Big Bazaar Profit Club: Is it worth?

Now Big Bazaar (or let’s say future group) is known to be a pioneer in the field of retail innovation in India. There are several examples of innovations that are so specific to India that you can just marvel at the wisdom of the though leaders behind these moves. Noticeable are the very successful “The Great Exchange Offer”, the 5 day republic day sale, or the sabse sasta din concept (Wednesdays), the last one is not so ingenious, but anyways..

Now we need to add one more nugget in this list, Big Bazaar’s Profit Club.

The scheme’s punch line is that you pay 10000 upfront & then shop for 12000 in any one of the Big Bazaar stores (& certain affiliate stores of the group like Food Bazaar, EZone etc). Cool! isn’t it?

Big Bazaars profit club schemeBig Bazaars profit club scheme

 

 

 

 

 

 

 

 

 

 

 

 

Now, the scheme is really simple with only a single catch that these 12000 are not available to you upfront and only 1000 Rs will be credited to your card every month for the next 12 months.

For the financial wizards out here, for a normal rate of interest that we expect(~10-12% per year), the present value of these 1000 Rs/month cash flows works out to be Rs ~11250 Rs. So we can account for a neat notional benefit of ~1250 Rs due to this scheme.

(For the uninitiated, the money that you get late, needs to be discounted. For Ex: with a ~11% rate of interest, you’ll get ~1000 Rs if you invest just 900 now.  Similarly, all the future credits of 1000 Rs each will have lower value today, If we do the same exercise for all the 12 credits, the current value works out to be ~11250)

So if you are a regular Big Bazaar customer, it’ll always make sense for you to go ahead & enroll for this scheme. In fact for heavy users, they can also think of having more than 1 such card.

Things to keep in mind before enrolling to the scheme:

-          What is your average spend pattern at Big Bazaar stores? If this is on an average >=1000 Rs per month, you need not think twice before enrolling in to this scheme

-          You have a nearby Big Bazaar but you don’t visit it often, though your grocery bill easily runs into a few thousands Rs per month: you may consider this scheme.

-          You gain the maximum if you pick the branded, packaged food/household items that you will not find at a discount anywhere. For apparel etc, you may perhaps find better price/collection elsewhere

-          You don’t have a Big Bazaar near your place or your grocery bill(or items that you may purchase from Big Bazaars) is limited: Forget about this, you may eventually end up paying more on unnecessary items that you perhaps won’t buy otherwise, just to utilize your credit.

Now coming to the other side of the story, what does big Bazaar gain from this outrageous scheme (losing ~1250 Rs on every such membership)? As per the latest updates, they already have more than 1 Lac card holders now, means ~12.5 cr already down the drain?

Not really, here is the broad maths from their side:

-          Weighted margin for Big Bazaar’s average basket is >45% (as per their annual reports). Assumption is that profit club members will utilize the card for this average basket in general. Higher margin products are usually the in-house/local branded, apparel etc. If a lot of people focus only on the branded items where the margins are in the 20% range, the scheme will backfire.

-          It is also a financing scheme, capital is very costly these days with short term borrowing costing companies (even good ones) in excess of 20% per year, Big Bazaar is effectively managing its working capital requirement through this scheme. The size of this scheme has already crossed ~100 crore Rs, significant enough to cushion the group’s stretched financials.

-          Another assumption is that not all people will utilize this credit limit in an optimum way, people may underutilize the limit for months and use the remaining amount at the end(or with a lag at least)

-          Last, but most importantly, the profit club members are enticed to visit the store with a higher frequency and will tend to purchase more (as they know that they will need to pay 1000 Rs less per month). This upsizing and higher selling opportunity is the most significant piece of this game. Even if a customer buys for additional ~500 Rs per month on an average, this 500X12 =6000 Rs additional spend will mean at least 2000 Rs additional Operating profit for Big Bazaar, which easily surpasses the ~1250 Rs cost of this scheme.

So this is happening for perhaps the first time in this world when a customer is paying in advance to the retailer to buy otherwise widely available grocery products, the retailer in turn is paying an exorbitant effective interest rate of ~34%, and surprisingly both are glad with their respective moves.  

 

Mr Biyani, take a bow!

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