Daybreak - Why Metro Cash & Carry may exit India after almost 20 years

Episode Date: December 21, 2022

70% of Metro AG’s business in India is made of kirana or mom and pop stores.But despite being Metro’s core customer base in India, kirana stores are actually turning out to be the straw that's breaking the German retailer’s back. Tune in to find out why.With inputs from Aayush Agarwal

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. 2003, Metro A.G, the 78 billion dollar German retail giant entered India with grand plans.

The Indian economy was growing at lightning speed. and the government had just allowed 100% foreign direct investment or FDI in the wholesale trade on a cash-and-carry basis. A cash-and-carry is basically a self-service wholesale store, especially for FMCG goods. Small business owners buy in bulk, pay the entire amount and then take the goods with them. So Metro AG, the fourth largest retail giant in the world, became one of the first companies to enter the segment in India. The timing was perfect. Over the years, Metro worked hard to develop strong partnerships and efficient supply chains in the country. And 20 years later now, it operates 31 wholesale stores in India, with seven of them on company-owned land in prime locations.

But even though it is closer to profitability than it's ever been before, Metro is still in the red in India. Its revenue in the year that ended in March 2021 was just $835 million. To give you context, Demart, which is a supermarket chain that started at the same time as Metro, saw 3.5 times that amount in sales in the same time period. Nearly 20 years of operating in the country and yet Metro could not graduate to a unicorn status. And now there is news doing the rounds from credible sources, that Metro Cash & Carey is looking to exit India. Yesterday, the Economic Times quoted Metro A.G's global CEO, Stefan Gruble,

as saying that the company is at a very advanced level of discussion on its India business. Why does Metro want to exit India after doing business in the country for all these years? Welcome to Daybreak, a brand new podcast from The Ken. I'm your host, Nick Da Sharma, and in each episode, I will tell you a business story that current, significant and most importantly interesting. Today is Wednesday the 21st of December. Let us first understand how Metro has been running its business in India. The B2B or business to business segment in which Metro Cash and Carry operates

is considered to be a low margin business in our country. Metro Cash and Carry stores in India are not directly open to consumers, which basically means that you have to register with Metro as a business customer to visit their cash-and-carry outlet. You buy what you want and carry your purchases back with you instead of placing the order with multiple vendors. Now, India poses a unique challenge to B2B retailers. Unlike in Western countries where groceries mean large supermarkets,

in India, we have Kirana or Mom and Pop stores. Despite being declared obsolete as e-commerce became all the rage, these stores are still around. In fact, according to CB insights, they make up most of India's $932 billion retail economy. In India, as Metro expanded over the years, Kirana stores emerged as the backbone of Metro's business in India. There are close to 12 million Kirana stores in India and they make up 70% of Metro's business here. This is despite Metro having a clientele that includes restaurants, offices and hotels. A few years ago, Metro even ran programs to digitize these small Kirana stores via an app.

But despite being Metro's core customer base in India, Kirana stores actually turned out to be the straw that broke the German retailers back. Let me explain why. Despite its two-decade-long presence, Metro was still playing the supporting role to traditional distributors of FMCG companies or small-scale wholesalers. It was almost like a one-sided relationship. Metro was way more dependent on FMCG manufacturers rather than the other way around.

FMCG companies in India have traditionally had a solid network of these distributors who supplied to Kirana stores directly. Now, these are lasting relationships that have been built on mutual trust over years and years. So why would they want to add a middleman in it like Metro in this case? This network of FMCG distributors is especially large and strong in big cities. It would be next to impossible for a metro to replace them. 16 out of Metro's 31 stores in India are in Bengaluru, Hyderabad, Delhi-NCR, Mumbai and Ahmedabad. These are all places where Kiranhas are directly serviced by FMC company's own distributors,

leaving little incentive for Kirana owners to shop at Metro. And in Tier 2 cities too, where the distributor network is relatively weaker, there is hardly any space for a metro cash-and-carry store. We need to keep in mind that Metro Cash and Carries are massive stores usually expanding to 30,000 to 40,000 square feet with some as large as 100,000 square feet each. It is not easy for a cash-and-carry store in a small town or a city to justify that kind of space. A retail analyst who spoke to my colleagues, Ayyush Agarwal and Sita Ramanji, put it quite bluntly. He said, and I'm quoting, brand metro has zero value.

Let me give you another reason why the metro model does not really fit the Indian retail market's needs. A former senior executive with FMC company Mariko said that expecting Kirana owners to go to a metro store to refill their shelves may be unrealistic. This is because the owners are often also the ones who are manning the cash register at the shop. They simply do not have the time. He said that the only silver lining that Metro offers is free delivery for orders above $10,000. Now, let us look at stockkeeping units or SKUs. FMCG companies don't give shopkeepers large quantities of a product. This is particularly true of popular SKUs such as 1 kilo packets of detergent surf-exel,

or say, 500 gram packets of Tata T premium, both of which are extensively supplied to Kiranhas through the company's own distribution networks because these products are in high demand. So it makes no sense for FMCG companies to give these high demand products to another wholesale distributor like Metro. If anything, they would like to do the opposite, right?

Which is to push products that are not in so much demand to Metro. But this in turn would dilute metering. Metro's proposition to Kirana store owners, because Kirana store owners would obviously want the fast-selling products. And last but not the least, looks matter. Sita Raman visited a few metro stores and in his own words, even the no frills demart looks like a gourmet store comparatively. Metro stores are that plain. A bad mix of a warehouse and a supermarket. So now you understand why Metro's gross margins are just a.

11% in India. It is lower than Demart even, which has about 14 to 15%. Metro has been incurring losses in India for years. In the financial year 2021, the German retailer posted a net loss of over 67 crore rupees in India. So it is not really surprising why Metro A.J is reportedly looking to sell its business in India. And what is even more fascinating is the range of suitors who are interested in buying it. The going price for Metro cash and carry, when this news started doing the rounds, was reportedly about $1.5 to $1.75 billion. So earlier this year, there was a queue of companies that wanted to acquire Metro. Among the predictable names were Thai conglomerate CP Group, which wanted to add to its three existing cash and carry stores in India.

Then there was the e-commerce behemoth Amazon and private equity firm Samara Capital, which together owned the more supermarket chain. The most unlikely candidate of all, however, was food tech giant Swiggy. Swiggy has big plans to grow its grocery delivery arm, Instamart, and acquiring Metro was a part of it. But it was too big a risk for Swiggy just to service Instamart. The retail analyst I quoted earlier explained it quite simply. He said, and I'm quoting, unless Swiggy wants to compete with Geomart and Udahn by supplying to the hotels and restores category, the deal doesn't make sense. End quote.

And finally, the most interesting and also the most likely suitor. Now, let me warn you that neither of the parties have either confirmed or denied this news so far, but if media reports are to be believed, it is reliance retail. Last month, the Economic Times reported that Reliance had agreed in principle to buy Metro A.G's Cash and Carry wholesale India business for $4,000 to $4,500 crore rupees. But Reliance exited the offline wholesale business in late 2020 despite being the largest player. It turned its 52 cash and carry reliance market stores into fulfillment centers for its e-commerce service, GeoMort.

While no one can say anything for certain about what exactly is in this deal for Reliance, we can try to put two and two together. Reliance already operates the largest B2B and B2C grocery business in the country via GeoMart and Reliance Retail. Since Reliance left the brick and mortar B2B business during the pandemic, Metro stores would be nothing more than real estate to it. After all, all the old Reliance Market wholesale stores are now just, Geo Mart warehouses.

Plus, Geomart also consolidated its back end for its B2C and B2B businesses. It now carries a common inventory for both, which means it needs more warehouse space to carry out a more centralized and streamlined operation. And Metro Cash & Carries stores with their size and some with their prime location seem like the perfect fit. Or maybe they could just turn them into Reliance supermarket stores. Who knows? Daybreak is produced from the newsroom of the Ken

India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.