Sunday, November 23, 2014

Nilgiris in Biyani Shelf: Scaling the Retail Heights for a New Azure Future?

For those living in South India, Nilgiris has been a highly visible and iconic brand that brought style and substance to purchases of day to day food product, grocery and general merchandise needs of the population. The retail format popularized by Nilgiris over the last several decades ensured convenient availability of high quality products, both third party branded and self-branded, in neighbourhood communities. As a result, Nilgiris, founded in 1905, has become a household name in the South, with stores in all the five states. The company sells a wide range of products, including an assortment of dairy and bakery products churned out by its manufacturing facilities in Bangalore. No wonder then that the large customer base of Nilgiris would have been saddened that the heritage brand of Nilgiris was acquired by Kishore Biyani’s Future Group on November 20, 2014. Future Group informed the BSE that it has bought a 97.97 per cent in the retail chain. According to press reports, the deal is estimated to be worth around ₹300 crore. Future Group is understood to have acquired a 65 per cent stake in Nilgiris from PE firm Actis Capital and the balance from the company’s promoters, the Mudaliar family. The Nilgiri Dairy Farm, the retailer’s operating company, will now become a subsidiary of Future Consumer Enterprise, the acquiring company of the Future Group.
The first attempt by Nilgiris to significantly scale up its retail presence came in November 2006 when it accepted an investment (of $65 million, then worth about ₹300 crore, for a 65 per cent stake) by Actis. At that point of time, Nilgiris had just about 30 stores, built over 80 odd years. The Actis investment helped the chain to grow nearly five-fold to 150 stores as of date (adding nearly 120 stores in just 8 years), besides strengthening Nilgiris’ dairy, bakery and food manufacturing operations. The exit by Actis is reported to be related to the differences between the promoter family and Actis on a number of issues including a move to get into large-format stores. For Biyani, the acquisition could be synergistic helping the Group expand its footprint in Kerala, Karnataka, Andhra Pradesh, Telangana and Tamil Nadu, where it lacks a broad presence, and also through franchises. Typically, Biyani’s group believed in centralized large format, multi-line stores such as Big Bazaar, and the convenience chain retail format of Nilgiris could, therefore, be quite complementary. In addition, it provides a foothold in food processing by virtue of Nilgiris manufacturing operations. In an era where even globally iconic brands such as Nokia are acquired (and eventually phased out), the acquisition of Nilgiris may not seem surprising. However, like all heritage stories Nilgiris has its lessons which the Future group may need to be cognizant of, if it is keen on ensuring a new future for Nilgiris, and for itself.
Humble beginnings
Nilgiris has had a humble but focused start nearly 110 years ago! In 1905, Muthuswami Mudaliar, a mail runner, used to carry butter and dairy products from the foothills of the Nilgiris, from Mettupalayam, to the English living in the picturesque hill stations of Ooty and Coonoor. Later, after acquiring a butter business from an Englishman, Mudaliar moved to Ooty in 1922 and then to Brigade Road in Bengaluru in 1936, where the Nilgiris supermarkets story really began. In many ways, Nilgiris was a forerunner of the organised retail chains one sees today which had to do with the visit of Mudaliar’s son, Chenniappan, to the US where he saw the supermarket model at work. In 1945, Nilgiris revamped its Brigade road store to set up a milk and ice cream parlour and added grocery and general merchandise to its portfolio in addition to the bakery and confectionery it was selling. Perhaps it was the first ‘modern’ retail store which also had its own private label with its dairy products. Its dairy offerings were further enhanced with the setting up of a dairy at Erode in Tamil Nadu in 1962. In 1971, its stores moved to the self-service format. At present, Nilgiris produces, procures and processes 50,000 litres of milk a day, a bulk for its own dairy products, and sells milk in some markets.
In 2006, the family owning Nilgiris sold a majority of its stake to private equity fund Actis. Actis owned 65 per cent, while a section of the family retained the rest of the stake. Actis brought in professional CEOs to run the business and the past eight years also saw rapid expansion. In September, Nilgiris opened its 141st store in a new location on Chennai’s Radhakrishnan Salai, where it ran a store for 32 years before the erstwhile store closed down. Five more stores are due to open, three in Tamil Nadu and two in Karnataka. Today, Nilgiris has a strong private label in foods, which constitute 30 per cent of its turnover in the foods category. Dairy products constitute 30 per cent of the chain’s overall sales. The chain has followed a franchisee model of expansion where franchisees pay royalty for use of the Nilgiris brand and stock their stores through a central purchasing model. The chain achieved overall revenues of Rs 765 crore for the year ended March 2014. As The Hindu Business Line observed, Mudaliar could never have imagined his small butter business would one day be a pioneer in modern retail; however, that is how heritage stories are made of! Like another iconic heritage brand, MTR which also got acquired with its business, Nilgiris stands out as an example of how tradition and modernity can be blended on a platform of quality and convenience to keep growing, albeit at a scale just possible.
Principles of principled success
Although an annual turnover of Rs 765 crore and a deal value of Rs 300 crore may not appear awesome in relation to the potential of the food processing sector in India, Nilgiris deserves praise for not only being a pioneer but holding on its own over a century, despite the entry of large business houses and corporate firms into convenience retailing. Reliance and Birlas as well as Heritage (besides Biyani himself) brought scale to convenience retailing but could not displace the brand equity of Nilgiris. Part of the reason, if not the whole, is that unlike these competitive ventures, the Mudaliar family knew the food processing business thoroughly through its experience. In a period of time when logistics were poor and the concept of cold chain was less heard of, Nilgiris brought fresh processed produce and products to the customers over long distances overnight. The decision to strategically locate the manufacturing operations with geographically contiguous expansion of the retail stores helped the chain preserve its uniqueness all through the years. Unlike other chains which have had poor reception to self-labels, Nilgiris could leverage its industrial knowledge to develop its own brands of dairy products, processed foods and groceries, competing with other well-known brands. For Nilgiris, if the milk and butter business was its bread, its grocery and processed foods business became its butter!
The marketing approach of Nilgiris has been simple; self-selection by consumers with a little locational help by the stores personnel. Each store has typically a manager who volunteers to find the products a consumer wants even if there are stores personnel to do the job, lending huge customer-centricity. Nilgiris understood that the success of retail marketing would come about only when the visits to the store become a part of the consumer’s regular life. By offering additional and independent selections like vegetables and bouquets within the premises Nilgiris became a one-stop shop in one’s life. Nilgiris provided support to novel concepts such as pre-cooked chapathis for lunches and dinners, and ready-to-convert batters for breakfast needs like idlis and dosas, developing local supply sources in each case. Nilgiris also appreciated that to be a retail icon one needs to be a locational landmark. The company took particular care to choose highly visible and easy to access locations for its stores. It was always keen to venture into newer suburbs, with developing gated communities and suburbs quoting the location of Nilgiris in the vicinity as an added plus for their real estate projects.  Despite a principled approach of product quality and customer care, and despite pioneering in India several principles of retail success, Nilgiris had to accept an acquisition which points to certain other influencers on indigenous business development.
Founders’ dilemma
The Nilgiris episode brings to the fore (yet again!) the dilemma of the founders of a successful indigenous business with high growth potential but with low financial resources to grow. This is particularly true in emerging markets such as India which provide niche footholds for initial success but present multiple barriers for logical scale-up. When, how and to what extent to dilute the founders’ control in the equity of the firm constitutes the founders’ dilemma. For Nilgiris themselves, whether the sale of a huge chunk of 66 percent in the first stage itself to a private equity firm is open to question. This contrasts with the Western start-up approach of diluting less (usually even cumulatively to a level less than the threshold of majority control) with high increasingly higher valuations in multiple rounds of fundraising as the value gets built up. Quite possibly, even an initial public offering would have laid a more value building pathway.  That Nilgiris has not been able to do that could relate another aspect of the classic founders’ dilemma. The dilemma also encompasses when and how to induct as well as how to utilize professional talent to resolve the founders dilemma and also build greater value in the business.
Admittedly, in founder-led businesses with thin margins it is difficult to get professional leaders who have the passion to take forward the founder’s dream, balancing the founder’s values and aspirations with the business potentialities and needs. Having such professional leaders, however, can be of great help in identifying multiple strategic choices and selecting the optimal ones. They could also be of significant help in developing the right financing and dilution strategies for the firm, enabling the founders to stay on longer and build greater institutional value. Companies such as Priya Foods seem to be taking a more calibrated approach by deploying professionals or getting the family members trained in technology and business management. There are many other successful niche businesses in the indigenous business sector in India, especially in the food processing, food product marketing, restaurant and multi-brand retail space which could benefit from resolving the founders’ dilemma in a win-win manner. Hopefully, the higher management institutes such as the Indian Institutes of Management (IIMs), Indian School of Business (ISB) and SP Jain Institute which have custom courses for family businesses would not only develop solutions but also encourage the graduates of mainstream programs to enter the indigenous family businesses to upscale them.  
Future choices
It is not that Nilgiris has reached the final lap of its growth phase with the acquisition by the Future Group. For one, the Future Group is by itself not too financially strong, having built up huge debts on multiple initiatives and having been forced to divest a few non-core businesses to pare down debt to some extent. It has also multiple store formats such as Big Apple (acquired in 2012) and Kishore Biyani’s FairPrice and Aadhar. The retail formats will cross-sell each other’s products and they will also be sold through the Future Group’s retail outlets such as Big Bazaar, Central and Foodhall. It is important for Biyani to figure out the best way to harmonize all the retail businesses and leverage the brand equity as well as the manufacturing and marketing capabilities of Nilgiris. It would be tempting for the professionals in the Future Group’s management to overwhelm, if not belittle, the native wisdom of Nilgiris that has seen generations of success. Scaling up the Nilgiris plants, distribution network and retail network and adding new product development capabilities with the requisite investments in a positive frame of mind must merit high priority.
Equally, learning from MTR and Nilgiris cases, Biyani must put in place a virtuous cycle of incremental value creation and reinvestment in the Nilgiris business so that its organic growth impulses are preserved. It is not clear from the reports if the Nilgiris brand has been acquired by the Future Group for perpetuity or for only a limited period. The respect the Future Group would give to the Nilgiris brand could well determine how the loyal customers and the past owners, the Mudaliyar family, would respond to the treatment of the Nilgiris brand by Biyani (By way of a comparison, Microsoft may not admit it but Nokia getting into the tablet space based on rival Android platform within days of Microsoft phasing out the Nokia brand of smart phones is not a great signal for Microsoft Devices business!). The stakes for Biyani and the Future Group are high. If the acquisition is handled poorly, the retail business could be at crossroads in not too distant a future again; on the other hand, as the well-wishers of Nilgiris and the Future Group desire, if the acquisition is integrated harmoniously and scaled up judiciously it could help the Future Group scale new azure heights (Nilgiris, as freely translated in Sanskrit) and the acquired Nilgiris business could move into a new future of sky-high potential!
Posted by Dr CB Rao on November 23, 2014


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