Slowdown Benefits for Spice

One of the best ways to come out of an economic slowdown is to reach
customers. Making use of the market conditions, HotSpot Retails-a Spice group
company, recently acquired Indian stakes in Dubai-based mobile and IT products
retailer, Cellucom.

This acquisition of Cellucom by HotSpots has taken the total number of
HotSpot stores to 720 as HotSpot already has over 500 retail stores across the
country, and rest of the numbers came from Cellucom. HotSpot claims to have
occupied second position in the mobile and technology-product retail category.

By way of this deal, HotSpot has acquired 100% equity of Cellucom in lieu of
its 26% equity on a consolidated basis. The new entity, with an employee capital
of 2,500, will be led by Sanjeev Mahajan as CEO.

Cellucom's product offering spans an entire set of mobile and IT products,
the merger will further enhance HotSpot's product line to include IT and related
products along with the existing line of mobility offerings. Therefore, HotSpots
will be able to register footfalls of customers who are looking for IT products,
and will be a better place to see the game of smart phones versus small
notebooks .

HotSpot has registered 100% growth in the calendar year 2008 compared to its
performance in 2007. The head honchos of the company estimate the combined
turnover for the year 2009 to be around Rs 1,000 crore. Spice group has further
announced to infuse another Rs 100 crore in the business in 2009 to fuel growth
plans and expand operations to over 100 cities across the country.

Spice group had been successful in running HotSpot where Cellucom was running
in loss. Industry experts feel that this deal is a positive value addition in
Spice's retail footprint; and that consolidation has taken place at the time
when valuation of the deal is low. This is a courageous decision at the time
when customers have reduced replacement of handsets. This has reduced profit
margins of the retail chains. Though the price of real estate has come down, the
rent that large format retails are paying is still making them bleed.

HotSpot will need to display its best practices to churn money out of loss
making Cellucom units. However, this deal will also provide an opportunity to
Hotspot to enter a new location where it did not have presence. The acquisition
of Cellucom will provide HotSpot with a strong foothold in southern and some
parts of western India where it did not have a strong presence as compared to
the north Indian market. In south India, HotSpot will have to put in a lot more
effort to compete with players like Univercell Mobiles and Sangeetha.

The pressure on HotSpot will be to reduce the cost of operations to increase
profit margins. Though Mahajan has ignored the possibility of cutting down
workforce at the retail outlets he has not ruled out possibility of shutting
down of Cellucom stores close to HotSpot locations.

“With two organizations coming together, we have an opportunity to build our
presence in a new locality. We have the ability to drive double digit gross
margins and will ensure that the same ability gets translated into the acquired
stores of Cellucom. We have been experts in playing on product mix. It is a
strategic decision that we will be closing some of the Cellucom outlets. At
present we are evaluating whether we can co-exist,” says Mahajan.

It is the first ever large format retail acquisition deal in India. More
consolidation is expected to take place this year as the market does not seem to
have enough demand to support many players.

Prasoon Srivastava

prasoons@cybermedia.co.in