Big Bazaar Direct Franchisee Model : Decoding the Economics

[Editorial Notes: Future Group has launched Big Bazaar Direct, a direct selling platform for which it will use a tablet based e-commerce backend. Reproducing this piece of analysis on Big Bazaar Direct Franchisee Model, from  NextBigWhat Forum, a melting pot of entrepreneurs, doers and geeks. This analysis has been done by Sandeep Reddy,Co-founder of Groffr.com.]

It’s great to see big companies think like startups and then executing it on a massive scale!

After seeing full page ads in TOI, i was trying to think how the economics would work for a franchisee. Did some google search but did not find any…so did some thinking and those thoughts are presented below. Hoping that others on this forum will contribute to this thought process and it would be great if some prospective franchisees benefit from this! 🙂

Clearly it is a great business for Big Bazaar because they are targeting 1 lac franchisees across India and are asking for an investment of Rs 3 lacs (Rs 1 lac as security deposit+ Rs 1 lac as advance for goods to be sold + Rs 1 lac for tablet/training/branding etc)

* Source

Big Bazaar Direct Franchisee Model : The Big Deal

Big Bazaar gets a cashflow of whopping Rs 3,000 crores! So for Big Bazaar this is a negative working capital business! (I am not going into the profitability of the business for Future Group and i also hope all this cashflow does not go into reducing the debt of Future Group!)

Let’s look at the franchisee now.

Assume I take a franchisee of BigBazaar Direct in a tier II city like Nashik. Now I have to go door-to-door and sell goods on the tablet and Big Bazaar Direct will ensure the delivery of goods in 3-7 days

(Source)

Assuming I can sell to 10 families in a day and the order size is Rs1,000-1,500 (rationale is that since the delivery is 3-7 days, these typically would be planned purchases mostly groceries which are repeat purchases and this could get higher in case of consumer durables and apparel, but lets be conservative for our analysis)

Daily average value of goods sold per franchisee= Rs 10,000-15,000

Monthly average value of goods sold per franchisee = Rs300,000-450,000

Now the important stuff, MARGINS!

Big Bazaar has Gross Margins (values of goods sold- cost of goods) of close to 25%.

*Source

Now, this margin already captures the lower price of goods that Big Bazaar has compared to mom-and-pop stores which would entice a household to buy from a Big Bazaar Direct franchisee.

Assuming the franchisee gets 10-12% margins on the goods sold which will give Big Bazaar Direct also margins of 13-15% [25%-10%=15%]

*Rationale: Big Bazaar in its retail format has EBITDA margins of 8-9%, so i am assuming higher margins of 13-15% for Big Bazaar Direct since real estate costs will be significantly lower but employee costs may increase as they will have more delivery men.

*Source

Now going back to calculations:

Monthly average value of goods sold per franchisee = Rs 3-4.5 lacs

Annually each franchisee could potentially sell goods worth Rs 36-54 lacs.
Margins of 10-12%= Rs30,000-54,000/- per month

So, a franchisee can make an income of Rs 30,000-50,000 per month or Rs3.6-6 lacs per annum!

So basically on an investment of Rs2 lacs (since Rs 1 lac is deposit), you can start making Rs3.6 lacs annually.

I believe Big Bazaar Direct will have a strong focus on Tier II/III cities where internet penetration and credit-card penetration is much lower and therefore a direct door-to-door selling by a brand could be hugely successful.

Since each franchisee is going to sell Rs3-4.5 lacs of goods per month. Imagine what 1 lac franchisees would do!

Yes…Rs3,000-4,500 crores per month or Rs36,000-54,000 crores per year~ US$5-10 billion!!
The fact is that this is not additional/incremental consumption in the economy…so who is going to LOSE!

I believe this business model may turn out to be one of the major shifts in a massively fragmented retail market where the mom-and-pop/kirana stores are going to lose market share to an organised Big Bazaar Direct scheme. Therefore I feel it would be BEST if local kirana store owners themselves become Big Bazaar Direct franchisees making it a WIN-WIN for everyone involved—consumer, kirana store owner/franchisee, Big Bazaar!

I am hoping that if Big Bazaar can educate the Kirana store owners to treat this business model less of a threat and more as a business opportunity, it would not be difficult to find 1 lac such people. And these people will be best equipped to sell to 10 households/day with their existing relationships and the entire calculations/scenario may just come out to be true!

[Follow Sandeep Reddy on Twitter @hsrdce.]