Shuddho is the Shwapno of Tomorrow
VALUE-ADDITION FOR DIFFERENTIATION
From having 60 outlets to partnering with farmers for Shuddho, how far has Shwapno evolved over the years?
Right now we have 107 outlets. When I joined back in 2012 I actually shrank the number of outlets to 37 initially because I wanted to rationalize the portfolio. Once we got our value proposition right, we started growing again.
Coming back to how Shuddho is linking Shwapno with the farmers – the vision of Shwapno was always to connect the seed with the shelf. But you need volume to do that, you need a scale. We started sourcing directly from the farmer’s right from 2013, but right now 45% of our fresh produce is coming straight from the field and 64% fish is coming from fishermen. Shuddho is a new concept, connecting us directly to the growers so that we can capture value, pass that value to farmers and share with the consumers. In the value chain, you eliminate some of the intermediaries, their added value is now your value, and you can pass some to the farmers, some to the consumers. Our price became lower than the market, and the farmers were getting a better price than what they were used to having, so both were happy – farmers and consumers – and we were the bridge, the platform connecting these two dots.
Then we thought only value might not work, because our competition thought “let’s cut down the price, let’s bleed and let them bleed as well”. So there began a price war. I am talking about 2013 and 2014. We became the market leader right from 2014, and still, now we enjoy 46% of the market share, growing every year. Since we focused only on value, I thought we need to differentiate ourselves from just price and convenience, we need to add something else. That’s when we focused on our purpose. A purpose of ensuring that we deliver safe food at an affordable price. For packaged goods’ health-related safety issues, we can’t be held accountable entirely, since we as a shop only keep them; it’s impossible to go to the factories and check their QA and monitor whether the manufacturer followed proper rules and regulations. But for fresh produce, we wanted to ensure the trust of the consumer.
I was introduced to Kristian Moeller, the CEO of Global GAP. We had a long discussion and we decided that this is important to us. Shwapno became the first Global Gap member in South Asia as a retailer. We were ahead of time, and through it, we brought the Global Gap principles and started encouraging the farmers to ban known pesticides. They have to follow PHI – Pre Harvest Interval – so, let’s say we add pesticide to a crop now and according to PHI, I have to wait for 7 – 10 days before plucking it. If you don’t wait for that time, the pesticide residue will remain in the crop and eventually will make its way into our food and that’s extremely harmful. To prevent all these, we established this concept called Shuddho, a new brand of Shwapno which ensures that we are following PHI; we are not adding any harmful pesticide, and we are promoting non-chemical pesticide in our food. To ensure transparency we are putting boards in the fields to show that this is where we buy our produce from and this is how it is done. In our stores you’ll see under Shuddho brand it is written when this crop has been harvested, what PHI it was at. Conveying all these messages is important as it bears testimony to our transparency to the consumers.
Convincing farmers is also important. They are getting 5-10% extra on top of what they used to get from us and that’s how they are encouraged. But the problem is when the price is moving to the consumers, they were initially not happy that Shwapno has increased the price, then we had to convince the consumers that Shuddho is different from what you are getting in the market and you should pay something extra. So the struggle is to convince the consumers to stick with Shwapno because we are not just about value, we stand for quality, we stand for safe food, and we stand for something good for your child and your family.
How optimistic are you about the scalability of Shuddho?
I am very much optimistic about Shuddho. Consumers aren’t foolish, but sometimes consumers don’t know what they actually need. Sometimes a new marketer has to create that need, has to show them that there is a need. I am a believer in that philosophy. I am a visionary marketer who thinks something different from the current stream and I believe that consumers will move towards Shuddho and they would understand why we are doing all this and why they should also take this flag. This is for a better future, for a better generation.
Have you thought about any particular time frame, say one or two years?
I think we’ll take three years to establish this value proposition among consumers.
Tell us about the franchise. What encouraged you? How do you see the whole market from a local context?
Till 2014 Shwapno wasn’t a great brand. It was just a market leader at the beginning of 2014, but even as a brand, it was nowhere. At that time Kantar Millward Brown and Nielsen actually ranked Shwapno as number 3 or number 4 as a brand. Then I started working on store design, communication, customer lifecycle, their satisfaction issue, service level, and it improved every single day. The consumers saw that Shwapno had great stores such as Gulshan 1 and Dhanmondi 27, which created a new perception and increased our brand equity. When that got stronger, the investors also got interested in doing a partnership, so they came from different parts of the country saying they want to be our partners. After strengthening brand equity, we thought its time to leverage. If you look at our PNL Shwapno, there is a red line because we borrowed money from the bank and created the value out of loans. Our debt to equity ratio is close to 3 and we should be 0.28 ideally. No equity, more bank loans, so the financing cost is terrible, and major loss is coming from debt and financing cost and from the bank. They’ll set up the store, and you’ll give the merchandise, and then you grow together so you cut down your borrowing money for your growth, and the rest is your previous loss and debt and financing cost. We are now a 110 million dollar company, and valuation is 350 million. Our EBITDA is positive for the last two years so when retailers see this they understand that we are making money but when you see PNL you see red, because of bank borrowing. Bank borrowing has to be taken out by a private equity company or through partners with equity. Next comes growth; we have partnerships with investors who believe in our dreams. The core value proposition is convenience and scale. The more stores you have, the more convenient it will be for consumers. At the same time, you’ve got a better scale, you can negotiate better, your gross margin improves and you can share the value with consumers. It’s a virtuous cycle. So far we have 45 franchises, and all of them are making money. My vision is to have 10,000 stores in Bangladesh by 2021.
Could you tell us where do you stand with Shwapno’s e-commerce venture? Is it a profitable decision or is this something you wanted to make happen because it creates more visibility?
Our own consumers don’t come to the shop every week. They do their weekly or monthly shopping, and the refilling is done by the domestic help from some mom & pop stores. We wanted to fill that need so now they can go online and make their purchases. It started like that but then we found that we are servicing another need – millenials like to shop online. That became a new target segment, and it’s growing at a monthly rate of 25%. It’s incredible! We partnered with an Indian company, and they gave a very basic skeleton which created login problems but now we are revamping the whole backend. From April onwards consumers will have great user experience with Shwapno.com. The e-tail business in Bangladesh is really small compared to the retail business. Millennials will come to the online space, and the projection is that globally e-tail will be 30% of all purchases by 2023. So besides having our brick and mortar retail shops, we would like to make our online presence palpable to our customers.
Shwapno is a data-driven company. How are you incorporating data analysis in strategy and day to day operations?
I did 10 months and 6 month and 1-week programs at UC Berkeley, MIT, and Harvard. As a CEO you have to always be updated. From MIT I learned entrepreneurship and innovation, and how startups run. I have been a mentor in MIT for the last two years. From UC Berkeley I learned data science and formed a data science team which is now creating machine learning models. From Harvard, I learned strategies and leadership.
First I created a team at Shwapno called Process Innovation and Data Science. I recruited brilliant people from different sectors, including Telco’s, robotics and AI companies. I also hired fresher’s who can do the job. I ran a companywide programming training for even senior and junior level managers. I showed them how to create data models, and bring it into decision making. All these have enabled us to be more data-driven. So any decision we make, any strategy we create it has to be based on solid data and we encourage experimentation. At least 20 experiments take place in Shwapno in a month.
What kind of experiments?
One is pricing. So you change the pricing and see what happens. Or you change the assortment and see the customers’ reactions. We also try cross-selling, up-selling. We change the communication mix starting from press ads to online ads to burst SMS. We change the color from yellow to blue to red, and see how consumers respond. We change the lighting. We alter the sales pitch, the way a salesperson talks and what kind of response the customer gives. This is offline. Online also we are doing a lot of experiments. We target different groups with different promotional offers.
Have all these experiments helped your team understand the consumers better?
I am giving you one simple insight. From the beginning of Shwapno till today, we developed a data model. I, along with everybody else on our board used to believe that our shops will be more successful in places which have high-density population. However, the data model says that’s not true. According to the analysis, the success of a shop depends on the wealth index of the area. We didn’t have this kind of insight at our disposal earlier.
You’ve been mentoring startups. What’s your take on the current startup scenario of Bangladesh?
I think some of them did really well, e.g. Pathao, Chaldal. But I would say they have to bring robustness into their platform. Mimicing is not enough, because at one point global companies will come to Bangladesh and will take over. Nevertheless, I love the budding culture of entrepreneurship prevalent now among the youth. I love the millennial and even the Alpha generation. They are bright. They are a new breed. Having said that, disciplined entrepreneurship is a cry of the moment. Impulsive entrepreneurship is not something that’ll take you anywhere. Facebook, Google, Amazon happened because they had Princeton, MIT, Harvard. The culture of private equity and hedge fund also has to be here.
Secondly, the culture of private equity and hedge fund and reform in the financial sector has to come. The government has to understand that hedge funds and private equity are different from the traditional banking system. When venture capital came in, they invested in traditional companies which is not the philosophy. The philosophy was to understand the difference between SME, large corporate and IDE (Innovation Driven Enterprise) which is basically a startup. IDEs behave like SME but they become global, they become big and they run on an idea, and the strategy should be the blue ocean. But venture capital here started funding big corporates which is very inconsistent with the concept of tech-entrepreneurship. That has to be framed right. I think we should have great institutes in Bangladesh. MIT created its branch in Malaysia. Why can’t government sign agreements with MIT and Harvard and we can have campuses here? It’s possible. Why can’t we upgrade BUET and IBA? Instead of pushing students to get jobs in large MNCs, the startup culture should be encouraged. Having said that, I’m not sure of the system architecture we are designing for startups. We are more focused on UXIX and coding to imitate some other company. I met Uber’s and Facebook’s Head of Data Science. These companies are driven by data and data modeling. I don’t see startups here thinking about that, not in that line. We may have data analysts, but we don’t have data scientists. We should create a panel of data scientists who can work with the engineers and then form the company. When you are creating a startup, you should also think about how the data will support creating your core and modes and leverage. These are some areas we have to work on, but it is encouraging that youngsters are coming into entrepreneurship.
You mentioned having great experiences at UC Berkeley, MIT and Harvard which of course have great tie ups with local startups. Why do you think there is a gap between business and academia here? How can we reduce this gap?
First of all, I think in our society a scientific mindset is absent. Scientific and rational thinking is very important. We still believe in a lot of superstition, and don’t really focus on science and technology. Religion and science should be separated and realize that everything has its own function. The culture of scientific thinking needs to be encouraged and appreciated. That’s the basis of culture re-engineering in Bangladesh. Secondly, professors can work with corporates as consultants, so that together they build solutions to problems.
Coming back to your question, every university should be given a target that you have to create startups which will value at such amount and every professor should be given that target. MIT has got this target, and they have created startups valued at 3 trillion dollars so far.
Should the government take initiatives in regards to this?
For the startup culture to sprout forth, we need an effective ecosystem. For that, the government should work closely with the private sector and academia, investors, R& D Labs, entrepreneurs, financial institutions and even donors if necessary, to design the ecosystem which will include reforming the education system by making it more pragmatic and more business oriented. It should also include financial reform and a roadmap, how hedge funds, private equity & venture capital firms will be formed and encouraged. There should be a target for universities and professors to create this many jobs and startups.
You’ve been grooming and updating yourself. What’s next? Is there something you are looking forward to?
Right now, I am really stuck with Shwapno because I want to finish my milestone. If it happens I’ll move out and work in the tech industry. I want to play a role in women’s empowerment, education, healthcare and establishing children and women’s rights. I believe with a technology we can achieve much more in each of these areas.
