s other major fashion retailers, Central and Brand Factory, are still part of Future Lifestyle and Fashion, though it is Future Retail that is meant to be the repository of his retail formats.

Coming back on track

For the last six or seven years, equity brokerage firms had stopped tracking Future Group’s various listed companies because they were constantly changing shape, making year-on-year comparisons impossible. But with the establishment of Future Consumer and Future Retail, analysts are once again covering the group’s activity.

Morgan Stanley has initiated coverage of Future Retail. Yes Bank’s equities team is now covering Future Consumer, starting this fiscal year. The reports are generally hopeful. “De-merger of the retail infrastructure has transformed Future Retail (FRL) into an asset-light business," Morgan Stanley said in its first report, from March this year, on Future Retail.

Yes Bank began coverage of Future Consumer in March, anticipating that the business will grow partially by piggybacking on Future Retail’s anticipated growth. “FCL is expected to grow at a strong pace led by multiple drivers: expansion of FRL’s store count; increased penetration to such stores," the report said.

Analysts who formerly tracked these companies are also taking notice. “Overall disclosures (for brokerage reports) are going up, and we are seeing more stability, no reckless expansion, and he is exiting non-performing businesses," said Abneesh Roy, senior vice-president at Edelweiss Financial Services Ltd. Roy used to track Future Retail for Edelweiss. “Market cap is reflecting that. Earlier we didn’t see many examples of this (careful expansion). Biyani is focusing on inventory control."

Previously, Biyani’s hallmark was acquisition, which he would use to test a new business model. Now, Roy says, it looks like Biyani is being more cautious. “Most of his recent acquisitions have been at low or fair value," he said. “Earlier he was tying up with a lot of brands. Now he is acquiring his own, which gives him more economies of scale."

The pace of expansion

In an interview with Forbes Magazine in 2010, Biyani said that he would slow the company’s pace of restructuring. Two years later, he sold his flagship retail business Pantaloons to the Aditya Birla Group. the apparel chain that made him famous as a retailer. Yet, he then embarked on a hectic restructuring journey, focused on reducing debt and clubbing like businesses together.

Seven years on, Biyani says he has learnt from the heady days of trying anything and everything. “We are more careful than we used to be," said Biyani. “We think a lot before we do something now. We have a lot of advisers working with us. Earlier the advisers were…you sought their advice once in a while…you went there for half an hour, one hour. Now we sit with them, now we spend time with them." One of the advisers Biyani regularly consults is Milind Sarwate, former chief financial officer of Marico Ltd, who was officially brought on as an adviser to the group in October last year.

But some observers say Biyani has not changed his experimental ways. “Mr Biyani seems to have tried to implement every idea that came his way," said independent market analyst Ambareesh Baliga. “Having had the first-mover advantage in retail and with investors queuing up at obscene valuations, he did what most others before him did—he thought he had the magic wand and encashed the demand for his equity."

Baliga says Biyani’s dream run could well be flagging, as he continues to expand into non-essential businesses. “My unsolicited advice for Mr Biyani is stick to two major verticals, retail distribution and brands," he said. “Concentrate on food and daily essentials, and related. Exit Ezone, fbb, HomeTown, and expand Foodhall to other tier I and tier II cities."

Baliga compared Future Group to D-Mart, arguing that Biyani had been unable to find a single, consistent business model to stick to despite owning several attractive businesses.

Restructuring is often a big, bad word that businesses don’t want to be associated with. But Biyani is clear that without willingness to change, a business cannot move forward. “Who knows?" he said philosophically. “I am a strong believer that nothing is permanent in life. So who knows what will happen three of five years down the line?"