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
