The dawn of modern retail is gradually heading towards the more mature days of bright sunlight. The sunrise sector is welcoming the retail companies to roll out their plans. Besides metros, the focus is on tier II and III cities where people are still euphoric about new fashions and trends. The money minting is no more concentrated in a few selected cities and the spreading of urbanisation is boosting up the overall growth of modern retail. The organised retail sector is growing at a rate of 30 per cent, and constitutes 5 per cent of the entire retail industry in India. The capital intensive industry requires investments upwards $100 billion over five years and FDI is one such facilitator that can actually pumps in the needed fresh air for retail to breathe easy. Funding takes the lion’s share of any business plan, and venture capitalists, PE funders and angel investors are the key drivers in this respect besides the more commonly accessed bank loans.
The Indian retail sector is an alluring option for the venture capitalists to invest in. But there’s a clause in it. Rajesh Sharma, Assistant Vice President of Brand Capital explains, “A PE investor is interested in profit. If you play on 2-3 per cent margin, the game becomes difficult. Say a company of Rs 5000 crore, making a profit of Rs 50 crore, will find hard to attract a PE investor, even if there is scalability and growth opportunity.” The clause itself has made some categories in retail favourites for PE funding. According to Sharma, the segment like consumer durables will hardly allure PE fund firms, since the margin is very less, whereas apparel and food retail, where margins are high, there is active interest of the PE funders.
Who is eligible?
The enterprise with sustainable growth is always desirable for funding from any external sources like PE funding or angel investment. Padmaja Ruparel, President, Indian Angel Network informs that her organisation is mostly investing in retail enablers. “We don’t see retail from the angle of store open and mall. We look at it with a lot of retail enablement. We look at lot of devices, retail analytics, software packages and supply chain managers that help retailers. We will invest in retail stores but more interested in retail enablers. Enables means like a retail handcart with a device installed at the top that beeps once recognising the product items, and instantly records the price”, she elaborates. Indian Angel Network works for start-ups and invests where the proposition is unique with differentiation and has a large market. Even if there is a competition, they see whether the company can sail through quicker and faster. Indian Angel Network also considers team a critical factor. “We evaluate the domain expertise, their experiences, we take reference checks, we interact on an ongoing basis with key management team”, she adds.
Sharma views that the basic parameters a PE funder looks at is - the promoter should have scalable plan in mind; the product and the brand have to be aspirational and appealing, so that the franchise should come forward to buy the product, since retail involves franchising too; and the last but not the least is the ability of the business to control the financial operations. Kishore Biyani’s Big Bazaar is a glowing example of growth and sustainability backed by well-planned financial strategy and adequate cash inflow because there’s a huge operational costs involved. The basic criterion of the promoter is his ability to manage the business financially year on year, since it’s a huge operational expense game. If the retailer wants external fund, the opportunity has to be sizable.
Revamping a dying organisation
There are some retail enterprises which had proven track records, impressive market positioning but for certain reasons had a downfall and glorious days became all about past achievements. Vishal Retail is one such example. Once this well-known retail chain is now a debt-ridden organisation, but still manages to attract the US-based PE funding firm, TPG Growth, for investment in the dying company. What logic actually plays here that exhibits a positive sign for the PE funder? Sharma explains, “From an investor’s perspective a private equity player wants to earn a certain amount of money. A dead player has the value, if the promoter has the right plan. For example, the brand Genteel has fizzled out over the years, may be for the lack of resources and modern tools to scale up the distribution, promotion to face the competition from other MNCs. In that case yes, we’re interested. In such case the brand owner became isolated from the market reality and didn’t integrate in the market too much, and failed to raise the fund. It has the brand value, and needs a player who can unlock the brand value.
In such cases, problems lie on the business front, ie, distribution and production problems, and financial and branding problems. We advise on these fronts. Actually, it can be a very good theme - reviving a business. Whatever business plans we receive are mostly on excel sheet or power point. But these businesses are on the ground and promoted by very strong people. If they take up modern tools they can write another success story. “ Though seed funding firms like Indian Angel Network do not invest in a dying enterprise or any big corporate houses which are in need of capital, Ruparel opines, “To invest in a dying organisation is a good opportunity, because they played out their proposition, they understood what they need to do. If now they understand where it has gone wrong and where the correction is required, it’s a bigger opportunity where you get an asset in a lower valuation. Down rounds are doable things. The entrepreneurial team is more amiable for mentoring since they’ve hit a road block.”
To attract funding there should be some substance in the business plan and product offerings. A great plan and attractive offerings can always unlock the coffers of financial institutes.
SL Date Type Buyer Target Size
1 January 2010 Buying equity shares Asia Bridge Fund Alok H&A, Rs 45 crore
2 March 2010 Buying equity shares IL&FS Investment Managers The Mobile Store Rs 100 crore
3 April 2010 Re-sale of equity shares TPG Growth Lilliput Rs 115 crore
4 June 2010 Buying equity shares Peepul Capital i-mint $ 30 million
5 June 2010 Buying equity shares Shapoorjee Chandabhoy Liverpool Retail Rs 40 crore
Finvest Pvt Ltd India Ltd
6 August 2010 Buying equity shares TLG Capital Re-feel Cartridge $ 5 million
Engineering Pvt Ltd
7 August 2010 Buying equity shares SAIF Partners Catmoss Retail Rs 100 crore
8 September 2010 Buying equity shares TPG Growth Vishal Retail Rs 100 crore
9 December 2010 Buying equity shares Sequoia Capital Fashion and You $ 8 Million
10 December 2010 Buying equity shares Concept Venture group Addict Juice Bars Rs 4 crore
(only for Bangalore outlets)
11 December 2010 Buying equity shares IL&FS Investment Managers Jyothy Fabricare Rs 100 crore
Services Limited
(JFSL)
12 December 2010 Buying equity shares TVS Shriram Growth Fund Om Pizzas And Rs 50 crore
Easts Private Ltd
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