In 2018, a private equity consortium led by Swiss PE investor Partners group and Indian Kedaara Capital, announced its plans to buy Vishal Mart from US private equity giant TPG Capital and Chennai-based Shriram group for around ₹5,000 crore.
TPG and Shriram group had taken over Vishal Mart on a slump sale basis, approved by the Delhi High Court only seven years earlier in 2011. They had acquired the debt-ridden business through a joint venture subsidiary, TPG Wholesale Private Ltd, after paying just ₹70 crore to the founder Ram Chandra Agarwal.
In its first year of operations after TPG took over, Vishal Mart registered a negative EBITDA, company’s operating profitability, of ₹5.49 crore. When TPG decided to sell Vishal Mart in 2017, it was the sixth-largest wholesale and retail chain in India. Vishal Mart had annual earnings before EBITDA of ₹70 crore.
Although the company had a dream run from 2010 to 2018, the years ahead were expected to be tough for the new owners. The biggest issue was Vishal Mart’s exposure to risks related to a price-sensitive customer segment and intense competition.
In addition, aggressive expansion and the penetration of e-commerce, popularised by giants such as Flipkart and Amazon, were likely to pose challenges for Vishal Mart.
Past glories
Vishal Mart was founded by Agarwal, a first-time entrepreneur, in 2001. The retailer soon became a significant player in the manufacturing and retailing of readymade apparel and non-apparel, besides fast-moving consumer goods (FMCG). Vishal Mart mainly catered to tier 2 and tier 3 cities, offering its customers one-stop-shop convenience that appealed to the needs of families.
Products
The retailer offered a varied range of products including apparel, food, farm products, furniture, child care, and toys. Products of all the major brands were available. Many in-house private label brands were promoted too.
Vishal Mart had sold over three lakh pairs of jeans, 50,000 DVD players, and 25,000 microwave ovens by 2010. In all, the fashion, electronics, and travel segments made up about 70 per cent of sales in 2010. The retail chain diversified to operate brands such as Vishal Megamart, Vishal Retail, and Vishal Fashion Mart.
Vishal Mart commenced operations with the retailing of readymade apparel for children, women, and men. Gradually, it expanded its product portfolio to include non-apparel and FMCG products. With over one lakh stock-keeping units , apparel (63.2 per cent in FY 2007) was the largest contributor to sales. In-house manufacturing of products helped to improve its operating margin. As of FY 2006, the in-house products manufactured by the company contributed to 9.7 per cent of total sales.
Pricing
Vishal Mart worked on the model of economies of scale. Its pricing objective was to improve market share using Value Pricing (EDLP - Every Day Low Pricing). It promised consumers they would get the lowest available price without coupon clipping, waiting for discount promotions, or doing comparison shopping.
Operations
The company operated in the ‘value retail’ segment — selling affordable goods, manufactured either in-house or procured from small- and medium-sized manufacturers. It also set up manufacturing facilities in Gurgaon and Dehradun with a capacity of 15 lakh units each, and a bakery in Gurgaon.
The Gurgaon manufacturing facility began operations in 2004 and operated at 80 per cent utilisation while the Dehradun facility began operations in 2007 and operated at 40 per cent utilisation before the financial crisis set in. Vishal Mart operated 172 hypermarket stores located in 129 cities as of 2010.
It had a presence in almost all the major Indian cities and the stores had an average area of 25,000 to 30,000 sq ft. The retailer also had 29 warehouses located in nine key cities, covering over 1,053,066 sq ft area.
Vishal Mart targeted cities with an urban population of one million people or above which were classified as tier 2 and tier 3 cities. In tier 1 cities, the company opened retail outlets on the outskirts, rather than in prime areas.
This enabled the company to overcome competition due to its first-mover advantage (as competitors had relatively less space in tier 2 and tier 3 cities) and also helped to lower rental costs. The retailer intended to maintain the ratio of tier 2 and tier 3 to tier 1 cities at 80:20. Its target market included people of the middle and lower income levels.
Promotional strategies
Advertising had played a crucial role in building the Vishal Mart brand. Vishal Mart is advertised regularly in the print media, TV, radio and even on roadside billboards. The retailer had also started many new and innovative cross-selling and up-selling strategies in the Indian retail market including mega sale events such as Dhanteras Dhamaal, Great Savings, Vishal Mega Mart gift voucher ₹1000, 25 per cent off on all items every month, discount offers on various festive occasions, grand winter sale — 50 per cent and 60 per cent discount for two days, Paise Bachao Aandolan — 9 Din Ki Maha Loot (nine-day mega haul ), 5 Din Ki Maha Bachat (five-day mega savings), and 2 Din Ki Maha Loot (two-day mega loot).
It also offered the Vishal reward plus loyalty programme where consumers could make purchases at any store and accumulate and consolidate points. These points were redeemable at any of its stores. In cross-category promotions, discounts were offered on grocery purchases that were redeemable against the purchase of apparel and household products.
The various initiatives taken by the retailer resulted in its sales growing at an annual growth rate of 80 per cent, from ₹88 crore in 2004 to ₹288 crore in 2007. During the period, net profit also jumped from ₹38 lakh to ₹12 crore. Agarwal decided to take the retail chain public and went in for an IPO in 2007. The Vishal Retail IPO was a huge success and was over-subscribed 81 times.
The downfall
Vishal Mart’s sales and profits started to dwindle in the aftershock of the global financial crisis of 2008-09. The company had to close down its manufacturing operations and give up on its expansion plans. Agarwal had resorted to further short-term borrowings that were used to purchase more inventory that eventually went unsold.
The debt-laden Vishal Mart was consequently forced into a debt restructuring exercise, which was led by the State Bank of India. The recast was initiated at the behest of the Reserve Bank of India (RBI) to protect Vishal Mart’s major lenders HDFC Bank Ltd, HSBC, UCO Bank, Bank of India, and ING Vysya Bank Ltd.
Agarwal attempted to revive Vishal Mart by raising additional capital but his financial advisors suggested that the short-term borrowings were too high and no financial institution would be willing to infuse further capital. Agarwal had to eventually sell the company he had built over the years.
TPG Capital and the Shriram group took over the business through a joint venture subsidiary, TPG Wholesale Pvt Ltd, after paying ₹70 crore on a slump sale basis approved by the Delhi High Court on March 14, 2011. Vishal Mart’s retail trading unit was sold to Airplaza Retail Holdings Pvt Ltd, owned by the Shriram group, whereas the wholesale trading, institutional sales, and franchise operations were taken over by TPG Wholesale. The deal was labelled the first-ever, significant, distressed-asset buyout in the Indian market at the time.
The turnaround
TPG and Shriram had to manage the huge debt, extreme shortage of working capital, and a large inventory of unsold goods. Gunender Kapur, who had earlier been the president and chief executive of the food and grocery division of Reliance Retail Ltd, was brought in by the investors to turn the retailer around.
The first major step taken to achieve a turnaround was rationalising the store count. Most of the stores were unprofitable due to poor location, bad economics, and under-utilisation of resources. Kapur reduced the store count to 100 from 172 as the new owners went about getting rid of the legacy business and its problems.
A new management team led by Kapur was put in place; compliance issues were fixed; the entire apparel strategy was streamlined; product sourcing, assortment, and display were optimised; and distribution centers were made more efficient.
In its first year of operations after TPG took over, Vishal Mart registered a negative EBITDA of ₹5.49 crore. In comparison, between 2013-14 and 2015-16, the company’s EBITDA rose sharply 3.6 times to ₹57.52 crore. At the same time, the retailer recorded steady growth in net sales, had modest operating efficiencies, and weak profitability.
Over the next few years, Vishal Mart managed to get back on track. The revenue grew at a strong Compound Annual Growth Rate (CAGR) of 24 per cent during the three years through FY 2018.
TPG invested heavily in turning the retailer around and was reported to have spent about ₹358 crore by way of equity between 2012 and 2016, according to filings with the Registrar of Companies. The documents showed that the company had pumped in ₹41 crore in 2012, another ₹219 crore in 2014, and that it had secured a further infusion of ₹98 crore in 2016.
At the time TPG decided to sell Vishal Mart in 2017, it was the sixth-largest wholesale and retail chain in India with annual earnings before EBITDA of ₹70 crore.
Search for a leader
Though the Indian retail market was mostly unorganised, the organised market had grown from 9 per cent in 2012 to almost 12 per cent in 2020. FMCG, apparel and footwear, and consumer electronics are the largest retail segments, constituting 65 per cent, 10 per cent and 9 per cent respectively of the retail market in 2021. The organised retail industry is expected to grow at a CAGR of 15 per cent to reach 18 per cent by 2025.
In this scenario, the new PE consortium continued with the management team led by Kapur in order to keep the growth momentum going. The focus continued to be on value retailing in tier 2 and tier 3 cities. The retailer also looked to online avenues for growth. In May 2020, Flipkart partnered with Vishal Mart for home delivery of essentials. As part of the alliance, a Vishal Mart Essentials store was created on Flipkart’s platform.
Consumers could order essential products like flour, rice, oil, pulses, beverages, and other items from various brands and also Vishal Mart‘s own labels. As of 2022, Vishal Mart has over 400 stores across India. In March 2022, the newest store of Vishal Mart opened in Manipur near Kakching Lamkhai along the Indo-Myanmar border road.
In August 2022, the retailer launched a third store in Wokha district, Nagaland. It already has two stores in Dimapur and Kohima. The new store has various items starting from groceries, apparel, footwear, electronics, and kitchen utensils at affordable prices and gift hampers to attract local shoppers.
The task
Consider yourself part of the new ownership team tasked with formulating a growth strategy for Vishal Mart and answer the following questions:
- What should Vishal Mega Mart do to grow in the competitive and dynamic retail sector?
- Would you recommend to Vishal Mega Mart that it opt for an omnichannel strategy or should it continue to focus on offline expansion as a value brand?
- How can Vishal Mart expand its consumer base across India?