Germany B2B wholesaler METRO AG is in talks with potential local partners to grow its cash-and-carry business in India. While the percentage of partnership hasn't been made clear at this stage, METRO AG spokespersons have confirmed that they are looking at "strategic options" to "accelerate the business development in India".
The recent media reports suggest that METRO has reached out to several potential companies to partner or buy out its India operation at an estimated valuation of $1.5 billion to $2 billion.
However, METRO AG spokespersons said that "METRO India is a growing business in a market with enormous potential for wholesale. We are reviewing strategic options with potential partners to enhance METRO's existing wholesale capabilities and accelerate the business development in India." However, the spokesperson denied to "comment on rumours or speculations in the media."
METRO Cash & Carry currently operates 31 stores in the country and caters to small retailers and kiranas, hospitality business, small restaurants, food outlets along with institutional businesses. METRO was one of the first companies to start the cash and carry business in India in 2003 in India. But METRO seemed to have misread the India potential. The company made slow progress in initial years and till 2016, METRO had just opened 18 stores in India (with one store being shut down at Ludhiana). The company had been making losses for 14 consecutive years, and it was only in 2018 that the company finally reported profitability with a revenues of INR 6140 crores. In early 2019, METRO AG's then CEO Olaf Koch on his India visit had confirmed to Times of India that "Five years down the line, the Indian arm should generate significantly more than one billion euros in turnover and should continue to grow in profitability."
The prophecy turned true. In the last five years, the company underwent a successful transition under the current CEO, Arvind Mediratta , who is accredited to have turned the company's fortunes around making it a profitable billion-dollar company. Since 2016, the company has substantially scaled operations adding 13 new stores to its portfolio, even amidst the pandemic. In FY 2020-21, the company clocked ₹6,738.3 crore in revenue, with EBITDA up by 57%.
While the company may have had a positive EBITDA and a profitable run for the last couple of years, the expansion has still been slow and has been reported due to lack of funds. Till 2015, METRO had a commitment to open 50 wholesale stores in India by 2020. However, in 2016, when Arvind Mediratta took charge of the company, he retuned the India strategy to ensure a profitable growth for India. He is quoted in an interview with HT Mint in 2016 stating that "There's a new strategic plan for the next five years for the Indian market". He made changes to the expansion model to make it more viable and cost efficient. He has been quoted in media that "METRO wants to ensure profitable growth that is sustainable."
A person familiar with the development confirmed that the turn around of the company has indeed helped the company seek the estimated valuation. Requesting anonymity, the person said "METRO is a profitable EBITDA positive company, but still has not been able to expand much due to lack of funds. To sustain in India, they will need more investments either from the parent firm or local partners."
Commenting on its India business, one of METRO India's spokespersons said, "METRO India business is doing very well and has been profitable since 2018; now continuously four years in a row. We have seen a big jump (+57%) in our EBITDA for FY 21 vs FY20. Our e-commerce business in FY 21 grew by 5.7X vs. PY and we have successfully opened three new stores in India in the last 9 months."
Pricing and margin pressures along with cost efficient real estate for opening new stores are some of the challenges that the global wholesaler has been facing in India. In addition, with the influx of the new age ecommerce and quick commerce players, the competition has only intensified and has been disruptive. With instant deliveries and the cash burn for meeting customer expectations, the market is majorly being driven by venture capital infusion. Amidst this, METRO seems to have been scouting for funds to stay ahead of the curve. METRO started its ecommerce for trader and kiranas only in 2020 and while it is reported that the ecommerce business is contributing to over 20% of their business, the company is looking for investment to scale up in India including its digital presence.
A person familiar with the development said the despite being profitable, the current challenges that the parent company is facing with its global operation in Ukraine and Russia, along with the global inflationary pressures has led them to tighten strings on their purse and rethink India operation.
The Indian retail sector is estimated to cross the mark of USD 1.8 trillion by 2030, and the market dynamics are getting more intense. To survive this fierce battleground, METRO will need funds from investors to sustain competition from VC funded players and goliaths of the market.