Retail Business - How to Get Shelves of Large Retailers

Small businesses should follow 10 important rules if they want to place their products on the shelves of large retailers. But first ask yourself: Have you already tested your product with your target customers and can you provide data about the tests? What is it about your product that would make the retailer excited? Do you want to sell your product directly to the retailer, or do you want to license it to a manufacturer who will distribute it for you? If you get in, can you handle rapid volume increases, and can you prove this to a retailer? Are you prepared to share some risk with the retailer in case your product does not turn around fast enough?

The 10 Critical Rules
1. Know why your product deserves shelf space over other products. Think about a large retailer as a company that wants to maximize rent for its shelf space. This can be done in two ways, by either generating greater margins or quicker turnover. At the beginning you will likely not able to compete on price, so it is critical to know your product and what it can do for the retailer.

2. Know your target distributor and your end customers. A search for the best retailer for your product starts with you browsing stores for similar or related products and to get a feeling for the type of end-customers that frequent these stores. For example, if you want to sell high-tech products that need a fair bit of explanation, then a big box retailer might not be the right distributor for you. Make sure that the customer that likely buys your product frequents the retailer of your choice. Spend some time at the retail stores to see what is on the shelves and who shops there. Have a clear vision where in the store your product would be positioned. Keep that in mind when you present your product to the buyer.

3. Make sure you and your product qualify for listing. If there is an application process, be sure to read the guidelines thoroughly before submitting the paperwork necessary to apply to become a vendor. The bigger the retailer is, the more specific and often more expensive their vendor requirements will likely be. Make sure that you are able to meet the standards for insurance coverage, electronic business processing, labor law and product safety, and delivery and lead times.

4. Check to see if the retailer offers any special programs, including local vendor shows that serve as an entry to regional markets or that offer opportunities for women-owned or minority-owned businesses.

5. Know your way in. Inside connections are always helpful. Contact the buyer or category manager by phone to check when and how frequently they look at new products. Try to see if you know someone at one of the target retailers who is able to connect you. However, buyers often have to follow very strict rules, and being too friendly can derail your sales efforts right at the beginning.

6. Generate excitement. Determine who should pitch your product to the retailer. Your decision to either present the product yourself or hire a representative to do it for you depends on your product as well as on your strengths as an individual salesperson. In addition, if your product line is one that involves frequent changes (like fashion clothing), you may want to hire a manufacturer’s representative who will present your line, among others, but therefore more frequently than you would be able to. In the grocery industry, it is common to use a broker who will sell your product for a commission. If you have a one-time sales pitch that needs to be done, you may choose to do it yourself.

7. Avoid product placement on the “graveyard shelves.” Visibility is extremely important. As a newcomer, you compete with much larger and more established vendors for shelf space. If your product is not being put in an attractive spot, you might not want to go ahead with the listing. However, declining an offer might also jeopardize any future opportunities.

8. Therefore, consider offering some initial in-store promotion activities for your product. Retailers really want support from their vendors, including in-store demonstrations, point-of-sale displays, advertisement and any other kind of promotion they can get. This can help you to bump up sales at the beginning and to make store personnel familiar with your product.

9. Leverage your online strategy. In today’s business environment, it is critical to have an online strategy. With very little resources, small businesses can create a professional Internet presence. If you are aiming for brick and mortar distribution, your online presence should serve as a multiplier. Don’t think “either or,” think “and!”

10. Be fully prepared for your presentation before you meet with the buyer. Know about the industry standards for your product, including sale terms, discounts, credit, shipping, allowances and return policies. Be ready to present your marketing and promotion plans, including visualizations of in-store demos, point-of-sale displays, advertising, online presence, etc. Have a sample of both your product and its packaging, including bar code and language requirements available. Packaging is of great importance, and therefore yours should follow the merchandising standards of your buyer’s policy exactly. Have a product brochure that provides thorough information on the product, including wholesale and retail prices, discounts, credit, shipping, allowances and other sales conditions available. Prepare a list of retailers currently selling your product. Be prepared to prove that you will be able to provide large volumes. This includes manufacturing information and as much evidence as possible to show how you or your manufacturer will be able handle increased volume while maintaining quality sand on time delivery. Be ready to talk about both your business and your personal history.


Source: Andreas Schotte @ HBR

India’s footwear retail Entry: Opportunities, Issues and Challenges.

Global recession had a major impact on the industry, in terms of revenue fall and markets. Some saw a dip over 30% in their revenue.  SME focusing on exports and producing only semi-finished leather witnessed low demand, increasing margin pressures and high inventories. With the collapse of traditional North American, Eastern Europe market, SME were expecting Dubai to bail them out. However, that did not happen.  Cheaper alternate markets such as Russia, Eastern Europe emerged to fill in the coffers. A major challenge faced by the SME’s, especially in Vaniyambadi, Tamil Nadu is the cost of effluent treatment. Some SME’s tanneries that could not meet the cost of CETP norms were closed. 

What next for Indian leather SME’s and what can they learn from Indian IT industry?..

The recession and the hardening of Indian Rupee against US Dollar is propelling leather companies the need to diversify and de-risk their business. Eyeing the sizeable mall-hopping consuming class, manufacturers are turning retailers, either going ahead on their own or forging alliances with international partners. Foresight, Chennai based company is partnering with Pavers, of UK to introduce European fashion footwear brand Staccato in India. Reliance Brands has entered into an agreement with The Timberland Company, a major manufacturer of outdoor footwear and apparel. 

Future Group and the UK shoe retailer, Clarks, have formed a JV to bring high quality shoes to India. Domestic footwear retail business is witnessing a shift in channels too. With large volume brands sales remaining at high streets, and mid segment customers preferring to purchase shoe and other accessories in tandem with clothes, some of the retailers are reworking their presence. Footwear retailers prefer to use Malls to de-risk their channels and product lines. 

Domestic brands are moving beyond regional markets and embarking pan-India presence. From a primarily NCR player, Mahtani Fashion, an aggressive shoe retailer who owns Vi-Ga has plans to build a national presence. Domestic market offers tremendous opportunity and hope for diversification, de-risking the export heavy business. However, it does pose challenges and issues for new entrants.  

India’s domestic leather market

Indian domestic leather goods market is estimated to be worth Rs 16,300 crore and is expected to grow at a CAGR of 20%. Domestic footwear market is estimated to be over Rs 15,000 crore in value terms and has grown at the rate of 8.8% over the last couple of years. Men’s footwear accounts for almost half of the total market, with women’s shoes constituting 40 percent and kidsʹ footwear making up for the remainder. The  domestic  market is substantially  price driven, with branded footwear constituting less than 42 percent of the total market size. 

Background

With a direct employment of 2, 50,000 (with 50% of them being Women) and an export earnings of $14 billion, leather industry is a significant driver of  economic growth. The Indian leather industry enjoys abundant availability of raw materials, availability of low cost skilled labour, and availability of supporting institutions. More than 4000 units are engaged in manufacturing, of which 95% are SME.  

India’s share in the global footwear imports is around 1.4% and future growth is expected from the SME’s venturing into value added products. Major competitors in the export markets for leather footwear are China (14%), Spain (6%), and Italy (21%). 55% of India’s leather export comes from US and UK, and Dubai in recent years had emerged as a trading destination to Africa and other markets. SME’s export most of their finished leather (about 95% is export revenue) and have very small contribution from the domestic market.       

         

India is the second largest footwear manufacturer in the world, next only to China. Nearly 58 percent of the industry, which is by and large labour intensive and concentrated in the small and cottage industry sectors, remains unbranded. 

However, as part of its effort to play a lead role in the global trade, the Indian leather industry is now focusing on key deliverables of innovative design, state-of-the-art production technology and unfailing delivery schedules.

Customer Segments

Retail footwear segment in Indian is very price sensitive and has been steadily growing over the year. Major part of the demand is met by the unorganised sector and still there  is a shortfall of 300 million pairs. Branded shoe market only account for 20% of the entire market. While international brands largely dominate the higher end of the spectrum, the lower end of the market is dominated by home-grown players as well as unorganised players. While men's footwear is the biggest target category (contributing almost 48%), children's (11%) and women's lifestyle footwear (41%) is not behind in the race.

Segment wise classification of price ranges in the men’s footwear segments:

Segments Price Ranges in Rs % of growth

Mass market  185 – 700 60% (Liberty Bata)

Economy market 700- 1000 30% (Bata Liberty)

Sports market 1000 – 3000 7% (Nike Adidas)

Premium leathers  3000- 5000 5% (Charles and Keith)

Luxury 10000- 50000 1% (Gucci Louis Vuitton)

Segment wise classification of women footwear segment:

Segments Price Ranges in Rs % of growth

Traditional footwear 699 – 999 5%

Designer Footwear 599 – 799 10%

Formals 299 – 699 40%

Casual Wear 499 – 799 25%

Sports Shoes 500- 699 20%

About 37.8 percent of Footwear retail is the organized segment, which qualifies it as the second most organized retail category in India, next only to Watches. While the average spend on the footwear by urban consumers is Rs 240/annum, consumers in rural areas spend just about Rs 100/annum. The annual domestic consumption of footwear is approximately 1.1 billion pairs per annum, and top 20 cities contribute about 450 Million pairs/annum. The kid’s footwear segment is one of the fastest growing segments in India. The Indian kid’s footwear segment is highly fragmented and dominated by the unorganised sector. The branded kid’s footwear segment has a big card to play as India has the world’s largest child population. The overall kid’s retail segment has a robust margin of 20 – 25 % which is huge potential opportunities for organised branded retail footwear players. S&M is one of the players who have ventured into kids wear segment which has 27 exclusive outlets through franchise model. S&M sees a huge potential with age group of 3 – 16 years kids segment in the domestic market after the economic slowdown in the international market that hit the company’s revenues has now been targeting  the growing consumers market of India. It has set up store in store format for optimised revenue flow. The store in store format of business model has been the trend among many retail footwear players in India.

Disney kid’s is another international brand which has forayed into exclusive kids shoes in India and has targeted kids within the age group of 5-10 years. Disney shoes have a tie-up with Sierra Industrial Enterprises to manufacture and market Disney shoes for kids in India. Disney aims to become the market leader in the kid’s footwear segment in India. 

The Disney shoe collection will include boots, sandals, slippers and sports shoes for boys and girls. The footwear’s has a price range from Rs 150 – Rs 850. Disney has targeted malls across the country and in prominent chain stores such as Lifestyle, Loft, Shopper’s Stop, Pantaloon and Central.

Bata is one of the oldest brands which have a more than 50% share in the executive segment. As the young Indian executive class matures in terms of quality, design and brand, the preference will be more towards branded footwear and the growth is expected to be high in this segment with the migration of people from villages to cities for better career and profession.  The footwear retail segment is currently one of the most organised sectors within the retail domain. However, this is purely due to the highly organised nature of the men’s footwear segment. The women’s category is largely unorganised, in fact close to 95% of the category is unorganised. With respect to the rest of the world, this is an anomaly as the women’s category is majorly organised and forms a big chunk of the market. Thus for us as retailers in the women’s footwear category, the market is still largely untapped and hence a big opportunity for growth. 

At present, almost all of the organised retailers in the women’s footwear category are located in the metros and Tier I cities and towns. The Tier II and Tier III towns have over the last few years seen a spurt in income driven by the service industry boom. Hence these towns definitely are a potential target.

Organised footwear market Vs Unorganised footwear market
The average growth in the industry has been estimated at 12% and is estimated to touch Rs 47000 crore by 2025. 

Presently the Indian organised foot wear market is dominated by men’s footwear segment that contributes for nearly 60% of the market where the casual footwear has been better off with two thirds of the share in the men’s segment. The unorganised players have the lions share in the ladies and kids segment with 80 percent share. The organised footwear brands have less penetration in the ladies footwear segment mainly due to the complex buying behaviour of Indian women. The ladies and kids segment is one of the fastest growing segments in the branded footwear market and many foreign brands like Catwalk have ceased the opportunity and have set their footprints in this segment which has been untapped by major traditional Indian footwear brands. Considering this many of the Indian footwear brands have seen growing opportunities in the segment to widen their product portfolio, widen their risk appetite and increase their market share in the footwear segment by contributing to newer growing consumer segment which will boost the bottom 

lines of the retail players. The business models of the footwear retail players have been different with a wide popularity of stores in high streets, malls and new formats such as store in store has been catching up even with international brands having gone the store in store model which has been the most cost effective model in terms of testing the markets.           

           

Major challenges in running domestic retail 

a) Retail presence:  till recently, most companies invested in own stores as the means to grow and expand.  With commercial rents increasing in last few years, capital required for expansions was a bottleneck. 

b) Credit Management:  Brands that had no local presence, but preferred the third-party retail route had to face the challenge of receivables, often the credit period as high as 120 days. 

c) Brand:  Many of the leather firms are SME’s, have great experience in trading and vendor management, but completely lack brand building experience.  Even when attempts were made, they lacked focus and consistent efforts, thereby diluting the impact.

 d) Low IT investment:  Except the major leather manufacturers, none of the companies had an ERP connecting POS data so as to effectively manage inventories.  It was not common to have round the year discount offerings to get over the inventories.  

Some Successful Retail Entry Strategies

RED TAPE

Red Tape is a manufacturer and an exporter under the flagship brand of Mirza International  Initially the business model is more inclined towards exports were out of 250 crore 200 crore business was done through export closures. Mirza International had very less or no presence in the domestic market until 2006. So to set its footprints in the domestic footwear market Mirza International forayed into women’s footwear, men’s footwear and accessories market in 2006. It also launched a low price footwear brand called Necleus and is positioned to cater to lower end customers for high volume sales. The company also plans to have a national presence through exclusive stores and shop in shop stores.

M&B 

M&B is one of the major players in the footwear business in India. M&B has two manufacturing facility one each in Baddi and Noida. With more than 75 stores spread across the country making M&B one of the fastest growing footwear brands in India. M&B has very strong distribution network across India with Brands marketed by M&B are sold in over 1000 stores across India. 

ID is the flagship brand of M&B which is targeted towards fashion savvy youngsters it is one of the popular brands among the youth community in India.The iD store has a unique layout, striking visual impact and catchy merchandise display which will make shopping an experience to remember.Some of iD‘s brands are: 

Camdan – This boot is targeted towards ruff and tuff guys. It has a very strong upper mould that gives a tough looks on the shoes.

Colonge – Is another iD shoes from M&B is a trendy shoes with unorthodox styling blended BI- colour and antique and suede leather, which has a inspiring looks with a combination of leather and thread in the upper.

Figo – iD shoes from M&B. Figo is a brand inspired by soccer sports which has  a classic theme with a blend of sporty colour. Flashing streaks of gold and silver looks classy with comfy grip with sporty spikes at the bottom which makes a cult shoe.

Fly – iD shoes from M&B. It makes the wearer of the shoe feel high, it has a bi-coloured soles and leather with tie and die finish.

Hotshot – is a one defines complete casuals and comforts for the leisure mood.

Icon – It is the trendsetter bi-colour soles with contrast streaks on the upper.

What determines the success of new entrants Building retail presence, brands and sustaining them in the domestic market is not an easy task. Remember Corona, the legendary brand that was the no.2 brand in the market with its large network of stores, filed for BIFR in 1998 and eventually closed in 2003.  Cost management and effective marketing are key to survivors in domestic markets.  

The common underlying strategy of successful companies like Mirza’s or M&B or Lakhani’s is control over cost and right placements. 

a) Location

Successful brands are realizing that while malls offer higher footfalls, the advantages of high street are many. Average Cost/sq ft would be almost 40% less than the Malls, and considering the overhead costs of parking, energy, etc high street is more suited for “youth” targeted products. It is also more suitable for players with wide product assortment.Companies with presence in textile and leather are discovering the advantages of bundling.  Presence in a high street market such as Marthahalli, Bangalore, or Fashion Street, Bandra or S.V. Road, Mumbai or Khan Market with higher footfalls of a particular segment increases cross-selling. For example, M&B footwear does high street retailing through multi-brand outlets and discounts retail chain stores, prefers Malls to position international retail chain stores (sale of international brands such as Lee, Provogue, etc).  Domestic brands are realizing the limits to growth by pursuing own store format and switching over to franchise formats to tap markets such as Patna, Ranchi, Vizag, Raipur, etc. 

b) Product focus

Successful brands are realizing a focused product portfolio (with even fewer products) is better off at managing customer expectations and experiences.  S&M, a Coimbatore based company is targeting young customers (7-14 yrs) and Hidesign, the leather boutique firm is concentrating on business professionals and Double-Income Parents.  Focus does pay in domestic market.  Expansion into sub-brands such as sportswear, kids and women are the steps the domestic brands expected to pursue in future. SGL leathers increased their gross margins with introduction of Bags, Wallets and Leather Accessories. SME’s focused more emphatically on institutional sales. Local players such as Damask, SS and other also found safety shoes for industrial use a niche segment where margins are better than in the wholesale business.  

The informal / casual footwear holds two third of the share in the men’s footwear market in India. The informal segment has always been high on demand mainly due to the changing trends in the consumption patterns of the Indian consumer. The young population has always shown more interest towards westernised culture and brands and this has given ample opportunity for international footwear brands to have strong foothold in this segment. Allen Cooper is one of the brands which had forayed into this market in the new millennium which has entered with a floor price of Rs 1000 plus in the southern markets has been able to penetrate strongly in the segment which has targeted its products with the age group from 24 – 35 years.

a) Business model

One learning from Carona’s fall has been the need to minimise risk and spread the risk with partners. Successful brands like M&B, S&M are pursuing a good mix strategy of few owned and franchise models to expand and serve markets.  Own showrooms are used to identify the changing trends (M&B consistently targets the high end students in Delhi) and create successful product lines.  Franchise option is vigorously pursued to expand the footprints and reduce the cost of Operations. S&M, has adopted a unique “Store-in-store” model using IT as a backbone to significantly reduce the cost of operations, almost 35%. 

b) Enterprise-wide IT

Successful entrants S&M while pursuing innovative store-in-store policies have relied on IT investments such as POS and ERP.  Companies such as Khadims, M&B are heavily relying on IT to understand the models of the seasons, price ranges, store performance, etc.  

c) Pricing model

While tradition wisdom recommends, floor pricing to penetrate into markets, the successful companies have pursued premium pricing targeted towards the middle high and high income group people.   Selecting a particular segment with an affordable price has been the key underlying the success of S&M, M&B.

Conclusions

With organised retail on the rise and increase in the disposable  income retailing certainly looks a promising option. Potential opportunity for value added products in the domestic leather market is high; opportunity to cater to the domestic market with a blend of traditional, western fashion can bring in huge market in the footwear segment in India.

Increasing forex impact and global competition implies that leather companies cannot sustain their growth from only exports front.  The experience of companies like S&M, M&B underscores the fact that entering domestic market can derisk the business and increase revenue growth.  Success depends upon consistent strategy linking location, product range and execution. Success in domestic market requires listening to the customer, adapting the product and price, and managing the cost of operations.  Scale is important to survive and grow, and low risk models such as franchise or storein-store may prove be effective. In the final analysis success depends on each company’s willingness to take risks and implement required changes.  

 Source: http://www.browneandmohan.com

E-Commerce In India - The Second Coming

Once more ‘e-commerce’ is on the lips of entrepreneurs and investors. This time the surge is bigger and better than before.

Image: Vidyanand kamat

Nobody saw it coming. Nobody wanted to. It was, after all, the summer of 1999. The spirit of the times was heady and a thousand entrepreneurs had bloomed. Fabmart and Firstandsecond.com wanted to be the Amazon — the giant book store — of India. Rediff was selling knick-knacks on its e-commerce channel. Sify too had joined the bandwagon. Apnaloan was promising to ‘sell’ loans online. Shaadi.com wanted to find your dream “other”. And then on April 4, 2000,  Nasdaq crashed. K. Vaitheeswaran, the CEO of Indiaplaza, remembers the moment vividly. Many venture funds of that vintage perished. Entrepreneurs were worse off. “There were almost 1,000 e-commerce businesses in India at that time. All of them closed down,” says Vaitheeswaran. In the space of six months, ‘dotcom’ had gone from meaning ‘hip, cool; inheritors’ to ‘naïve, paper tigers; lambs to the slaughter’. Hell had frozen over. But so much chaos, so much life had been unleashed. Could something have survived — spirit, derring-do — the carnage? Kapadvanj, a small settlement of 50,000 people, is an hour’s drive from Ahmedabad. It hasn’t changed much in the last 10 years. Yes, there are a few more cars and thanks to DTH and pay-per-view, the latest movies get screened much faster, but life moves at an easy pace. Of course, the Internet connection is much more reliable. And Rinkal Shah is all grown up now. This 26-year-old Web designer’s house in Triveni Park has all the things you would find in a modern house: LCD TV, DTH set top box, laptop, refrigerator and of course Shah’s favourite, Nikon D5000 digital SLR. 

Shah bought all these things without setting foot inside an electronics store. He just ordered all of it online. All put together, it must have cost at least Rs. 2 lakh. “I get most of the products on the fourth or fifth day after ordering, at prices lower than physical stores. Free home delivery is a given. And the products are always box packed unlike physical stores like Croma, which have offered me products in open boxes saying it was their ‘last piece’,” says Shah.

In the age of the ever ubiquitous World Wide Web it is hard to shock people, but when a 26-year-old guy in a small town starts buying stuff worth a couple of lakhs without touching the products or without asking the salesman 101 questions, it is time to ask oneself what Marvin Gaye, the singer, asked: “What’s going on?”.

Hitesh Dhingra, the founder and CEO of Letsbuy.com, the online store from where Shah bought his Nikon D500, would simply say: “e-commerce” is what’s going on. Dhingra started Letsbuy in 2009, quitting his job at Tyroo, a digital advertising firm.

By December 2010, Dhingra was selling between Rs. 75 lakh and Rs. 1 crore of electronics every month, causing three venture capital firms to invest $6 million into his company. Today, sitting in his three-storey building off Aurobindo Marg in Delhi, Dhingra says his site has grown to 10 times over the last six months and expects to be doing monthly sales of Rs. 25 crore by December this year. If you thought that was fast, wait till you hear Dhingra’s ambition: Rs. 2,000 crore in revenue over the next three years.

Where honeybees go, the bears follow. Led by an aggressive charge from a New York-based investment fund, Tiger Global, venture capitalists are virtually stampeding to invest in e-commerce startups. Publicly, they have invested nearly $140 million into these companies in just the last six months, compared with just $48 million in all of 2010. Add deals that haven’t yet been reported or are close to being signed, and the number shoots northward of $200 million. Suvir Sujan, partner, Nexus Venture Partners and former co-founder of Baazee, says: “If not two, we must have met at least one e-commerce entrepreneur a day in the last six months who are looking for financing.”

Entrepreneurs and investors had stopped thinking really big over the last decade, says Rajesh Reddy, the founder and CEO of July Systems, a mobile solutions company based in Bangalore. “But big-sized ambitions — ‘hyper growth’ — is back today!” he adds. Reddy is also one of those few entrepreneurs who have been doggedly managing and growing online businesses in India during the last decade.

In the last 10 years, China has created giant e-commerce companies like 360buy, TaoBao and Tencent. Russia has Yandex and Mail. Brazil has Mercado Libre and BuscaPé. And these companies came about because funding sources in these geographies did not dry up the way they did in India. Indian e-commerce is playing catch up.

So, could something have survived the carnage of 2000? It sure looks like the spirit of e-commerce has shot through a wormhole and appeared in a different place and time: Bigger and hopefully better than before.

  Source: Rohin Dharmakumar @ Forbes

The Business of Schools

Schools are notoriously tough to scale up and the government isn’t letting profit-motivated models to take off. But a new breed of entrepreneurs is experimenting with some solutions

Image: Dileep Prakash for Forbes India MODEL 1 Satya Narayanan's Indus World runs school in partnership with real estate companies who lease him the land in residential projects that they are building K rishnan Ganesh, chairman and founder of TutorVista.com, an online tutoring company, is a serial entrepreneur with a nose that can sniff out new opportunities very early. In 2002, he and his wife Meena sold their call centre business, Customer Asset, to ICICI for $20 million. His investment in the next business, Marketics (a data-analysis start-up) fetched him a good return too (he sold it to Business Process Outsourcing firm, WNS, for $65 million). And now the duo has spotted their next big thing: Schools. Last year, Ganesh and Meena joined hands with the Manipal Education and Management Group, one of India’s oldest names in private education, to get into the business of running K-12 (short for Kindergarten through Standard XII) schools. The opportunity for the business of education in India is huge. India has the world’s largest population of school going children (over 200 million). Indians also spend a lot of money on education. “School education forms the second most important spend item on an Indian family’s list, just after food and grocery. In US it is seventh,” says Ganesh. But it won’t be easy for him. Education is a difficult business to build scale; there are hardly any businesses of scale in this sector, in India or elsewhere. There are only 75,000 private schools in India, and only a handful — like Delhi Public School (DPS) — have managed to cross 100 locations. A key reason for that is schools are a not-for-profit pursuit by law. And with reason — education needs to be inclusive. Human Resource Development Minister Kapil Sibal has minced no words in letting the whole world know that as long as he stays minister, those seeking to make profits out of schools can take a hike. So, schools in India are required to be set up by charitable public trusts which cannot take out surplus money out of the institution. As a result, there is hardly any venture capital investment that has gone to setting up schools in India. According to a research report published in January 2009 by IDFC SSKI, only $180 million of private equity investment has taken place in the formal education sector. This includes the entire gamut — from playschools, to coaching classes, online tutoring and digital content for schools. Yet, Ganesh is not the only entrepreneur venturing into the business of schools. In 2007, Shantanu Prakash of Educomp Solutions started The Millenium School which has plans to set up 100 schools, and in 2007 Career Launcher’s founder, Satya Narayanan R., started the Indus World School. Today Indus World has 12 schools across India, and aims for 100 schools by 2014. Why are so many entrepreneurs interested in this business, despite the constraints? Karan Khemka, who heads Parthenon Mumbai (a global strategic advisory firm), lists five reasons why schools are such an attractive business: “There is more demand than supply, there are high barriers to entry, school fees rise higher than inflation, there is high visibility of revenue, and finally it works with negative working capital [since a school collects fee in advance]. No other business has these characteristics. It is better than IT, investors are dying to get in.” And each one of these entrepreneurs has a blueprint for how to build a significantly large chain of schools. Cracking the Code Schools in India can only be owned by a not-for-profit trust or society or the government. With over a million public schools, the government runs the largest number of schools in the country. DPS is run by a not-for-profit trust. Most businessmen and investors blame the law for creating pygmies in the sector. Their reasoning is that the absence of clear profit making structures make it difficult to raise and deploy capital across schools, which makes it difficult for them to scale this business. A school is a capital-intensive business. In a metro, setting a school for 1,000 children on a 2-acre plot could cost anywhere between Rs. 15 crore to Rs. 25 crore (including land and buildings). The simplest way to raise money is through equity, but no private investor wants to invest money in a not-for-profit trust. This is why the entrepreneurs getting into the business have created two legal structures. A trust that runs the school and books all the expenses, and a company that owns all the assets — land, building, management and technology — and leases it to the trust for a fee. Almost every new entrant into the school business is using this twin structure to set up a school with minor variations. Some use it for setting up new schools; others have used this route for working with existing trusts and schools. Image: Hemant Mishra MODEL 2 Ranjan Pai, CEO, Manipal Education and Medical Group. Manipal K-12's model involves getting into a management contract with trusts that already run schools but are struggling While Career Launcher’s Satya Narayanan has set up new schools in Tier 2 and Tier 3 towns, Ganesh of Manipal K-12 is tying up with trusts which had set up schools (and owned the land and buildings) but were struggling to run the schools better. Manipal K-12 gets into a management contract with these trusts — for a fee, Ganesh’s company runs all aspects of the school starting with appointing the principal, the faculty, teacher training, curriculum design, running the ICT (information and communication technologies) class, and so on. In return, the trust pays him anywhere between 20-80 percent of the school fees it collects from parents (depending on what investments Manipal K -12 is willing to make). Ganesh says it’s the best way to build scale, since Manipal does not have to invest in expensive land and building. In five years, he hopes to sign up 100 schools across the country. Each will be co-branded as Manipal, which is already a recognisable name in education. The key here, says Satya Narayanan, is to build scale and ramp up the model in as short a time as possible. Satya Narayanan raised about $10 million for Career Launcher from Gaja Capital, part of which is going in setting up the schools business. Schools bring in revenue of about of $4 million and are yet to start making profits, he says. Narayanan’s Indus World runs schools in Tier 2 cities like Amritsar, Gurgaon, Bhiwani, and Raipur where the fee ranges between Rs. 1,500 and Rs. 6,000 per month. While five of these schools are owned by him, the rest are in partnerships with real estate companies who lease the land to him to build a school in a residential project that they are building. For example, he has tied up with Shriram Properties to set up 25 schools in residential projects being developed by it. It’s a win-win situation for both. A school inside a residential complex helps the builder sell his property faster and provides Narayanan with good real estate. Is management services contract then the way to go? Some think it is. Sandeep Aneja, of private equity firm Kaizen, which raised a fund of $150 million for investing in education, says given the current regulatory structure in India, it is a good way to build a scalable model. He says his firm will soon announce an investment in a company which has a similar structure. Not everyone agrees. Investors and analysts say that it is still not a clean corporate structure. While the law has so far allowed schools to function this way, there is no guarantee it will be continue to do so. As far as Manipal K-12 is concerned, Ganesh says there are no violations of any law because he takes over existing schools. Ganesh’s competitors say that the risk here is that only the schools that are struggling will look at this model. The good schools, which have the reputation and the staff, are not interested in partnering with entrepreneurs in this model. That may be so, but Ranjan Pai, CEO of Manipal Education and Medical Group doesn’t see it that way. “How many students can get into these elite schools? We are a country of a billion people, how many elite schools can we create? You need mid range schools in this country. The entire IT boom was created by tier 2 and 3 colleges. You can’t be elitist in this country, you need good quality but you also need scale.” Patience Capital In 1998, when Kavita Sabharwal dropped out of the MBA programme at Harvard and went back to her dad’s business, the $600 million Lupin, she had no idea that one day she would start a preschool. In 2005, frustrated by her attempts to find a good preschool for her son, Sabharwal set up Neev in Bangalore. Today Neev, a kindergarten school for ages two to six, has four branches in Bangalore. It charges an annual fee upwards of Rs. 1 lakh a year (most others charge one fourth of that). Sabharwal now wants to take Neev to other cities like Mumbai and also extend it to higher classes. Her first concern is raising money. Neev was funded by her own money but Sabharwal says she needs Rs. 20 crore to Rs. 25 crore for each full-fledged school she sets up. Four such schools would need at least Rs. 100 crore in capital investment. She has received feelers from venture capital and private equity firms, but is not convinced that is the best way to raise money. They look for quick returns in three to five years, while this business is for the long haul, she says. Establishing a brand takes years. Her only choice then is to take debt to finance her expansion or fund it through her own money. Image: Vikas Khot THE PULL The schools business "is better than IT, investors are dying to get in" , says Parthenon Mumbai's Karan Khemka Raising money and working around regulations is a serious worry for entrepreneurs, but there are other complexities as well. Sawal Jethani, is a trustee at Vibgyor High, which runs about five schools across cities like Baroda, Pune, Lucknow, Mumbai and Bangalore. He says, “Any other business in this country will have the same rules and regulations across the country. Telecom, retail will have one centrally controlled policy making body. The only thing that will differ is tax. When it comes to education everything is different”. For example, while the syllabus is set by the board (like Central Board of Secondary Education, for instance) that the school is affiliated to, individual states can dictate the maximum fee that a school can charge, insist on the local language as the medium of instruction and restrict the distance that a child has to travel to get to school, limiting a school’s market to the neighbourhood. You won’t get economies of scale if you run schools across the country. “Only 20 percent of the costs will be common across all schools, like curriculum, management overheads and so on. The rest is all local,” says Jethani. At best, schools in the same city can perhaps share the transport company and a central cafeteria. It is this local nature of the school business that also means that a standalone school could continue to flourish for a long time. “Eighty percent of the kids in a school will come from a 5-7 km radius, so how many more schools can you put in the same location? After all, land inside the city is extremely hard to find,” says Jethani. Which is why, the school business will be one that grows slowly. For instance, the biggest challenge in the Manipal K-12 model, says Pai is getting the right principal, who he thinks is crucial for a school’s success. Finding 300-400 good principals to manage new schools is a difficult task. So, Manipal K-12 is looking at only 100 schools in its first five years. In a stable state, a school earns net margins of 25 percent, which makes it an attractive business on a per unit basis. But revenues from a school tend to be low (Rs. 3 crore for a school of 1,000 children charging an annual fee of Rs. 30,000 per child). Which means, to build a company of size, an investor needs to look at at least 500-1,000 schools. That is quite a task. “In India no one knows what model will work” says Aneja of Kaizen. “Even globally there is no billion dollar company running schools,” says Khemka. “If you are talking about a commercially viable scaleable model, I would look at the mid-segment where there are 35-40 kids a class with one teacher. There the breakeven is three to four years,” says Abha Adams, a Delhi-based an education consultant. Entrepreneurs like Narayanan believe that in time we will get there. It has not been done anywhere in the world, because no one else has India’s scale. Plus, in developed countries it is the government which has stepped in to provide education to the masses. In India, government schools have failed to do that. “Even my driver’s son goes to a private school,” says Ganesh. Narayanan says that just like in telecom, retail and health care, in education too the government will change regulation and allow profit making because “it is the only way to solve the problems in the sector today”. Once that happens, he says it will be entrepreneurs who will create profitable, scalable models serving the masses in the country. “There is no doubt in my mind, that in the next five years we will have a chain of 1,000 schools in this country and it will be done by an entrepreneur” says Narayanan. Khemka of Parthenon says that the industry will really take off when large corporate houses in India enter the fray. “The only way I see scale in this business is through the endowment route where large wealthy patrons set aside patience capital to build quality institutions,” says Anurag Behar, co-CEO, Azim Premji Foundation. Till that happens, entrepreneurs should treat this as a “spiritual return on capital” says Kavita Sabharwal.

Source: Mitu Jayashankar  & Malini Goyal @ Forbes