Retail Romancen-is It Over

Retail Romance Is it over? Retail industry often considered as the next big thing after IT is 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

Retail Romance P/MN/R/08/149

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 let’s 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.

GDP (%) 10% 8%

6% 4% 2% 2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

0%

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.

Retail Romance P/MN/R/08/149 This represents the current consumption pattern of India consumers-

Following diagram represents the projected consumption pattern-

Retail Romance P/MN/R/08/149 As we can see the projected growth of Indian retail industry is quite high. Following graph will represent it in a better way-

Current Size & Future Projections for Indian Retail Market 900 800 700 600 500 400 300 200 100 0

US$ Billion

800

408

373

342

530

486

445

200 18

12 2007

2008

2009

2010

Total Retail

87

59

39

26

2011

2012

2017

Organized Retail

As we can see from the data that the percentage of organized retail which we are more concerned about is very less compared to that of unorganized retail. Compared to the other countries the share of organized retail is very low. 100% 80%

40%

36%

30%

Thailand

Brazil

Indonesia

20%

20%

Poland

China

3%

55% 60%

85%

81%

US

Taiwan

40% 20% 0% Malaysia

Modern Channel

India

Traditional Channel

So we can clearly see that there is immense opportunity in India retail space. Now the question arises ‘Why Indian retail industry struggling?’

Retail Romance P/MN/R/08/149

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 the limits 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 are creating 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.

Retail Romance P/MN/R/08/149

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 its rentals 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 they don’t want to burn any more cash. Its Reliance Fresh is not doing that well. RPG Group’s Spencer’s not doing very well. Spencer’s recently closed some of its stores to streamline the operations and cut costs. Aditya Birla Group’s 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 Group’s Big Bazaar has bucked the trend though it is resorting to new ways to boost sales. 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  

Sumangal–Apprel 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.

Retail Romance P/MN/R/08/149

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 “Money is like blood. If stops, the entire brain stops working." As this money flow stops, the huge expansion plans entire brain stops largely debt funded working.”current spending pattern of MIG and LIG R. Subramainum, MD, just worsened the Subhiksa’s situation. Consumers who used to shop in Shopper’s 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 the retail industry in 2009 said that due to factors such as slowing economic growth, high interest rates and the liquidity crunch and high real estate rates most retailers have experienced a drop in footfalls and demand, reflected in slowing same-store sales (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 deteriorating macroeconomic climate, retailers may be forced to give discounts and promotional offers to maintain volumes, which will drive down margins. Consequently, Fitch expects value retailers to have an edge over lifestyle retailers due to the valueseeking approach of the Indian consumer, although overall the operating environment for retailers will remain challenging during FY09," says the report.

Retail Romance P/MN/R/08/149

The factors that improved Sumangal’s numbers are as follows Offering discount up to the optimal level of Brand Price Trade Off  Intensified relationship marketing techniques such as sending direct mailers, SMSes to customers  Using database maintained by the chain they are also sending personalized messages regarding new stock arrival and offers  Cutting costs by using efficient workforce, supply chain and better inventory management  Reducing waste even to the level of recycling cartons and boxes

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 "The current phase does not growth. indicate any slowdown in Favourable modern retail even though government for the time being it may policies will help in look as if this is the end of creating and sustaining the demand." Many companies are the growth story. The still ready to enter the retail business and some of them will industry is suffering from the be investing heavily. According to reports the retail players in first pangs of growth. India would be investing close to Rs 1 trillion by 2012 in Favourable government developing the market. However, retail analysts believe that it policies will help in creating is time to exercise caution against mindless expansion because and sustaining the the Indian retail scene could at best support 10 large players demand."-Kishore Biyani 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.

Retail Romance P/MN/R/08/149

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 stable growth.

"The rapid expansion in retail space in recent years was largely debt-funded. This has resulted in substantial leverage at retailers during the last two to three years, which could add to their refinancing risks. There is a great deal of learning in the Indian retail story. There will be lot more regional variation and mom-andpop stores will continue to exist. Largely, retailers have to develop a format which will succeed in India. And in my opinion, the best format for India will be a mix of everything - right kind of stores, pricing and even consumer loyalty. Though logistics and supply chain issues will remain a constraint, in the long run, it will ease."Dr Richard Cuthbertson, Senior Researcher, Said Business School, University of Oxford

Sources: Businessline, Chennai: Feb 26, 2009 Images Retail, January, 2009 Google