One hundred and twenty million Indians know him. They have walked into at least one of his 334 stores in the past year. The man — Kishore Biyani — is India’s largest retailer and, perhaps, the most ambitious. Exactly 10 years after he opened his first store, Biyani has built an empire that spans 50 different types of stores occupying five million sq. ft of realty in 40 cities.
Every 30 seconds — the time you have spent reading the first paragraph — consumers buy products worth almost Rs 30,000 from him. His stores cut bills worth Rs 36 lakh every hour, over Rs 8 crore a day, and over Rs 250 crore a month. That means Rs 3,000 crore in revenues this financial year.
These are just two reasons why Pantaloon Retail’s market capitalisation has zoomed in the past five years — from Rs 100 crore to over Rs 5,600 crore. But in the next five years, Biyani, along with his partner Sameer Sain (formerly a Goldman Sachs International managing director in Europe, more on him later), want to build another, completely new business. They want to give loans to consumers who buy stuff at Pantaloon’s stores. That way, they hope to make money both ways — on the goods sold and on the money lent to consumers who buy them. So far, Biyani has peddled shopping carts full of groceries, garments and other goodies. Now, Sain wants to hawk credit cards, consumption loans, personal loans, insurance, mutual funds, car loans, home loans and every conceivable financial product. “Retail and capital has to converge. We have to give people the capacity to consume,” says Biyani.
Sain is setting up 400 financial supermarkets — branded Future Money — in all Pantaloon Retail’s outlets such as Big Bazaar (a hypermarket chain) and Central (a chain of malls). That is a proven profitable model globally — the UK’s largest supermarket chain Tesco gives credit to five million customers and makes about £130 million (Rs 1,079 crore) in net profit (Tesco Personal Finance is a 50:50 joint venture with the Royal Bank of Scotland.) Retailer biggie Sears’ US credit portfolio of about $28.4 billion (Rs 1,16,440 crore) earned a pre-tax profit of $1.5 billion (Rs 6,150 crore) in 2004. And that is exactly how Biyani and Sain are planning to shake up the Indian consumer lending market.
About 120 of the Future Money outlets will be almost as big as a full-fledged branch of a bank. That leads to the question: Will Biyani and Sain set up a bank some day? “Every retailer would love to have a bank... but it is not so easy,” says Biyani. In private, though, sources close to the group say that they will make their first move once banking regulations are freed up in a few years. But that is only one part of the big plan. Biyani and Sain are also moving into the money management business. They are already managing over Rs 4,100 crore ($1 billion). This includes a private equity fund, two real estate funds and a fund that will set up hotels. The duo raised their first billion from investors like hedge fund Tiger and Ochziff, investment bank Goldman Sachs and Lehman Brothers, and high net-worth individuals such as Bernard Arnault, the owner of celebrated luxury brands such as Louis Vuitton and Christian Dior.
In the next 12 months, Sain hopes to raise the second billion. In five years, he expects to have $5 billion (Rs 20,500 crore) under management. That could include a hedge fund, an urban infrastructure fund, a logistics fund, etc., he says.All these businesses (except insurance, for regulatory reasons) are housed in a company called Future Capital — Pantaloon Retail holds 74 per cent of its equity; CEO and managing director Sain and a few other employees and investors hold the balance. Sain believes that in five years, Future Capital could earn more profits and be more valuable than Biyani’s sprawling retail empire. “Can the child (Future Capital) become bigger than its parent (Pantaloon Retail) in terms of market capitalisation?” asks Biyani. No sooner has he said this than he admits, “Sometimes, I think it could.”
A large US-based strategic investor is reportedly in talks with Future Capital to pick up a 10 per cent equity stake in the company. The deal, if it comes through, could peg Future Capital’s valuation at over Rs 1,000 crore. “The idea is quite brilliant,” declares Mumbai-based Raman Mangalorkar, the Asia head of Consumer Industries and Retail Practice at consulting firm AT Kearney. “Globally, the credit portfolio of retailers account for a substantial portion of their valuations,” he adds. In his earlier stint with AT Kearney, US, Mangalorkar had worked extensively with retailers.
In 2003, Sears, a chain of department stores, sold its US credit card business to Citigroup for $3.4 billion (Rs 15,500 crore then). Later, in 2005, its Canadian credit card business was sold to JPMorgan Chase for $2.2 billion (Rs 9,900 crore then). Similarly, the UK-based Marks & Spencer sold its financial services business to HSBC for £762 million (Rs 6,400 crore then) in 2004. “Biyani has the opportunity to build a similar portfolio and, perhaps, monetise it at a later date,” adds Mangalorkar. But already, there are some rumbles in India’s financial system. Banks are agitated. “Growth of bank branches is being regulated by the Reserve Bank. But non-banking finance companies like Future Capital have no such restrictions. They could even set up 400 branches overnight,” says the retail head of a bank on the condition of anonymity. “Biyani has access to customers. But does he have the ability to manage credit? There is more to lending than just finding borrowers,” he adds.
Others point to the clout that a retailer like Pantaloon could wield if it controls the consumer’s borrowings too. Company executives say that 30-40 per cent of purchases at the stores are made through cards. That may account for almost 1-2 per cent of India’s total credit card billing of about Rs 25,000 crore. Interestingly, in March, Wal-Mart, the world’s largest retailer, withdrew its application to set up a bank in the US, though it continues to offer credit services to its consumers globally. “Wal-Mart is a different story,” says Biyani. “It has a different agenda. It wants to own and control everything. We don’t have those issues,” he argues. But it is clear that he and Sain have plans to set up a bank some day.
But as Sain builds Future Capital, he will not have one key ingredient that Pantaloon Retail had — Biyani himself. The feisty entrepreneur built the retail operations with a ‘hands on’ management style: store by store. But Biyani is not playing any role in the day-to-day management of Future Capital. “We brainstorm a lot. We argue a lot. But Sameer runs the business,” says Biyani. Proof of that is evident at Future Capital’s headquarters in Peninsula Corporate Park, Mumbai Biyani does not even have a full-fledged office there. He has full confidence in Sain. The billion that Sain manages now or the $5 billion (Rs 20,500 crore) he may manage by 2012 is still no comparison to the $30 billion (Rs 1,23,000 crore) that he was partly responsible for in his earlier stint at Goldman Sachs. At the I-bank, he was the head of special investments and institutional wealth management for Europe, Middle East and Africa.
Biyani has also known Sameer for a long time. Two decades ago, Sameer’s father Sushil Sain had mentored Biyani during his formative years. Biyani was just 25 then. In 1986, Sushil, Biyani and another friend invested Rs 3 lakh each in a company called Dhruv Synthetics in Tarapur, near Mumbai. But it was shut down soon due to labour unrest. But in 1987, Biyani and Sushil co-founded Pantaloon with just less than 10 employees. Sameer was one of them. Another was a tailor master who would stitch the trousers in a small, spartan gaala (small store or warehouse) in Andheri. “Biyani and I would fold the trousers, draw up the challans, and take a taxi to deliver them to stores in Mumbai,” recalls Sameer.
Almost two decades later, the duo conceived Future Capital in the back seat of a Honda Accord in November 2005. They were driving past Mumbai’s Breach Candy Hospital when different pieces of the big idea fell into place, recalls Biyani. A few weeks before that, they had decided to float a private equity fund (Biyani had already floated his first real estate fund). In the car, they decided to get into credit cards and retail lending, and, eventually, a bank perhaps.
Seventeen months later, Future Capital bears the unmistakable imprint of Sameer Sain. Several of his old Goldman Sachs connections are investors in Future Capital’s many funds. The premier investment bank has also reportedly invested about $60 million (Rs 246 crore) into Indivision, Future Capital’s private equity fund. Some of his former colleagues at the bank — Atul Kapoor (formerly a managing director with Goldman Sachs International) and Roopa Purushotaman (former Goldman Sachs economist who co-authored the iconic BRIC report) — now hold key roles in Future Capital. Kapoor leads Indivision and Purushotaman heads Future Insights, an in-house think-tank.
The first Future Money outlet was opened in Noida, near Delhi on 6 April. It is a 300 sq.ft. bay, crouched in the middle of a sprawling 125,000 sq. ft. home materials store called HomeTown. Its size belies its importance. HomeTown offers products such as tiles, sanitary ware, bathroom fittings, paints, furniture, etc. Future Money hopes to finance the purchases made here. Sixteen days after the store opened, Rakesh Makkar, CEO, Future Money, was pleased as punch. Customers walking into the store made over 100 loan applications amounting to Rs 25 lakh. “This is a record of sorts,” he exclaims. In a new location, a bank branch would receive only 40 loan applications in a month. He knows his numbers. Before joining the Future Group, he was the risk director at Citigroup and the head of retail business for First India Credit, Temasek’s Indian financial services wing.
The plan is to roll out Future Money across many Pantaloon stores. Future Money will offer credit to fund anything that is sold in any Pantaloon store: you could get loans to finance your grocery purchases at Big Bazaar, your garment buys in Pantaloon, or the laptop you pick up at eZone. About 30-40 Future Money outlets will open in the next four months; by the end of the year, there could be 150. “Pantaloon has been opening more formats and stores because it wants a larger share of the consumer’s wallet. But Future Money wants to be the consumer’s wallet,” says Makkar. Future Money’s first batch of customers has applied for loans to buy products like granite, bathroom tiles, etc. Such products have never been financed in India. “Availability of credit spurs consumption,” says AT Kearney’s Mangalorkar. “If credit is offered at the point of sale, impulse purchases will increase,” adds Roopam Asthana, CEO, SBI Cards & Payment Services in a telephonic chat from Gurgaon.
Later, Future Money will also offer credit cards and personal loans, and eventually an entire gamut of financial products including life and general insurance products from Future Generali (the 74:26 joint venture between Pantaloon and Generali, one of the world’s largest insurance firms). However, till Future Money becomes a bank, its cost of funds will be about 200 basis points higher. But that could be offset by lower distribution costs. Banks spend about 5-8 per cent of the loan amount in distribution. Since prospective borrowers will be walking into Pantaloon stores, Future Money need not spend as much. “I don’t have customers trooping into my office. But Indian retailers have a lot of footfalls,” says a senior banker based in Mumbai.
With 200 million footfalls expected next year, Future Money expects to ramp up lending. Already, there is some evidence of Pantaloon’s ability to sell financial products in its stores. Big Bazaar, Pantaloon’s hypermarket, offers co-branded credit cards along with ICICI Bank. In the past 24 months, 700,000 cards have been issued to Big Bazaar shoppers. The number may cross one million in the next six months. Compare that with SBI Cards, a partnership between the State Bank of India and GE Money. It took SBI Cards 48 months to issue its first million cards — even though it had the benefit of using about 2,000 of SBI’s 4,500 branches as a distribution channel. (It has since added another three million cards in the next four years.) Now SBI Cards is planning to use the Tata Group’s retail stores as a distribution chain. This is part of its larger credit card alliance with the group. “It is quite attractive to use retail stores as a channel to issue credit cards,” says SBI Card’s Asthana.
Soon Future Money will launch a new range of credit cards under its own brand name and make it available in all formats; not just in Big Bazaars. That could lead to more cards being issued; but it could also lead to more defaults if Future Money’s risk management is not up to speed. That is one of the reasons why Future Money is considering a joint venture with GE Money, one of the world’s largest dispensers of credit at retail stores. “Financing retail goods has lower defaults,” says Vishal Pandit, the Gurgaon-based CEO of GE Money India. “Retail stores attract better customer profiles and have lower frauds,” he adds. That statement is based on GE Money’s experience in its global multi-billion dollar partnerships with large retailers such as Wal-Mart, Tesco, GAP, JC Penny, etc. Cheaper distribution and lower defaults will make Future Money a profitable business, argues Sain.
But it will take time. Leading credit card issuers have seen their business turn profitable only a couple of years after launch. Consumption loans given at the point of sales for the purchase of products like consumer electronics are not a profitable business. “This is a loss-making business. But it helps us find new customers,” says the retail head of a bank. Moreover, managing credit and risks may not be easy, they say. “In this business, everybody will struggle initially,” says AT Kearney’s Mangalorkar. “To begin with, there will be more risk and, therefore, lower profitability.” That statement is mirrored in Future Money’s business plan. It expects the lending business to make a cumulative loss of about Rs 65 crore on a credit book of about Rs 450 crore by the end of the second year. But by the fourth or fifth year, when the credit book would have grown to almost Rs 5,000 crore, Future Money expects interest income of about Rs 470 crore and a net profit of Rs 180 crore.
Globally, banks love working with retailers. In 2004, HSBC bought 100 per cent of Marks & Spencer Money. Yet, HSBC still gives a part of its profits from the business to Marks & Spencer. “The HSBC brand is largely invisible to the customer. Only the Marks & Spencer brand is used,” Rob Skimmer, the London-based HSBC spokesperson, told BW in a phone interview. The Future Money-GE Money joint venture — if it is indeed signed — will follow a similar model. Future Money will invest only 50 per cent of the capital required for the joint venture, but it will get two-thirds of the profit. Still Future Money will initially suck in a lot of cash — about Rs 4,400 crore to be precise in the first five years. That would require a minimum of Rs 880 crore to be invested into Future Money as equity; the rest could be borrowed. That means it has to raise Rs 440 crore over the next four years as its share of equity in the joint venture.
Starting 2003, Biyani faced a peculiar problem: there was not enough retail space to accommodate all the stores he wanted to start. He was forced to consider building his own malls. “But Pantaloon did not have the money to set up the malls it wanted. It had just enough for its working capital and merchandise,” recalls Shishir Baijal, CEO of Kshitij Investment Advisory, the Future Capital subsidiary that manages the realty funds. At that time, Pantaloon’s market capitalisation was a measly Rs 600 crore. So, raising equity to build malls was not an option.
But soon after that, Sebi allowed venture capital investments into the real estate sector. Pantaloon raised its first real estate fund, the $80-million (Rs 328 crore) Kshitij fund. Mopped up in August 2005, the fund was fully committed by January 2006. The next fund, the $350-million (Rs 1,435 crore) Horizon International Fund, was raised a few months later. That was followed by the $425-million (Rs 1,742 crore) private equity fund, Indivision. Another $200-million (Rs 820 crore) hotel fund has just been closed. In less than two years, Future Capital had built a thriving fund management business. “This is not about funds. This is about consumption. All the funds are based on the consumption story,” says Biyani.
In fact, profits that come from managing these funds will be ploughed into the retail loans business. For every rupee that Future Capital manages in these funds, it will earn a management fee of 2 per cent. It also gets to retain 20 per cent of the profit generated. The Rs 4,400 crore that is currently being managed by these funds will generate an income of Rs 88 crore in annual management fees. And if the fund management business grows to Rs 20,500 crore (that is the plan), there will be more returns — much of it will be ploughed into Future Money. In effect, Sain and Biyani are building a web of intertwined companies. The Horizon International Fund is building several gigantic malls called Market Cities — many of which will be occupied by Pantaloon’s stores. The Hotel Fund will build a chain of four-star hotels — many of which will be set up in Pantaloon’s malls. Private equity fund Indivision has mostly invested in consumer product companies — many of which supply to Pantaloon’s stores.
Think of it as an intricate web — hotels are linked to malls, suppliers are linked to private equity and realty is linked to retail. Profits from the fund management business will be piped into Future Money. This, in turn, will spur consumer spending in Pantaloon Retail. Ultimately, everything is linked to India’s booming consumption story.
Within the Future Group, Biyani champions the retail operations, and Sain is the face of Future Capital. In their personalities, they are like chalk and cheese. In their businesses, they clash often. “There are a whole lot of issues we have agreed to disagree on,” writes Biyani in his book It happened In India, published last month. Sain’s response: “It is a hellish experience to criticise or disagree with Biyani and with the exception of his two daughters, most rarely do.” But Sain does. Often.
It is important that the two challenge and hold off each other. Sain will demand the best price from Biyani when Horizon International Fund leases realty to Pantaloon stores. Otherwise the interests of the fund’s investors would be compromised. Biyani will drive a hard bargain when Capital Foods (one of the companies that Indivision has invested in; it makes chinese sauces and processed food) asks for more shelf space in Big Bazaar. Otherwise, the interest of the Pantaloon shareholder and, more importantly, the Pantaloon customer would be compromised.
“The day the Future Capital blueprint was drawn up, I sold all my shares in Pantaloon Retail (worth about Rs 1 crore),” says Sain. The day the real estate funds were set up, it was decided that the fund management team would move out of Pantaloon Retail’s headquarters in Mumbai into a different office. It was also decided that no executive would hold dual responsibilities in Pantaloon and in the fund. “The real estate fund will not subsidise Pantaloon’s realty requirements. Investors would expect an arms length dealing,” says Baijal. He works closely with both Biyani and Sain. “Deep down all of us knew that there is a deep ‘positive conflict’ between Future Capital and Pantaloon Retail,” adds a group insider.
The conflict is deliberate. “Every stakeholder’s interest is aligned differently. That’s the beauty of it...the whole design is built on positive conflict,” says Biyani. “These are intertwined businesses — they converge at the consumer.”Before the Future Capital blueprint was finalised, Pantaloon Retail had targeted revenues of Rs 30,000 crore by 2011 (see ‘Double Or Quits’, BW, 28 August 2006). Now, with Future Money, it is aiming for Rs 5,000 crore to Rs 11,000 crore more. Those who have worked closely with Biyani say that he builds his businesses by simplifying things. “Ultimately, we want consumers to spend more money in our stores... if he has less money than he wants to spend, we want him to borrow from us... if he has more, we want him to invest with us,” says Biyani. That’s as simple as any business model can ever get.
Credit Beware!
S Ramesh (name changed to protect identity) is not yet 30, yet he has a debt of over 15 times his monthly salary. The space-selling executive, who lives in Chennai, has owned almost a dozen credit cards in the past five years. Ramesh has defaulted on the payments due on many of them. He even has some unsettled dues on a few cards; and he has neither the ability nor the intention of paying off these debts. Over 50 per cent of his take-home salary goes towards clearing the minimum monthly dues on these credit cards and the instalments on three personal loans. He is not married, does not own a house and lives with his parents. And he continues to use credit cards indiscriminately on impulse purchases.So, from one purchase to another, one credit card to another and one personal loan to another, it is quite a vicious cycle. Ramesh probably suffers from a compulsive shopping disorder. And he may be an exception. But as income levels soar, as glitzy shopping malls and availability of credit multiply, many more may join his tribe. As India’s consumption boom unfolds, this danger may rear its head. The Reserve Bank of India (RBI) and the banking system are aware of this and are taking the first few steps. RBI has been promoting credit counselling and financial literacy, and banks are developing risk management systems. Hopefully, the lessons will help keep compulsive borrowers at bay.
