Godrej’s Nature Basket acquired by Spencer’s Retail at Rs 300 crore – Why?

The post tries to comprehend the real reasons behind the deal and whom will it really benefit

On May 17, when I heard about it, the immediate reaction was WHY? Also the published valuation of Rs 300 crore against an annual turnover of Rs 338 crore (FY 2018-19) seemed low on every conceivable historical benchmark !

All of us know that retail businesses normally get valued at a minimum of 2x of sales with no upper limit…

So thought of finding out some facts to ascertain the real reasons for the deal at such perceived low valuation.

First, its important for the benefit of our Pan India readers to summarize the business of Godrej’s Nature Basket (GNB):

  1. Started in 2005, by one of the most widely respected Godrej group, GNB is a “niche high street grocery chain” spread across Mumbai, Pune and Bengaluru. Current total store count stands at 36 stores.
  2. Its format is neither that of a typical mom and pop store, nor of a large departmental store. Its customers mostly associate it with niche high quality food items both Indian and imported.
  3. The customer loyalty is reasonably high for GNB stores.
Why did Godrej sell it?

 

Its interesting to note here that Godrej invested almost Rs 450 cr in GNB business in last 14 years and finally they sold it for Rs 300 cr. Godrej normally is a very sharp business group and this kind of a deal surely was one offs for them. Speaks a volume about how challenging GNB would have been.

Business has been significantly loss making
In FY 18, GNB made a loss of Rs 62 cr on a turnover of Rs 291 cr. In FY 19, the turnover increased to Rs 338 cr (profitability numbers are awaited from the Company, though paid-up equity during FY 19 increased by about Rs 75 cr implying continued significant losses for the business net of money spent on opening new stores)
Losses a drag on listed Parent Company's profits
GNB is a 100% subsidiary of Godrej Industries Limited (GIL) – the holding company of Godrej group with interests in consumer, chemical, agri and real estate businesses. GNB’s losses have for number of years been a drag on GIL’s reported profits (in FY 18, it had put a drag of almost 13%) 
No clear business plan to turn it around
GNB was started way back in 2005 and the group gave it good long 14 years. Indian market has evolved drastically during this period. The competition has intensified on one hand from large departmental chains like Dmart, Big Bazaar and Reliance Retail and more recently from online players like Amazon, Big Basket and Grofers. I believe given the positioning of GNB stores, it somewhere was finding increasingly difficult to become commercially viable.

I believe Godrej Group sold GNB as they were finding it increasingly difficult to turn profitable and also their other businesses are doing well so why to unnecessarily waste energies on something where competition in any case is intensifying !

It makes perfect business sense and my confidence on GIL’s share further increases with this decision of theirs… 

Does it make sense for Spencer’s Retail?

Spencer’s Retail, part of RPG Group has a very long vintage in Indian retail landscape going as back as 1863. It has been through various ups and downs over the period and currently operates 156 stores in 39 cities. In FY 19 it reported a turnover of Rs 2,215 cr and a nominal profit of Rs 2.4 cr.

GNB acquisition to help Spencer's expand in Western India
GNB stores being primarily located in Mumbai and Pune, Spencer will get a foot in these markets
Spencer's strategy to turnaround GNB operations a key
If one simply looks at GNB losses of say about Rs 60 cr annually vis-à-vis Spencer’s reported profits of Rs 2 cr in FY 19, one would tend to believe that its a bad acquisition for Spencer’s shareholders. However, given Spencer’s vintage in retail business, I am presuming that they would have a definite plan for GNB business.
GNB current store locations and client profiling would be a challenge
GNB’s typical store locations are high street (with resultant high rentals), store sizes are small to medium, and client profiling is niche. To manage this unique mix commercially in an intensifying competitive environment is something to watch out for. 

Spencer’s Retail has surely made an interesting and bold move by acquiring GNB. How well it plays out, remains to be seen !  

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About the author

Nitin Jain

A finance professional with around 20 years of investing experience in Indian markets both on buy and sell side, equity and debt, private and public with some of the best organizations globally including Goldman Sachs, ICICI Group, ICRA and others. He is a All India Silver Medalist CA by qualification.

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