Currently, retail is growing at 13 per cent and will touch $ 590 billion (approximately Rs 23,600 billion) in 2010-2011 from $ 322 billion (approximately Rs 12,880 billion) in 2007-2008, an assessment of economic think-tank ICRIER( Indian Council of Research in International Economic Relations) reveals. A whirl of activities can be seen in commercial real estate developments. By 2008-end, there will be approximately 328 shopping malls across the country. Retailers are upbeat about the development and they have stopped their wailing for the lack of organised retail space, which was most probably the biggest impediment to the arrival of international retail brands in the country. Considering the huge customer base of 1.2 billion and also the fact that retail is the second largest source of employment in India (just next to agriculture), the sector does promise a bright future. But, there is a flip side too. The industry has some bumpy zones that need to be evened out. Contrary to big expectations and hypes, the retail segment actually projects a scenario where retail activities don’t send out encouraging messages.
Feeling the heat
It was reported that, with 600 stores across India, Reliance Retail Limited (RRL) has posted a net loss of Rs 10.99 crore on the total earning of Rs 259.85 crore in the fiscal year 2006-07. Organised food and grocery retailing, with its low profit margin and dealing in goods, which are highly-to-moderately perishable, have incurred losses to retailers. The situation has driven many retailers like Aditya Birla Group, Reliance Retail and Future Group to diversification of their business verticals into more profitable areas like apparel. “Also, rising operating costs in terms of electricity and occupation charges are a matter of concern for retailers.”, Rakesh Biyani, CEO of Future Retail, informs.
Sensex sees red!: Retail is a highly capital-intensive business. Most retailers were hopeful that they would be able to meet their capital requirements through primary markets but, at present, the bearish market has made many retailers abandon their IPO plan. Listed retail companies are also seeing a steep downfall of their share prices. It is noteworthy that the BSE Sensex touched the day’s low of 14,631.72 on June 20, 2008. At least 12 retail companies including Vishal and Spencer’s postponed or withdrew their IPOs in the past three months. The drought in the IPO market is going to affect capital expenditure plans of companies by halting temporarily any process of acquiring or financing projects.
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Sensex dip
Severed bonds: Several tie-ups and joint ventures are now falling apart due to lack of compatibility and differences in business interest. Planet Retail, India, frontrunner in introducing international brands like Debenhams, The Body Shop and Marks & Spencer in Indian retail landscape, lately called off its alliance with UK-based Marks & Spencer. Though Planet Retail will continue to run existing 14 stores, it is reported that Marks & Spencer is finding pricing of their products higher because of India’s high duties. Marks & Spencer has forged a joint venture with Reliance and hopes to increase their manufacturing capacity, which will bring down the price point.
Lee Cooper formed a joint venture with Indus League Clothing of Future Group in October 2006. But, the tie-up did not last for long and, this year, the UK company chose to part its way. Reason given by the Future Group’s spokesperson is Lee Cooper’s disinterest in India for any expansion. Recently, the tie-up between Arvind Mills and Italian denim giant Diesel BV has been called off. Both the companies feel that the JV will restrict their future expansion.
Retail realty woes: Mall developers are facing a ‘problem of plenty’, which arises from ‘surplus’. Kishore Biyani, Managing Director of Pantaloon Retail and CEO of Future Group, announced that his company acquired properties where they would not give rentals for a period of three years. He hoped that there would be more realty developments in 2009. There is also a hitch for retailers as high rentals of malls and high street shops keep on increasing adding new woes. Says Kishore Biyani, “At current property prices, you can't exist in the modern retail business. Either productivity has to increase significantly or the rent has to come down."
Growth slowdown: Today, retail companies are reviewing their blueprints of retail ventures expansion due to two reasons: a) poor performance of existing plans and b) competition. Aditya Birla Retail is revising its growth plans in non-metro (tier II) cities. Instead of 40 to 50 New U stores that Dabur was planning to launch in FY '09, the company now says that it will launch only 15 to 20 stores this fiscal. Rising pressure on their margins, rising rental and salary costs and, above all, inflationary pressures are seen as the biggest spoilsports.
Retail spirit restrainer?
Retail is a simple business. Profitability at the store level can ensure profitability of the Group. However, observations indicate that organised retailers are more enthusiastic about augmenting their size than ensuring profitability at the store level. Small retailers who also tried to follow the footsteps of their large retail counterparts but unable to manage the course are now facing fund crunch: low profit margin are making it tough for small retailers to sustain their businesses. Unable to upgrade, the only option left for them is now ‘sellout to big retailers’. The result is that they are made to succumb to terms and conditions laid down by the big brothers, resulting in undervaluation.
Realty corrections: For the past five years, retail realty was a seller’s market with significant imbalance between demand and available supply. But, the situation changed with supply slowly catching up with demand in retail real estate and coming to a point of surplus. Comments Ramesh Tainwala, President (Greater Asia), Samsonite, “In three years, we are planning 450 retail stores across India. Our expansion plans were awaiting correction in the retail real estate. Today, there is a surplus of retail real estate. The supply has exceeded the demand. In the last two years, growth of supply is 300 per cent. So, retail rent is under pressure and the rest is in favour of retailers.” But, the question of why the demand couldn’t remain as high as expected arises again. So, what has gone wrong with the assessment of the real estate developers?
Developers are taking all possible measures under the sun - right from doing revenue arrangements with retailers to bigger negotiations on rentals. Large developers are also looking to diversifying their business into non-core areas. Raheja Developers is converting its existing commercial project in Manesar into a hotel. Unitech has tied up with Marriott and Carlson while Parsvnath sealed a MOU with Fortune Park Hotel Ltd, a wholly-owned subsidiary of ITC Ltd. Tie-ups between developers and international retailers are possible for there are speculations on alliances between Parsvnath and French Retail giant Carrefour and also between DLF and UK-based Topshop. Large retailers have realised the need to fill up the existing retail space in-house whilst small developers have now chosen to lease out their existing mall space to banks and commercial offices.
Talent crunch: At present, retail industry is facing acute shortage of skilled manpower at all levels. If this gap is not filled up, all the estimations and hopes will remain on paper only and not realise in reality. With the entry of big-box retailers, there is a competition among retailers for retaining the talent. The sector is already reeling under the problem of attrition, which results in hefty salary package at upper and middle management level. This leads to erosion of profit margin of the business. Once the top brass decides to move from a retail company, other staff in the organisation also start exiting, consequently hampering the entire expansion structure of the company. Retail professionals are not keen in developing long-term associations with their respective companies, which is essential for any company to grow.
Soaring shrinkages: The mere mention of the word ‘shrinkage’ is sufficient to send shivers down the spine of retailers. Shrinkage could be the result of supplier theft, customer theft, process and employee theft. India has the highest shrinkage rate of 2.9 per cent among 32 countries, a recent global survey of global retail theft conducted by Centre for Retail Research, England reveals. For Indian retailers, the cost of retail crime was estimated at about Rs 8,160 crore (approximately $ 200 million). On the average, a retailer would have to sell 20 to 30 times more of a stolen product to make up his losses. Further, there is grey market, which is eating around Rs 500 crore of revenue, posing a major threat to retailers.
Pitiable SCM: Supply chain management (SCM) is the backbone of retail operation. According to Dharmendar Jain, Head - Finance and Business Development of HyperCity, SCM in India suffers from lack of experienced vendor, underdeveloped transportation infrastructure, fragmented supply chain of many big companies, lack of quality manpower, compliances, state levies and entry point tax etc. “Vendors’ capability to fulfill orders is a matter of concern. Also, interstate movement and city level taxes are not easy to manage.”, complains Rakesh Biyani.
A KPMG study reveals that the stock-out levels among Indian retailers range from five to 15 per cent whereas well-known global retailers ensure the availability of more than 95 per cent SKU on retail shelves. As per AMR Research report on retail supply chains, most retailers lose sales by around 41 per cent of the time due to stock-outs.
Logistics infrastructure is severely retarding the retail growth and, consequently, costs are extremely high. In India, logistics costs are worth around 13 per cent of GDP, as compared with eight per cent in US.
Inflationary trends: The rate of inflation in India has galloped to a 13-year high to 11.05 per cent. The economic rationale of high inflation is that it lowers spending power of people and, hence, affects the demand cycle. Consumers become cautious in their spending pattern and this will be a big blow to the already slow consumerism in India.
Too much regulation: The Government of India has been slow in announcing favorable FDI policies in retail. Not much initiative has been seen after opening up of 51 per cent FDI in setting up single brand retail outlets in 2006. The government has been maintaining restraint on FDI for multi-brand retailing. It has mandated NCAER (National Council of Applied Economic Research) to study the effect of allowing FDI in multi-brand retail. Much of the retail bang now depends on the council’s verdict. Permitting FDI in multi-brand retail will smooth the path of retail giants like Carrefour, Tesco and Wal-Mart in setting up their retail outlets in the country.
Funding crunch: Today, organised retailers in India are voicing their demand for industry status. The status will ensure easy access to bank loans and add more integrity and security to the business operation. Bank loans have been difficult to come by in retail sector and, in this not-so-encouraging scenario, private equity firms are reluctant to step forward. These firms are refraining themselves from financing in retail segment any more.
Consumerism under scanner: Surprisingly, as per ACNielsen Consumer Confidence and Opinions Survey, India has come out as a country of conservative spenders where saving rules spending. India does not figure in the top 10 spenders' list for any categories, except for investing in shares and mutual funds, where it leads the world. More than half the population keeps extra cash in bank accounts. This nugget of information could cause grievance to retailers. Among hundred countries, India stands at 30th position when it comes to choosing holidays and new clothes, whereas Russians and Thais are on top of the list when it comes to updating wardrobes and taking holidays.
The silver lining
India is just any other developing country trying to find grip amidst myriads of changes in its economic sphere. Retail is one sector, which has seen unexpected growth: perhaps, the growth meter has moved faster than even the growth witnessed. Retailers need to imbibe long-term optimistic approach and strategy. Reviewing their systems can make a big difference.
The sector also demands for non-negotiable national policy to get rid of state governments’ interferences. “Whether it is infrastructure issues like power or service tax on rentals or outdated laws on packaged goods, policy on retail is far behind the actual growth.”, regrets Govind Shrikhande, Customer Care Associate and CEO of Shoppers Stop.
Combating attrition: For retail sector to progress, it is important for retail professionals to show responsibility in terms of sticking to their roles as growth agents of the organisation they head. What matters is adoption of this attitude by the whole community of professionals and not by a few thousands of them. To some extent, the onus of the issue lies in retailers too, Samar Singh Shekhawat, VP-Marketing, Spencer’s Retail, believes. Spencer’s Retail has 14 training centres: ‘Pragati’. In 2007-2008, the institute conducted 78,000 man-days of training. Similarly, Future group is launching a residential learning programme called ‘Future Learning and Development’ to provide training to in-house shop-floor to store management level employees. To check high rate of attrition, the industry feels that motivation, rewards and compensation are vital means for these can retain employees.
Streamlining SCM: “The shrinkage has never become a major threat for retail business in India”, Kabir Lumba, Executive Director, Lifestyle International Pvt. Ltd retorts. However, all the retailers have admitted unanimously that there is much room for upgrade in the area of back-end operation. Joint planning between manufacturers and retailers, clear understanding of issues and control over the whole supply chain can work for the betterment, Mr Shrikhande thinks. Suggesting public-private partnership to set up warehouses across India, he says, “Government is the largest land holder of the country and should release some land for the sake of retail growth.”
Adopting technology: According to Mr Shrikhande, retail theft is an important issue, but it can be kept under control through technology and systems. He thinks that 10 per cent of retail employees and 90 per cent of consumers are responsible for retail theft. Spencer’s has installed a billing machine that beeps when a defaulter passes by. IT companies like SAP and Oracle are providing ERP (Enterprise Resource Planning) solutions for data management. Microsoft and IBM too are providing retail solutions. RFID (Radio Frequency Identification) is another effective device to track inventory movement, thereby reducing shrinkage.
Creating consumer awareness: Indian consumers’ lack of knowledge got exposed through a survey done by GLM 2008, which concludes that cotton is seen by 68 per cent of Indian consumers as the fibre best suited for today’s fashion but knowledge that denim is made from cotton is only with 36 per cent of them. Also, to eradicate retail piracy, there is a need to promote brand awareness and highlight USP of originals. A policy should be adopted to highlight that it is illegitimate for a product not to offer warranty.
Re-thinking retail strategy: With retail houses the sprouting for ever, retail game is becoming more and more competitive for retailers. To retain ongoing loyalty of customers, evaluation of brands becomes a necessary practice. To stay ahead, leading retailers like Shoppers Stop have undergone re-branding, moving the brand’s status from ‘premium’ to luxury, Mr Shrikhande divulges. The RPG promoted Spencer’s Retail is re-working on its five formats currently into just two to increase consumer recall and create a common visual identity. Currently, Subhiksha is also revamping its stores to improve the functional aspect of store by implementing SAP technology in its billing system with the intention of offering both convenience and value for money.
Sensitive partnership with mall developers: By way of giving suggestion, Mr Shrikhande says, “Mall owners have to think for customers and become partners of retailers to deliver actual services. Similarly, brands have to think of differentials for customers and work with retailers”.
Franchising, a veritable option: While commenting on franchising as the effective tool for retail expansion, Mr Lumba opines that the business model can play crucial for apparel, footwear and F&B retailing but, for large format, the model has no role to play. However, Westside of Trent, the retail arm of Tata group, has a different story to tell. Ms Neeti Chopra, Head- Marketing, Trent Ltd, says, “While analysing our customer base in our 30 stores across 19 cities in the country, it was found that many customers were from tier II and III towns. They were also frequent buyers." This large format chain of stores has taken up franchise as the preferred route for expansion in tier II and tier III cities. Pantaloon Retail is embracing franchise model for its venture with French apparel brand Celio. Talking about expansion plan, Rakesh Biyani says, “We are considering franchising as the mode of expansion for this project.” On the other hand, “Brands have worked with franchising quite successfully in India over the last three decades. It is a workable model.”, Mr Shrikhande comments.
Also, franchise plays a crucial role to increase store level profitability. Always, the commitment, devotion and business acumen of a franchisee will remain many notches higher than those of a professional store manager. Strengths of franchising need to be harnessed for retail to achieve ‘a spread’, particularly in tier II and III cities.
Ramping up profitability: Ultimately, retail is all about making money and this can be attained by sales productivity, Mr Lumba says. To ramp up profitability, Mr Shrikhande says, “There are many in the list!! Right from increased productivity to focusing on inventory, manpower costs, power costs etc.” Mr Shekhawat elaborates that factors like right store at right location, right mix of merchandise, demographic research, proper planogram, smooth traffic flow, effective SOP (standard operational procedures) and robust IT are of paramount importance. Also, efficient CRM helps retain customers’ loyalty, which is vital for increasing sale. In this regard, even today, traditional retailers fare better than organised retailers.
Empowering consumers: To beef up the purchasing power of consumers, retail sector is taking initiatives in consumer financing. Future Group was the first to introduce Future Money to provide instant money to consumers. Reliance Retail has a tie-up with Citi Group to provide loans to customers. It is a tactful means of alluring the conservative Indian consumer and making him increase his spend on consumer goods.
Future signals
As far as foreign tie-ups and new ventures are concerned, Rakesh Biyani feels that it is better to be cautious. Mr Shrikhande’s finds that today’s consumers seek more value and true international fashion and consequently there is always a space for good brands. On other hand, Mr Jain thinks that the large size of Indian market provides retailers enough scope to seize the opportunity and, for domestic retailers, Indian market should be the primary focus. Also, all the retailers concur that inflation and falling sensex is a temporary phenomenon. It won’t have an indelible impact on the sector though the sector will be affected to some extent. The coming days will tell how all the paper works and boardroom declarations can be realised or realized. And, like Mr Shekhawat, we too believe that, amidst chaos, the organised retail sector will grow and may occupy 20 per cent of the entire sector in a period of 10 years.
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