Retail Romancen-Is It Over

8/14/2019 Retail Romancen-Is It Over

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Retail RomanceIs it over?

Retail industry often considered as the next big thing after ITis going through a rough patch and with the economic

recession looming large things are going to be uglier. Can

Indian retail industry withstand this ongoing assault?

Here are some answers.

Arindam Das

P/MN/R/08/149


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Introduction:

Indian retail industry was growing at rapid rate till mid 2008, companies with or without prior

experience and expertise in this business was joining the retail bandwagon. Retailers especially

organized retailers were opening new stores in each and every corner of big metro cities as well as in

smaller tier-II and tier-III cities. Industry experts were going gaga over the golden future that retail

industry will unfold.

But then financial slowdown and liquidity crunch started showing the ugly side of consumerism which

later resulted in recession and economic downturn. This tough economic climate revealed the basic

weaknesses of the Indian retail industry which were previously remained out of picture. Now thing are

looking very ugly with big retailers who were too busy opening new shops earlier now planning to cut

costs by closing a bulk of them just to stay afloat. So the question arises- Is the honeymoon period of

retail in India over?

Before finding out what actually the scenario is lets see the growth of Indian retail industry and the

breakup among the players.

Indian retail industry started growing at a breakneck speed after liberalization policies improved the

growth rate of Indian economy. Indian economic growth paved the way for retail boom.

High private consumption, growing middle income group, large number of young professionals is some

of the causes that supported the retail growth. Following are the breakup of Indian consumption.

0%

2%

4%

6%

8%

10%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

GDP (%)


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This represents the current consumption pattern of India consumers-

Following diagram represents the projected consumption pattern-


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Bottlenecks:

Indian organized retail industry has several structural problems that are affecting the performance of

the industry. Some of the most important problems are as follows-

Lack of proper infrastructure: Due to lack of infrastructure in the ground level the whole

process of supply and distribution is getting affected very badly.

Weak supply chain: Along with infrastructural problems the slow development of supply chain

system is another hurdle which is making the retailing business inefficient by making retail chains violate

the promise of availability and convenience and results in customer loss.

High retail price: Due to the very rapid growth of the Indian economy real estate sector grew like

nothing else and real estate price surged sky-high. This high rentals and acquisition costs pushed thelimits of the retail players burdening them with higher costs without significant opportunities to recover

the cost since the location, though important are not the only factor driving retail sales.

Lack of diversity: Indian retail players started opening hundreds of similar type of shops without a

proper business plan targeting only the growing middle class and young professionals which during this

downturn hurting them a lot.

Conversion rate: Conversion rate of Indian retail sector is very low compared to that of the other

countries.

Political hindrances: Political parties concerned more with their vote bank and images arecreating roadblocks every now and then which are slowing the natural growth and evolution of the retail

industry.

Smooth communication between producers and retail chains: Due to political

roadblocks and lack proper government policies the channel between the producers and retailer has not

developed to their full potential.

In the following discussion we will try to understand what is working and what is just struggling and why.


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Success and failures:

Some of the organized retail houses are doing good business even in these downturns but some are

struggling to make an impact. Here are a few examples-

Subhiksha, which runs the retail stores across India, is battling for survival. It has negotiated itsrentals in many cities but now it is planning to close more than half of its stores.

Reliance Retail has pulled out of cash and carry business because of the bleak outlook and theydont want to burn any more cash. Its Reliance Fresh is not doing that well.

RPG Groups Spencersnot doing very well. Spencers recently closed some of its stores tostreamline the operations and cut costs.

Aditya Birla Groups More is also struggling.On the other hand some retail stores are doing good business and also trying to expand their business

verticals. Such as-

Future GroupsBig Bazaar has bucked the trend though it is resorting to new ways to boostsales. It is trying to rent expensive clothes for special occasions. It is also in talks with

Carrefour for a cash-and-carry set-up.

Some Indian business houses which are entering the retail segment are-

Tata group recently launched Croma, a retail chain consisting of electronic goods. Mahindra and Mahindra launched their new retail venture with Mom and Me names retails

stores. Bharti Group will be launching their cash and carry format retail chain BestPrice Modern

Wholesale in collaboration with US retail giant Wal-Mart.

So as we can see that the situation is not that bad. Small retailers are also doing good business. In

Kolkata these retail outlets and chains are doing well-

SumangalApprel retail chain Shagun- Bridal Wears

Exotica-Florist chain (Their City Centre operation is not doing well)

In other cities also some retail chains are also making decent profits.

Now the question that will surely arise is that why some retailers are doing well while others are finding

it very difficult. In the next section we will try to find some answers.


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Differentiating factors:

According to the data available published by Ernst & Young, "An

analysis of the EBITDA levels of the top 10 Indian retailers has shown a

decline of 201 basis points between2003 and 2008. According to

Pinaki Mishra, Partner and Industry Leader, Retail and Consumer

Product Practice, Ernst & Young, the trend of revenue reduction is

quite old. So the basic facts are indicating that the retail chains are

expending themselves on the basis of optimistic projections rather

than a full-proof business plan and the soaring real estate prices just

magnified that cost. Economic downturn just evaporated the sources

of finances pushing these retailers into the corner. "The credit market

completely froze up after Lehman," says R. Subramanian, Subhiksha's

founder and managing

director. "Money is like

blood. If the blood flow

stops, the entire brain

stops working." As this

huge expansion plans

largely debt funded

current spending

pattern of MIG and LIG

just worsened the

situation.

Consumers who used

to shop in Shoppers

Stop and Pantaloons are now going to local Kirana stores for their

merchandise. Since the retail industry specifically Indian retail industry

gets a high proportion of its revenue from impulse buying of shoppers

this mindset of shoppers of staying away from retail shops it a very

bad situation. On the other hand local kirana stores are using their

relationship marketing strategies to achieve better results.

The report also suggests that controlling the costs will be a key area of

focus to offset margin compression from top line pressures, increasing

competition and promotional activity. As a result, retailers are likely to

focus on inventory management, supply chain efficiencies and labour

productivity. Retail chains such as Vishal Retail already started their

negotiation to reduce their rental costs by at least 25-50%.

A Fitch report on the outlook for th

retail industry in 2009 said that du

to factors such as slowing econom

growth, high interest rates and theliquidity crunch and high real estat

rates most retailers have experienc

a drop in footfalls and demand,

reflected in slowing same-store sal

(SSS) growth and greater time to

break even for new stores. "We

expect SSS growth in 2009 to be

weaker than in 2008 due to slow

Indian GDP growth. In a deteriorat

macroeconomic climate, retailersmay be forced to give discounts an

promotional offers to maintain

volumes, which will drive down

margins. Consequently, Fitch expec

value retailers to have an edge ove

lifestyle retailers due to the value-

seeking approach of the Indian

consumer, although overall the

operating environment for retailer

will remain challenging during FY0says the report.

Money is like blood. If

money flow stops, the

entire brain stops

working.-

R. Subramainum, MD,

Subhiksas


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The factors that improved Sumangals

numbers are as follows-

Offering discount up to theoptimal level of Brand Price

Trade Off

Intensified relationshipmarketing techniques such assending direct mailers, SMSes

to customers

Using database maintained bythe chain they are also sending

personalized messages

regarding new stock arrival and

offers

Cutting costs by using efficientworkforce, supply chain and

better inventory management Reducing waste even to the

level of rec clin cartons and

"The current phase does not

indicate any slowdown in

modern retail even though

for the time being it may

look as if this is the end of

the growth story. The

industry is suffering from the

first pangs of growth.

Favourable government

policies will help in creating

and sustaining the

demand."-Kishore Biyani

Smaller chains like Sumangal, Shagun though remained

profitable their size of orders reduced significantly .But

they countered that by improving numbers of orders.

Some people like Ajay Rawla, director, Cocoon, are

pointing to a positive side of this bleak picture. According

to him this retail downturn will actually stabilize the

retail industry as well as realty industry. Sky-high realty

prices will come down to acceptable level which in long

run help retail flourish.

Most of retail chains and new entrants support this idea

including Kishore Biyani, CEO, Future Group and

Managing Director of Pantaloon Retail. He considers this

just as a part of the growth story. Says he: "The current

phase does not indicate any slowdown in modern retail

even though for the time being it may look as if this is

the end of the growth story. The industry is suffering

from the first

pangs of

growth.

Favourable

government

policies will help in

creating and sustaining the demand." Many companies are

still ready to enter the retail business and some of them will

be investing heavily. According to reports the retail players in

India would be investing close to Rs 1 trillion by 2012 in

developing the market. However, retail analysts believe that it

is time to exercise caution against mindless expansion because

the Indian retail scene could at best support 10 large players

with revenues in excess of $2 billion each by 2015. This would

mean that the weaker players would be flushed out in the

evolutionary cycle.


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Conclusion:

So, according to the earlier discussion we can safely assume that this

slowdown is just a combination of larger economic slowdown and bust of

retail and realty bubble. This does not signify the end of the retail growth

story rather it would make retailers more aware of the basic concepts of

retail business and thus lead the retail industry towards a more stablegrowth.

Sources:

Businessline, Chennai: Feb 26, 2009

Images Retail, January, 2009

Google

"The rapid expansion in retail

space in recent years was larg

debt-funded. This has resulted

substantial leverage at retaile

during the last two to three ye

which could add to their

refinancing risks. There is a gr

deal of learning in the Indian r

story. There will be lot more

regional variation and mom-a

pop stores will continue to exis

Largely, retailers have to deve

format which will succeed in In

And in my opinion, the best fo

for India will be a mix of

everything - right kind of store

pricing and even consumer loy

Though logistics and supply ch

issues will remain a constraint

the long run, it will ease."-

Dr Richard Cuthbertson, Senio

Researcher, Said Business Scho

University of Oxford

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Retail Romancen-Is It Over