Aditya Birla Group on Friday launched an online portal, Abof.com, to sell fashion merchandise. Kumar Mangalam Birla, 48, chairman of the group, talks to Dev Chatterjee and Raghavendra Kamath about the group's late entry into the online business, why millennials are flocking to e-commerce and why India Inc is not investing in fresh capacity. Edited excerpts:
Aditya Birla Group is one of the very few private companies in India investing in new projects or acquisitions. Why are others wary of doing so?
A lot of companies have huge debt on their balance sheets, which prevents them from investing in new projects. There are other reasons, too. The good news is that the pace of economic reforms is picking up and the government is taking a lot of steps to make investments happen. Take, for example, the goods and services tax (GST). A lot of action is going on behind the scenes. Still, I think it will take at least a year before we start seeing results on the ground.
Commodity prices are crashing worldwide and a lot of companies are seeing a fall in stock prices. How are the falling commodity prices impacting companies in your group, especially Hindalco and Novelis?
I think commodity prices have bottomed out…we have probably seen the worse and now, it's behind us. The low commodity prices are unsustainable because at these levels, many companies that run high-cost operations globally will find it uneconomic to sustain operations and, eventually, shut. One can already see the impact of this on metal stocks across the world, including that of Hindalco, which has touched a low of Rs 90. For Novelis, the high commodity prices are a pass-through; so, it's neither good nor bad. For smelters, of course, any low price will make it unsustainable to run operations in the long run. But, as I said, the worst is over for commodities.
What made you invest in an online platform to sell fashion merchandise when India already has many well established players? Besides, your group has sizeable presence in the offline format. Were you scared of missing the bus?
We continuously look at opportunities and mega trends in the economy, and to make the best of the opportunities presented by these trends. We have been looking at the e-commerce segment for quite some time; this makes sense from our perspective. We have huge offline presence in the fashion business and the companies (Madura and Pantaloon) have recently undergone major restructuring; that's why an online fashion portal is a natural choice. The other reason is the fashion market is growing very fast and we expect the overall fashion apparel business in India to touch $15 billion in the next five years, of which online merchandise will be close to $5 billion. We already have a site called trend.in, which is for Madura and Pantaloon products. Abof.com will have much wider products and we have already tied up with 55 external brands in the past nine months; soon, it will have 100 brands. There is a new target group of millennials that is looking for particular brands of clothes, in a particular price range. So, our new site will connect with them.
As a late entrant to the e-commerce segment, how will you take on the deep-discount model of established players such as Myntra and Jabong?
I think this is not a field in which we will see only one player who will walk away with all the goodies. This will be a two or three player-game and eventually, we will see some shakeout in the sector. Many smaller players are already drifting. But if you look at the medium to long term, it's unlikely that one site will have all customers flocking to it. A customer will always browse two to three sites before making a decision to buy. So far, customers have always looked at range and discounts. But we are looking at more personalised catalogues and well-curated merchandise. We are not looking at a deep-discount model but one high on style quotient. Our prices will be quite sharp, which we call "honest pricing".
Recent investments in many Indian e-commerce companies show valuation of billions of dollars. Do you think these valuations have become unrealistic?
Frankly, either I do not understand these valuations or they are terribly unusual. Obviously, these valuations are unsustainable. I think at some point, a business will have to make money. The jury is still out on that. We are expecting our site to start making money in four to six years. A business like this typically starts making money in five years.
How have e-commerce portals impacted your offline businesses such as Pantaloons? Are you noticing any drop in consumer spending in the offline stores?
Pantaloon's sales are growing and as of now, we do not see much impact of online shopping; it is more on the margins. If you talk about sharp discounting, it is going back to the fundamental issue of sustainability. We see the online business more as an opportunity than a threat to our businesses.
Offline retailers are seeking parity with online retailers who have raised funds from international funds; at the same time, they are not allowed to raise funds from offshore funds. Considering you have India's biggest offline retail business, what is your view on this?
I am not an expert on policy matters. But if foreign investment is allowed, we are ready to consider that both for our offline and online retail businesses.
Are you looking at private equity in the new e-commerce company?
Basically, it's about timing and getting good valuations. We are not desperate to get investments from outside parties.