Aditya Birla put Rs 110 billion into More grocery — and sold it at a Rs 70 billion loss

Spurred by Walmart's success in the US, the Aditya Birla group's promoters set up Aditya Birla Retail in 2007 to run the More chain of grocery stores. A decade later the bet had consumed close to Rs 110 billion of promoter debt and equity, and the proposed sale to private equity firm Samara Capital offered to take over only Rs 40 billion of external debt — leaving the Birlas staring at a loss of around Rs 70 billion, including their entire equity in the grocery operator.

The economics never worked. Accumulated losses crossed Rs 67 billion in 2016-17; that year More lost Rs 6.44 billion on sales of about Rs 42 billion, and total debt reached Rs 64.56 billion. Rivals that achieved scale — Reliance Retail and Future Retail — broke even on the same wafer-thin margins, while Tata's Star Bazaar and Spencer's were also still short of cash profits. "The firm had huge overheads and failed to achieve the scale required for food and grocery business," said the CEO of a rival who was approached for a takeover and did not pursue it.

A plan to merge More into the group's listed fashion business, Aditya Birla Fashion and Retail, was dropped after institutional and PE investors objected. By fiscal 2018 store-level break-even had arrived — 95 per cent of supermarkets and 90 per cent of hypermarkets profitable after closing unviable stores and cutting costs — but the group still had to write off Rs 10 billion of debt from unlisted group companies in the transaction.

Food and grocery runs on wafer-thin margins that only scale can carry; More's roughly 509 supermarkets and 20 hypermarkets never got there while overheads stayed huge.

Past losses were funded largely through external borrowings, so debt and interest compounded and kept net losses coming even as store economics improved.

With the buyer assuming only external debt, the promoters' decade of funding converted into a near-total write-off of their Rs 110 billion investment.

Scale is the whole game in food and grocery: overheads ate More's economics while rivals with scale broke even on the same wafer-thin margins.

Bonds worth Rs 28.7 billion due for redemption in 2018-19 were expected to be extended or converted to equity. Business Standard reported the group had also shut Aditya Birla Online Fashion the year before after its online business failed against Flipkart and Amazon. The Aditya Birla group did not respond to the newspaper's email.