Decoding VMart's 'Unlimited' move

In one stroke, VMart will now transcend from being a retail chain with a big presence in the north and east to a pan India footprint at a time when the going has been tough for most retail brands in India.

The acquisition of the 'Unlimited' retail store business from Arvind Lifestyle Brands will give VMart a significant footprint of an additional 74 stores taking the total tally to 356. Top that with an acquisition cost of just Rs 150 crore and the growth opportunity seems very attractive indeed.

It has been an open secret for at least 2-3 years that Arvind was looking to divest Unlimited. The company's decision to now hunt down the brand business - it has the likes of Arrow, US Polo in its portfolio - meant there was very little it could do with retail.

Starting primarily as a liquidation channel and in its earliest avatar as Megamart in 1995 selling old stock at a discount, the entity went through a long period of stress and this deal is a source of relief. For VMart, it could just not have got better.

As things stand, Unlimited has 282 outlets with as many as 111 in Uttar Pradesh and 51 in Bihar. Promoted in 2002, the company went public four years later.

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In FY20, the year before the pandemic, it had a revenue of Rs 1,662 crore with a total retail area of 23 lakh square feet. Unlimited brings to the table another eight lakh square feet and a turnover of Rs 533 crore.

Barring Gujarat, where the combined entity has seven stores, there is no overlap between the two businesses, with VMart having no presence in the south.  

For VMart, to set up a new store would have meant an outgo of Rs 2 crore split equally between capex and inventory and if one does the math, VMart would have spent nearly Rs 150 crore. That is the price at which they have struck the deal or less than a third of Unlimited's revenue for FY20

"What the deal gives them is an existing business which is fairly well managed. Besides, it would have taken VMart at least 3-4 years to enter and expand in a new market. That time has been saved," points out Abhijeet Kundu, VP Research at Antique Stock Broking.

The terms of the transaction entail a revenue proportion of around 2-3% to be paid to Arvind if the revenue per square foot takes off by at least 30-35%, says an industry tracker. "It is clearly a deal that works well for the buyer. Besides, only the assets are being acquired."  

Understandably, the pandemic has played havoc with the overall business.

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Both VMart and Unlimited went through a tough phase with both revenue and profitability taking a hit. It was not till the last quarter of FY21 that the latter registered a profit and that too after several years.

Speaking of the strategic advantage by way of geographical spread, as many as 67 outlets of Unlimited are based in the south with a much lesser seven spread across Maharashtra, Gujarat and Goa. It is estimated that at least 80% of all outlets are owned leaving VMart without the worry of higher rentals.

In a conference call with analysts over the weekend, the top management of VMart said it will invest more in Unlimited's profitable stores. A potential challenge could be the average selling price across both brands - it is Rs 500 for Unlimited vs. Rs 300 for VMart.

The management did hint at a complete overhaul of the product portfolio in the former apart from phasing out the brand name as well. The other element of tweaking lies in Unlimited's large proportion of stores - around 45% - in Tier 1 cities. For VMart, it is only 23% and eventually, that number will change to have more stores in smaller centres.  

Harminder Sahni, Founder & MD of Wazir Advisors, points out that it is only the big boys such as Reliance Retail who have managed to create a pan-India operation. "It is a huge challenge and one has seen how Future Group too had to buy out Nilgiris and Heritage in the south. This is a time-consuming process and VMart has done the right thing," he explains.

On the specific issue of phasing out the Unlimited brand, Sahni thinks it is the right thing to do. "Consumers are interested in the brands inside the stores and what the store is called does not really matter."

With this move, VMart has little to complain about and all eyes will be on how it decides to make the next move.  

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