The Hindu Business Line : Carving up FoodWorld

YOU could call it a double whammy of sorts. On May 9, Raghu Pillai, President, Retail Sector, RPG Enterprises, announced that he was quitting after a long and eventful tenure of 22 years with the RPG group. As the CEO of grocery retail chain FoodWorld Supermarkets Ltd (FSL) since its inception in 1996, he was the public face at various fora not only of this RPG-owned enterprise, but also of the growing business of organised retail over the past decade.

Then, on May 12, confirming speculation and news reports of the past couple of months, Dairy Farm International, which owns 49 per cent of FSL, and the RPG group, which owns the majority stake, announced that their five-year-old partnership was finally off. Both parties issued a bland press release, shorn of any detail, which stated that they had both agreed to terminate the existing joint venture.

Raghu Pillai, President, Retail Sector, RPG Enterprises

At the time of writing, Pillai had not officially announced where he was headed for, but all indications are that he would spearhead a new greenfield venture of the Pantaloons group to start a home solutions chain of stores. And, the $5.1-billion Dairy Farm, a member of the Jardine Matheson group, had yet to announce who would pick up RPG's 51 per cent stake in FSL. Under the present rules, which prohibit FDI in retail, DFI cannot buy out the RPG stake in FoodWorld, so it would need to find an Indian partner or a financial investor who would buy out RPG.

A questionnaire mailed by Catalyst to Howard Mowlem, Dairy Farm's Group Finance Director in Hong Kong, on DFI's plans for the Indian market, only got the same press release in reply, with Mowlem adding that DFI had nothing further to add at this stage. "We see great potential in the Indian market and are keen to expand our presence through both FoodWorld and Health & Glow," says the release quoting Mowlem.

The deal to split, expected to be completed in the third quarter of 2005, is complex. At the shareholder level, the RPG group would offer its shareholdings in both FoodWorld and in the beauty and wellness chain, Health & Glow, to other Indian investors and will subsequently buy back a part of the existing business as agreed in the settlement. FSL has an equity base of Rs 78 crore.

That apart, while DFI will retain the FoodWorld brand name, created assiduously over the past decade, both the groups, according to details emanating from the RPG group, are splitting the stores. DFI and RPG jointly operate 94 FoodWorld supermarkets in southern India and Pune and 30 Health & Glow stores, the latter owned equally by the two. While 28 of 29 FoodWorld stores in Bangalore will go to Dairy Farm, it will get 16 of the 21 stores in Hyderabad. All the 32 stores in Tamil Nadu will be retained by RPG, which, in most likelihood, will rename them as Spencer's. The Health & Glow chain will be managed by DFI.

Observers of the deal say that given the differences between the two shareholders, going their separate ways is the best for them as it would allow each to pursue their strategies for pushing organised retail further in India. Dairy Farm, given its position as a leading pan-Asian retailer, cannot but be serious about the Indian market, as organised retail is relatively in its infancy compared to other South-East Asian markets. The group and its associates operate 2,902 outlets, including supermarkets, hypermarkets, health and beauty stores, convenience stores and restaurants, and employs around 60,000 people in the region.

Says a Chennai-based retailer: "It will be interesting to watch Dairy Farm operate FoodWorld now; they will have to learn the Indian way of merchandising and also contend with a fragmented supply chain and an MRP regime; their operations have so far been in smaller, homogeneous countries like Hong Kong and Singapore."

Why did two partners, who had a head start in organised grocery retail in the Indian market, decide to part ways when the going seemed good? FoodWorld was one of the first to set up shop with a big vision and on a large scale. "It's been a mixed legacy; it's been a showpiece in a lot of ways and a poster boy for the Westernised retail form," comments a rival retailer.

FoodWorld was founded as a division of Spencer & Co, part of the RPG group, in 1996. In 1999, it was spun off as a separate company under a joint venture with DFI. DFI invested 49 per cent in the venture, before the rules prohibiting foreign direct investment in retail came into place in 2000-01.

Both groups had signed an MoU to expand in retail together. However, according to sources in the RPG group, this MoU expired, and the FDI rules were also in place so DFI could not invest further. RPG independently had floated the Great Wholesale Club to foray into hypermarkets and launched Giant (now renamed Spencer's) in Hyderabad in 2001. The genesis of the differences, says RPG officials, could have been that, as Giant was perceived as a rival, even though it was a different format.

Says Raghu Pillai, RPG's retail business President: "The challenges and issues started two years ago because there were unfortunate differences. The external impact of that was that FoodWorld did not expand to the extent we believe we should have — we could have had been 40-50 per cent larger than we are today. In a way, the parting of ways is good because both the partners can pursue their independent businesses." Pillai himself expects to be steering the company till the end of July when he will relinquish charge. The arrangements of the split are also expected to be complete by then.

The differences between the partners could well have rubbed off on its performance as well. Though the company is ten years old, it isn't making profits as yet. As a Fitch Ratings report on retail points out, FSL has been reporting losses at the net level over the past four years, largely due to low gross margins, high overheads and interest costs. However, Pillai insists that all FoodWorld stores are profitable today as standalone entities and since last year the company has been making profits at the operating level.

Retailers and analysts are upbeat about FoodWorld putting organised retail at the centre of things. As Munir Suri, Associate Director and Head, South India operations, of retail consultancy KSA Technopak, says, "FoodWorld has contributed significantly to the growth of organised retail. In fact, RPG as a group has been responsible to provide the much-needed focus to organised retail activity in India. It provided a new way of visual merchandising and a conceptual thought process for retailing in India."

However, as Suri points out, while FoodWorld has good retail penetration, good real estate space and strong brand recall in areas of presence, it faces competition from value-based formats and from independent modern stores providing a better value proposition. "FoodWorld may be crushed from both sides," he says.

A Chennai-based retailer is more critical. As he says, "FoodWorld has been a showpiece in many ways, but, unfortunately, there is a downside — high overheads plus the fact that it has not made profits after 10 years in business; nor has it has made much of a dent in fruits and vegetables; and despite a foreign partner they have brought in no best practices into the market; all these are a problem." Privately, FoodWorld officials in Chennai say that after the initial years not much by way of expertise was forthcoming from DFI as operations were pretty much left to RPG.

However, with both partners set to go their separate ways soon, the onus could well be on both DFI and the Goenkas of the RPG group. Retailers are not so sure that Spencer's, perceived as a premium brand in the South, would have the attributes for a mass retail brand, but it is a well-recognised one. DFI has the advantage of eventually managing a fairly well-established brand like FoodWorld. As KSA's Suri points out, ultimately, it is the merchandise on offer that will ensure consumer connect.

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