The case describes a private equity-led turnaround of a high-profile retailer, Vishal Mart. Once the founder exited the business in 2010 after seeing initial success, Vishal Mart’s retail, franchise, and wholesale businesses were sold to Chennai-based Shriram group and private equity firm TPG Capital in a distressed-asset buyout for ₹70 crore.
The PE team successfully turned the retailer around in eight years and exited by selling it to another private equity consortium led by Partners group and Kedaara Capital reportedly for more than ₹5,000 crore in 2018.
In order to address the questions and get a better understanding of the business challenges facing Vishal Mart, it is important to put things into context:
The retailing scenario in India is undergoing rapid growth and transformation. It is estimated that the retail sector contributes to approximately 10 per cent of India’s GDP. Here are some of those contributing factors:
Increasing affluence of India and its population
- Household incomes are expected to rise 40 per cent by the year 2030, with the average household income reaching ₹7,32,000 per annum, which is around $9,500. This also represents a nearly two-fold increase from 2010, when household incomes stood at ₹3,87,000 — just over $5,000, at the current exchange rates.
- The number of households in India will continue to grow, reaching 354 million by 2030, up from 289 million in 2020.
- Shoppers from tier 2 and 3 cities will account for over 61 per cent of the overall market share in FY 2022 — much higher than the 53.8 per cent in FY 2021. These cities reported a growth of 92.2 per cent and 85.2 per cent respectively, whereas tier 1 cities indicated a slower e-commerce growth rate at 47.2 per cent.
Accessibility as an enabling factor driving consumption growth
- Indian households have increasing access to avenues of consumption such as malls, shopping complexes, and multiplexes.
- Households have seen greater exposure to information and advertising through the television and the internet.
- The growth of retail malls has been considerable — going up from three in the year 2,000 to more than 600 just two decades later.
- Internet penetration has increased. Invest India notes that the country will become the third-largest online retail market by 2030, with an estimated annual gross merchandise value of $350 billion.
- In 2006, only three per cent shopped online. In 2019, with the internet population touching 500 million, around 10 per cent did online transactions. Some 80 per cent of households are anticipated to have access to the internet by 2026.
Vishal Mart has seen mixed success so far in its quest for market share in India in its nearly two-decade existence. Technological advancements, changing customer preferences, market forces, and economic pressures combined have changed the dynamics of the sector.
Some of these are worth mentioning to provide the context for the case analysis. A report by Deloitte in December 2021 succinctly presents the impact of disruptive forces on the retail landscape in India.
Against this backdrop, Vishal Mart needs to overcome several challenges if it wishes to compete with the major players — both offline and online. The biggest challenge for it is to communicate its v alue brand story . But this will be a tough task for it due to the following reasons.
- Many affordably priced and good quality products are widely available in India. This deprives Vishal Mart of the opportunity to differentiate itself and it is exposed to a direct threat from larger online and offline retailers.
- Expensive real estate prices prohibit rapid expansion. This could be challenging to Vishal Mart as it would have to pay a higher rent for the physical retail store.
- The biggest issue is Vishal Mart’s exposure to risks related to a price-sensitive customer segment and intense competition.
- Vishal Mart has more than 60 per cent of franchised hypermarkets in small towns with a population of less than one million. It is actually competing with the retailers in the unorganised segment who have lower costs and overheads.
- Aggressive expansion and the penetration of Flipkart and Amazon into smaller towns and cities could pose a threat.
In order to survive and grow, Vishal Mart’s owners are investing more money to turn the business around and take advantage of emerging opportunities. According to the case facts:
- As of May 2018, Vishal Mart had 230 stores in 110 locations with a larger concentration in northern and eastern India, and very few in the south and the west. The plan was to expand deeply across India and have a significantly larger footprint in five years (2018-2023). CRISIL put the provisional revenue of Vishal for 2018 at ₹22.52 billion. Adjusted profit after tax stood at ₹1 billion.
- In May 2020, Flipkart partnered Vishal Mega Mart for home delivery of essentials.
- As of 2022, Vishal Mart had over 400 stores across India. In March 2022, the newest Vishal Mega Mart store opened in the north-eastern state of Manipur near Kakching Lamkhai along the Indo-Myanmar border road.
What should Vishal Mega Mart do to grow in the competitive and dynamic retail sector?
In order to chart a growth path in the Indian market, Vishal Mart has to reconfigure its retail marketing mix namely — product, price, place, promotion, presentation, and people. On the product front, the company should set and communicate a clear value proposition. The merchandise mix should reflect the requirements of the local population/areas. The emphasis must be on affordable quality.
A continuous reliance on off price and every day low price deals has diminishing utility for customers. For the value based retail strategy to succeed, Vishal Mart should focus on economies of scale and lean operational supply chain and procurement processes that impact the final price for customers. Vishal Mart has to maintain a continued focus on the value proposition elements, namely, the target customers, geography, pricing, product assortment, and store experience.
Expand store network
Since a large number of Vishal Mart’s customers are from Tier-II and Tier-III towns, it is wise for it to have more offline store in these towns. Besides, opening stores in Tier III means catering not just to the population of the town but also to the people of nearby villages who come to the town for shopping. It has also followed a cluster-based approach to scaling up in specific regions like the north-east in the past year, which has worked well so far. This approach can continue in other unrepresented and underrepresented markets in India. The company should, however, approach store expansion cautiously.
Focus on enhancing customer experience
Vishal Mart should establish a strong foothold in the offline markets where most of its customers actually shop. Customers like to touch and feel the product before they buy. The comfort and convenience customers enjoy in getting everything under one air-conditioned roof is incomparable and offline stores can provide this seamlessly. Over time, in larger stores, Vishal Mart should leverage the power of technology to bring together seamless communication with prospective customers by providing them with a greater choice on where they wish to purchase the products.
Promote store and private labels and focus on economies of scale
Through offline retail stores, Vishal Mart can promote its own brands. However, cost optimisation will be the core of such a strategy. Having its own brands can lead to higher volumes at low operational costs. Its operations in tier 2 and 3 markets further add to cost efficiencies. Vishal Mart needs to conduct fact-based negotiations and zero-based terms-of-trade simplification to ensure best-in-class margins in each of the product categories.
Hire locally and train store personnel
To deliver an enhanced customer experience, the staff plays a critical role. Vishal Mart should invest in people and train them so that they will have a better understanding of customer behavior. As technology becomes more affordable, Vishal Mart can invest in technical gadgets that help track repeat buyers and profile new customers. Staff must be trained on the usage of tech tools and in understanding dynamic retail dashboards for focused customer engagement.
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?
Yes, Vishal Mart should opt for and invest in building an omnichannel strategy as compared to a pure brick and mortar model. The multiplier effect of pursuing an omnichannel strategy is already visible in many developed markets. Over time, its success is guaranteed even in countries such as India.
Leverage omnichannel sales
The e-commerce industry in India has been one of the rapidly developing retail segments, decelerating the growth of shopping malls to some extent. The 2010-2020 decade was known for the e-commerce revolution in the retail industry. However, it was also true that almost 90 per cent of the purchases were still being made in physical stores and shopping malls.
For optimal growth of the retail industry as a whole, offline retailers were going omnichannel, and so, it would be wise for Vishal Mart to go omnichannel to reach more customers offering them better deals with awe-inspiring benefits.
Omnichannel operations also help increase offline sales without requiring investments in physical stores — thereby raising the overall Sales Per Square Foot (SPSF) and helping turn around stores. However, execution is key here and requires building on the offline value proposition. In addition, investing in the platform and delivery experience is a must.
Take a digital-first approach
Vishal Mart must decide how to spend money on technology that will offer its business the best ROI possible. It must use technology that helps it mechanise responsibilities and provides insights into customer behavior, resulting in more and better sales with a unique customer experience.
On the warehousing side, mechanised and automated warehouses are becoming the norm. A careful evaluation is needed to decide to what extent Vishal Mart should invest in mechanisation such as robotic process automation and universal management information systems.
Vishal Mart needs to establish a business presence on social media if it wants to compete with online stores. This is possible by engaging more with the audience by providing high-quality content on a consistent basis.
How can Vishal Mart expand its consumer base across India?
The Covid pandemic has created greater complexity for the retail sector in India. Vishal Mart has to plan its growth path carefully. Its objectives can be achieved by focusing on the following.
- Vishal Mart has to invest in expanding its customer base by leveraging the power of digital technologies. New age customers are demanding an enhanced customer experience irrespective of the product being purchased. Seamless integration of the search, evaluate, and buy processes has to be achieved by having an omnipresent omnichannel strategy. This helps the company connect with customers independent of geographies. A digitally managed omnichannel approach will help Vishal Mart create deep engagement with customers. This connect must be augmented by selling quality products. For customers looking for the offline experience, the company must create differentiated store experiences with trained sales staff. Constant monitoring of these experiences through customer and mystery feedback programmes will provide detailed insights into customers’ potential pain points that can then be addressed on priority.
- The company has to upgrade its e-commerce capabilities over time. Its short term alliances with existing players such as Flipkart should be regarded as a training ground. Engaging with an all-India audience needs a differentiated service and product mix with last mile connectivity. Vishal Mart should create a strong ecosystem of suppliers, delivery agents, fulfilment centers, and cloud-based data centres to take this strategy forward. Tech solutions can help integrate inventory and third party logistics/ delivery companies for faster deliveries – something that customers truly value.
- The company should commit to sustainability. Vishal Mart can expand its operations across different markets in India by taking on a differentiated route through sustainability. Customers are becoming conscious of products that do not harm the environment. Having a product mix that is environmentally sustainable makes for profitable business.
- It should invest in customer service. Taking the help of technology tools, Vishal Mart should engage with dissatisfied customers, if any, on a priority. For this to be accomplished, the company should train its employees. Responsible company actions are a long term investment for future growth. The focus should be on investments in the quality journey.
- The retailer has to consolidate customer experience by having a super mobile application. This strategy will work for tier 1 and 2 markets. The navigation on this application must be customer friendly with a close interface of mobile, physical, payment channels, customer service, and data management. Doing this will help collect actionable data for the company in the long run. It is anticipated that in the next five to six years, active customers using multiple channels, primarily mobile, will reach approximately 600 million. The company will be ready to leverage this opportunity.
- It has to rationalise store count and develop a supplier base at important locations. Vishal Mart should close down stores that are underperforming and focus its energies and funds on strengthening the supplier base and tech platforms.
- It should invest in people. The company has to hire local talent and invest in regular training and upskilling. It should announce recognition and reward programmes as well as long term loyalty incentives. Committed employees look for stability and trust companies that put a premium on loyalty.