For the pioneering, iconic retail super market chain Nilgiris Dairy—a household name in South India, decades before the Biyanis and Ambanis of the world decided to enter the space—the past five years have been perhaps the most turbulent in recent memory, where the Mudaliar founding family has been sparring with private equity player Actis over how best to run Nilgiris, thereby hobbling its performance. The saga is a textbook example of what happens when an investor and a founding family of a business have different ideas about how it should be run. Sometimes, this could be catastrophic. In Nilgiris’ case, the 107-year old company is lucky enough to live to sell another day.
Tensions between the Mudaliar family and Actis-led management were high ever since Actis picked up a majority 65 per cent stake in the Bangalore-based grocery and food retailer for Rs 300 crore during the winter of 2006. Now, however, things have stabilised somewhat and Actis is reportedly working hard to restore value in their asset and take steps towards a possible exit.
Yet, those five years were far from easy. One bone of contention was a decision about reducing the private label business. Actis-led management wanted an increase in branded goods while the Mudaliars had traditionally relied upon—and continued to prefer—a private label strategy. Then, there was an aggressive expansion strategy orchestrated by Actis’ managers at Nilgiris’ wheel, but after the ambitious rollout, that too was found wanting. Then, the choices of franchise partners were also thought to be suspect by the Mudaliars.
The spectre of real estate also haunts the relationship between founding family and investor. When Actis took majority control over Nilgiris dairy, the company had three hotel properties in prime locations in Bangalore, Coimbatore and Chennai. As part of the expansion plan, the management decided to sell these properties for close to Rs 100 crore. While Actis said the proceeds will be used for expansion of the business, the family members balked, preferring instead that it be distributed among shareholders. Actis didn’t agree. Furthermore, Actis also suggested a Rs 35 crore rights issue for a much-needed cash injection but the family refused to play along and decided to approach the Company Law Board to stop it. An out-of-court settlement resolved the matter.
These disputes had disastrous consequences. “It was really affecting our morale,” said a franchise of this chain who has been with the company for many years. “Sales dropped by as much as 20 per cent and we were looking to exiting the franchise network,” he added. However, with an uneasy rapprochement worked out between the two warring factions, Actis is rolling up its sleeve and trying to get things back to normal and is understood to have convinced the franchises about the company’s growth prospects.
“The pull-back has been good,” says Shomik Mukherjee, director, Nilgiris Dairy and also a partner with Actis. The key to the pull back has been multi-pronged—empowering the franchise of the store to take critical decision on inventories, drive home the point of owner-manager aspect, build on the platform of the high-quality and fresh private-label business further (which Nilgiris has always been famous for), calibrate the expansion plan and tighten corporate overheads.
“The entire chain of 115 Nilgiris retail stores is through the franchise route and we have strived to retain the neighbourhood store nature. The franchises have deep knowledge of the neighbourhood tastes, have a rapport with customers just like the kirana store owner but offer the shopping experience through the modern retail format. We have ensured that this warmth is retained towards the customers,” Mukherjee said. Nilgiris Retail competes with the likes of Spencer’s, More (from Aditya Birla Retail), Reliance Retail and FoodWorld.
Empowering the franchises has enabled store-level profitability while bolstering the operating margins of the company. “We have worked extensively with our franchise partners, engaged with them on inventory management and tweaked towards the right assortment of goods which is necessary at that location,” noted Mukherjee. With the mission of constantly improving and upgrading capacities to satisfy consumers through a wide range of food products and service offered at the right quality, quantity and price supported by innovative solutions, Nilgiris is also embracing emerging technologies to fine-tune the inventory management.
Something else that’s bringing smiles this time around—especially to the faces of the founding family—an embracement of private-label goods which is apparently once again ringing in the cash registers. “We are focusing on high-quality private-label goods which have been the hallmark for Nilgiris Dairy over the past years and we are actively furthering that. As much as 25 per cent of the sales at our stores are from the private-label goods which are sold, not as a cheap alternate to the branded goods, but as a premium, desired product. We have ensured that they are fresh and are of high quality, which is also driving high profitability in the stores,” Mukherjee said.
The reputation of Nilgiris stores has been its premium private-label goods which its regular customers swear by, driving up the trading density to as high as Rs 1,800 to Rs 2,000, one of the highest for food and grocery retail in India. Nilgiris Dairy earns its revenues through licensing the brand to the franchises, earns a healthy operating margin on the private-label goods supplied to the network and in addition to this, supplies these goods to the general trade as well.
According to Nilgiris’ family members, before Actis took charge of the operations, the share of private-label goods was as high as 35 per cent, which later fell to 15 per cent and is now at around 25 per cent. Prabhu Ramachandran, director, Nilgiris Dairy, and the key representative from the Nilgiris Dairy founding family said that it is time that the chain understood the importance of pushing the white-label business further. “The operating margins are much higher in this…and we have the expertise to generate more such goods,” Ramachandran added.
Nilgiris is among the very few supermarket chains that lays special emphasis on its own products, sold under the brand name of Nilgiris 1905. With in-house capabilities centring on bakery and dairy products, Nilgiris has grown to become a household name in the south with consumers spanning successive generations.
It was on this plank that Muthusamy Mudaliar, started this retail chain in 1905. From those humble beginnings at the turn of the twentieth century to a household name in just over 100 years, Nilgiris has become one of South India’s leading supermarket chain with stores in cities across the region including Chennai, Bangalore, Coimbatore, Hyderabad and Kerala riding on the reputation as a major food brand as well. Known best for its dairy and baked goods, Nilgiris has been a trusted source of high- quality produce and retails its much-loved own brand products—Nilgiris 1905—alongside other well-known labels.
It isn’t easy to sit and watch an investment go sour and Actis has decided to change things around so that Nilgiris can keep its head above water. Apart from the private-label thrust, Actis has also decided to go in for a measured expansion, a change from the initial days after it took control of the chain. “We are now looking at putting up 3 to 4 stores in a month and we are sharply focused on profitability at the stores and not looking at massive expansion which was the plan earlier,” said Actis’ Shomik. With speculation rife that Actis may be looking at an exit from Nilgiris Dairy pretty soon, the management of Actis said that they still have two years before the fund can be exited. “If there is a right value, as a PE fund we will time an exit, but right now, we are focused on the momentum which is building up,” J M Trivedi, Head (South Asia), Actis Private Equity said.
The repair job seems to have had some effect. The company has, during the tail end of last year, posted a profit at the operating level, sales of around Rs 800 crore and seems poised to emerge from the quicksand that was rapidly sucking it down.
This is the kind of news that should put a bounce in the steps of both the Mudaliar family as well as Actis.
