RPG's Goenka: Scripting a new story

Towards the end of the first week of May this year, about half-a-dozen honchos of RPG Enterprises' retail businesses flew into Kolkata for a day-long review. Presided over by the group's Vice Chairman, Sanjiv Goenka, at his utility CESC's (Calcutta Electric Supply Company) headquarters in the city, the meeting was more than just a periodic going-over-the-numbers ritual. Rather, the men gathered around the large rectangular teak table in CESC's boardroom on the fifth floor had the onerous task of midwifing a brand new strategy for RPG's Rs 600-crore retail empire (see RPG's Retail Empire). The meeting progressed just as planned, but Goenka possibly wasn't expecting it to end the way it did. Raghu Pillai, an RPG veteran of 27 years and head of all its retail ventures, put in his papers. That was the second time Pillai, who's considering an offer from Pantaloon's Kishore Biyani and another from an American retail-focussed fund, had done so, but this time Goenka did not try to stop him. Announcing an interim retail sector head in CESC's Managing Director Sumantra Banerjee, Goenka proceeded to go on his three-week annual vacation abroad.

Clearly, as far as Goenka is concerned, it's business as usual in his retail empire. But is it? After nearly 10 long years of partnership with Dairy Farm International (DFI), part of the Hong Kong-based Jardine Matheson, RPG has decided to call it quits. Under a scheme of separation, RPG will get to keep 49 of its 93 FoodWorld stores, giving away to DFI 27 stores in Bangalore (minus the flagship store in the city), 16 in Hyderabad and one in Mysore. DFI gets to keep the FoodWorld brand, besides getting control of the 30 stores that make up the Rs 45-crore-a-year-in-sales Health & Glow business, owned by RPG Guardian.

Will RPG and DFI be better off going their separate ways than staying together? It's hard to say, but the Indian partner seems to be on a stronger footing compared to DFI. To start with, DFI has to negotiate a big regulatory hurdle. Foreign direct investment in retail is still not allowed (approvals are case by case), and if DFI has to continue doing business, it must find an Indian collaborator to pick up RPG's 51 per cent stake in FoodWorld. To avoid DFI having to reapply for a retail licence is possibly one reason why RPG agreed to let the foreign partner keep the FoodWorld brand and the corporate entity. A formal announcement of the split was made by DFI and RPG on May 12, where it said that the separation would be completed in the third quarter of 2005.

The $5.1-billion (Rs 22,440-crore) DFI (which refused to comment for this story except to say that it had "no intention to exit the Indian market and we look forward to expanding our retail business in India in the future") is said to be talking to some Indian players. The Tatas are rumoured to be one, although sources in the know deny that's the case. At any rate, DSP Merrill Lynch has been given the mandate to find a local partner. DFI needs one at the earliest, simply because that's holding up RPG's own plans of restructuring its retail business. It would, however, be interesting to see what kind of a partner DFI picks: If it picks one that's merely a financial investor, it runs the risk of losing out on know-how of the local market (regulatory and supply chain issues are the big concerns). On the other hand, if it opts for one with experience in retail, it once again risks becoming a second fiddle in the joint venture. DFI's best hope, then, is the government allowing foreign investment in retail.

Going Solo

Meanwhile, Goenka is itching to merge all of his retail businesses under the Spencer's umbrella, and move the headquarters from Chennai to Kolkata. There will be three different formats: Hypermarkets (called so because with an average store size of 20,000 square feet and 25,000 to 30,000 SKUs, or stock keeping units, ranging from foods to consumer durables, these are three to four times bigger than the typical supermarket) of the Spencer's variety; modern supermarkets in the 8,000-15,000 sq. ft. range, and finally the existing FoodWorld stores, which will be rechristened Spencer's. The back-end for all the three formats will be centralised. MusicWorld will continue to operate as a separate division with its own operating head. By 2008, Goenka wants Spencer's to be spread over 3.5 million sq. ft., with 28 hypermarkets and 160 supermarkets, and revenues of Rs 2,600 crore. "We've learnt the ropes, and now we are going to go all out and dominate the Indian homes in five to 10 years," says Goenka, who's already found a coo for the hypermarket business in Jeetu Mehta of Hindustan Lever, but is yet to get a replacement for Pillai.

After 27 years in RPG, Raghu Pillai (above), President & CEO of its retail business, is on his way out and is considering, among others, an offer from rival Pantaloon's Kishore Biyani

One would hope that Spencer's has learnt its lessons by now. A pioneer in the supermarket space, RPG grew rapidly (and wisely) in South India, expanding its presence in states like Tamil Nadu, where the first store was set up in Chennai in 1996, Karnataka, Andhra Pradesh and Kerala. But FoodWorld started suffering four years ago when RPG got into the hypermarket business with Spencer's (it was then called Giant). DFI, which had an agreement with the Indian partner for equal ownership in all their new retail ventures, wanted an equal stake in Spencer's. RPG was willing to give it too, except that when it applied for an approval, the government said that as a joint venture, it could only be a b2b, cash-n-carry retailer in Chennai.

When the approval was subsequently withdrawn, RPG went ahead and opened the first Spencer's hypermarket in Hyderabad in June 2001 as a fully-owned company. And when the format performed better than expected, RPG started focussing more on it. Relationship between the two partners became strained and the money that FoodWorld needed to expand and, thus, turn profitable, wasn't coming. In addition to that, FoodWorld made a disastrous foray into Pune in 1999, and ended up shutting several stores it opened, losing Rs 2-odd crore in the process. The stalemate allowed Pantaloon's Biyani to usurp the #1 slot (see The Quick Latecomer). Admits Pillai: "Going to Pune was a big mistake... there were no synergies. Instead if we had gone to Kerala then, it would have been a different story."

Now, Goenka says, Spencer's will adopt a "cluster approach"-that is, enter a market and quickly put in place a mix of hypermarkets and supermarkets. For example, in the Delhi region (including Gurgaon-Noida-Ghaziabad-Faridabad), Spencer's is slated to open eight stores over the next 15 months alone. The first one should open in Ghaziabad by early July, followed by Faridabad a week later, and Gurgaon, by year end. Says Goenka: "I want Spencer's to sell everything the housewife or the working couple needs every day. Good stuff, but at a reasonable price."

THE QUICK LATECOMER Meet Spencer's bete noire.

Pantaloon's Biyani: Sees no rivalry Talk to top executives at Spencer's and you can't help but sense how much they love to hate Pantaloon's Kishore Biyani. "He's been planting stories against us," complains one. That's funny because Pantaloon's hypermarket, Big Bazaar, or supermarket Food Bazaar don't yet compete head-to-head with either FoodWorld or Spencer's in any significant way. For instance, Biyani has built up a strong presence in western India, whereas RPG is strong in the south. In Delhi and Kolkata, Biyani has no competition from RPG. But what may have got RPG's goat is the fact that Biyani has come in from nowhere to usurp Sanjiv Goenka's status as the rajah of retail. In the last five years, he's grown his revenues eight times to Rs 1,100 crore (expected for 2004-05). Unlike, Food- World or Spencer's, his retail businesses make net profits. By the time Goenka reaches his Rs 2,600-crore target in 2008, Biyani would be more than $1-billion (Rs 4,400-crore) big. What does Biyani himself have to say about the rivalry? "How can there be any rivalry when we don't compete directly?" he asks. If RPG's Raghu Pillai ends up joining Pantaloon, Goenka may have one more reason to gnash his teeth at Biyani.

Despite Goenka's enthusiasm, there are two issues that he needs to resolve. One is the issue of money and the other is, focus. To fund his expansion plans, Goenka will need, by his own estimates, Rs 422 crore. He says he's already got Rs 50 crore and expects some money to come from DFI following the restructuring ("it will be much less than Rs 50 crore", he says). For the rest of the money, Goenka will need to either rope in a private equity investor or make an initial public offer (IPO).

The latter seems to be a more attractive option for RPG, given that the secondary market is head over heels in love with the retail story. Pantaloon Retail is trading at about 65 times its earnings, and Tata's Trent at 45, and the Shoppers' Stop IPO sold out within a few hours of its opening. But timing is of essence in the IPO market, and Spencer's may take until mid-2006. As for private equity, despite the boom, valuation will be an issue. Besides, a venture capitalist would want the business to become much more productive than it is currently.

That's where the focus bit comes in. In the past, FoodWorld has experimented with product mix in its stores and that hasn't always worked. Take the case of its flagship store on Bangalore's M.G. Road. Although the store is highly profitable, footfalls are beginning to drop. In a bid to make way for more fresh produce and in-store brands, the store cut down on branded products. Deprived of choice, at least some customers seem to have abandoned the store in favour of other local supermarkets (FabMall and Central opened recently just down the road from FoodWorld). But Pillai denies that's the case. "Same-store sales growth has been 7 to 8 per cent," he says.

The fact remains that retail, even organised retail, is a fragmented industry. Every region has local competitors (Vittan and Nilgiri's in Chennai, Margin Free in Kerala, Trinetra in Andhra), besides which RPG will have to contend with Dairy Farm in Hyderabad and Bangalore. Then, bigger players are looking at hypermarkets. Among them are the Rahejas of Shoppers' Stop (Rainbow as a hypermarket brand is being talked about) and the Tatas, whose first Star India Bazaar hypermarket is already up and running in Ahmedabad. Says R. Subramanian, Managing Director, Subhiksha Trading Services: "Value is the most important piece of the retail equation." Adds Harminder Sahani, a consultant at KSA Technopak, a retail consultancy: "Hypermarkets will be the model of choice going forward, simply because in retail the name of the game is scale."

Making Spencer's profitable will be Goenka's Job One. If he fails this time around, he won't have a Dairy Farm to pin the blame on.