RETAIL REPORT

THE SECTOR AT A GLANCE

• Retailing is a low-margin, high-volume, commodity business where profitability gets strained as competition
intensifies.
• Planned investments of $22 billion over the next five years.
• Between them the likes of Reliance, the AV Birla Group, the Tatas, the Godrejs, the Bhartis, the Mahindras, the
ITC Group and the Wadias -- and a horde of others -- will be sinking in close to Rs 1 lakh crore (Rs 1 trillion) in
the business of retail over the next five years.
• The retail sector is expected to grow 40% to $427 billion by 2011.
• Disposable incomes that are expected to increase at an average 8.5% per annum till 2015, and a steadily
climbing per capita income (from $460 in 2002, it rose to $620 in 2005) will drive the retail growth in India
• Only 0.5% of Indians own air conditioners, just 1% own computers, 3.5% washing machines and 11.7%
telephones. This shows the opportunity in the market.
• Indian retail market could at best support 10 large players with revenues in excess of $2 billion each by 2015.
• A host of retail-related activities such as cold chains, retail supply logistics, warehousing, sourcing and
merchandising management are also required for success of the ventures.
• The global retailers have sophisticated procurement strategies in place that hinge on sourcing products globally
based on prices, quality and timely delivery.
• Availability of quality retail space will be a key determinant for the growth of the sector in India.
• With real estate prices in most top tier cities hitting the roof in the past two years, lease rental increases are
making business unviable for organized retail.
• The current average lease rentals across some of the top cities range from Rs 88 per sq feet per month to as high
as Rs 120 per sq ft per month. On an average, lease rentals account for 7-8% of the revenue and 40-45% of the
non-material cost for retailers. Unless these prices stabilize, most retail businesses could end up taking much
longer than originally planned to break even.
• With most Indian cities undergoing rapid urbanization, spiraling rental costs has most retailers worried already.
• Anchor tenant: An anchor tenant typically commands a discount of 30-45% on lease rentals and is responsible
for attracting footfalls into a mall.
• KPMG is of the view that smaller stores of 1,500-2,500 square feet (as against 150,000 square feet
hypermarkets) in neighborhoods might do better in India.
• India is a fragmented country and an absence of a strong infrastructure and logistics system makes it all the
more challenging to reach consumers
• Cold-chain forms a vital link in the supply chain of a retail organization.
• Currently in India, the wastage levels for perishables are as high as 40% because of a large number of
intermediaries as well as loss during transportation as well as through lack of storage.
• Wal-Mart leverages IT to track supply chain processes like cross-docking very effectively. European giant Tesco
requires lean production techniques of its suppliers and has high-reliability delivery systems in place such as
'milk-runs'.
• Inventory turns ratio is one way to measure efficient operations. In the US, the retail sector has an average
inventory turns ratio of about 18 (some retailers like 7-Eleven score over 50), most Indian retailers range
between four and 10.
• Stock availability is also a key metric. Where global retailers achieve more than 95% availability of all stock-
keeping units on the retail shelves, their Indian counterparts cut a rather poor figure at 5-15%.
• The supply chain costs in India, across product categories are between 12 per cent and 50 per cent. This is
largely ‘cost’ and not ‘value added’. In the case of basic products, a significant portion of these costs is sheer
wastage.
• Indian retailers need to make progress in areas, such as, procurement and transportation, bulk storage, trend
forecasting to minimize inventory levels before they can even match, let alone compete with the global retailers.
• Strategic sourcing tie-ups between retailer and manufacturer will be the main drivers in optimizing the supply
chain of Indian retailers.
• Private labels have a big potential as promotional costs are low for retailers and the margins fat (as much as
60% against 35% for others). Also, these non-branded products can be offered at far lower price points,
generating volume sales.
• In India companies are gravitating towards the hypermarket format as this model is perceived by consumers as
more value-enhancing. However, it was found that single-format players generated higher shareholder value
than multi-format ones.
• What would set the survivors apart from those who are forced to sell out in a long run will be differentiators like
location, value-added services (convenience), private labels and customer loyalty programs, other than price.
• According to a TV18 report few days back, the battle for most effective supply chain has shifted to getting on
board the best suppliers in the world, globally known as aggregators.
• Aggregators are sector and category specialists. They provide end to end supply solutions to the retailer from
investment in product development, technology, sourcing and quality assurance. Experts believe this will help
revamp the entire supply ecosystem of India.

RELIANCE RETAIL
• The company is working on strengthening its procurement and supply chain efficiencies to emerge as a key
supplier and exporter as well.
• As a way of practicing its procurement tie ups, Reliance had earlier supplied fruits and vegetables to Big
Bazaar. It is keen to continue supplying to other retail players even after starting its own business.
• It receives a major consignment of goods from China, which include electronics, apparel, stationery and also
FMCGs.
• Procurement is a separate division from retail and there will be cost advantages as the company builds up farm
linkages
• Setting up rural business hubs in Punjab, Haryana, Himachal Pradesh, Uttaranchal and West Bengal. These
hubs, which will come up in the next six months or so, will not only be procurement centres for grains and milk,
but also house schools, medical care centres, apart from having weather and soil specialists to help farmers
produce better yield.
• Reliance is also keen to buy capacities, including food processing and FMCG manufacturing ones. It has also
bought few flour processing capacities in Punjab and scouting for others.
• Rs 25,000-crore (Rs 250 billion) retail plan that would see its outlets dotting 784 cities and small towns by
2010.
• Reliance could set up hypermarkets in their own SEZs to meet the needs of local residents.
• Reliance has its own Rs 6,000-crore drive to set up its own logistics, complete with its own airstrips and a fleet
of transport aircraft dedicated to airlifting supplies to key markets.
• Reliance has already negotiated with leading FMCG companies, including Dabur India and Nestle India, for a
direct retail account for the products they sell at its outlets.
• Each reliance digital store will be spread in 15,000-35,000 square feet and would retail some 4,000 products of
over 150 brands.
• Reliance also plans to roll out its own label of consumer electronics goods on opening at least 4-5 stores to
complement its retail appliance stores for tapping the $5.6-billion domestic consumer durables market.
• Relaince Retail model: Reliance has demonstrated that it will not hesitate to try out untested formats. (Whether
it works or not is a different issue.) Reliance Fresh is very different from what modern retail has offered in India
so far. Second, unlike global retailers who operate on thin margins, Reliance Retail is looking at a fairly high-
margin business model.
• Reliance Retail officials make it clear that the current format is only a pilot phase and they are open to any
seemingly efficient changes.
• Reliance Retail strategy:
o Reliance Retail is going after the very core of the great Indian retail opportunity. Food accounts for over
two-thirds of the $200-billion Indian retail market. Yet, it has seen less than 1 per cent penetration by
modern retail so far.
o Reliance wants to build a high-profitability business and food is, perhaps, the best place to start. That is
because the Indian food supply chain is grossly inefficient. There are several intermediaries, each of whom
adds his own profit margin to the cost. Besides, there is huge wastage in transit. This offers potential for
savings and profits.
 o Reliance retail plans to build its own supply chain. They have planned to always buy from the farmer,
almost never from the mandi. Even contract farming — by assisting farmers to procure high-quality seeds,
fertilisers and other essential raw materials — is on the cards.
o Reliance Retail has chalked out a plan to roll out about 5,500 stores of all kinds in 800 cities, 85 logistics
centers and 1,600 farm supply hubs.
• Advantages of small stores like Reliance fresh:
o They bring down the cost of real estate (and increase profits). It is easier to find space for small
convenience stores in a quiet neighborhood than for supermarkets in high streets.
o Two, you can set up more of them and, therefore, saturate the city with hundreds of small stores. This
makes the Reliance Fresh brand easily accessible to consumers.
o They are investing around Rs. 50-60 lakh in each store, and expect to turn the capital over six times (i.e. a
revenue potential of Rs 3 cores).
o Reliance’s prime focus is to open big-format stores. Reliance Fresh is just a pilot project. This is more to
understand the business.
• Trained manpower in retail industry is always in short supply. For their stores, Reliance take people from in and
around the locality where they have outlets and give them 10- to 12-day on-the-job training in standard
operating procedures and customer orientation and then employ them.

BHARTI WALMART
• Bharti joined hands with the world's biggest retail chain Wal-Mart, for a supply chain and cash-and-carry
venture, besides a franchise agreement for retail.
• Bharti is expected to invest Rs 6,000 crore (Rs 60 billion) in the initial phase.
• Bharti Group has said its top priority would be real estate acquisition. They are already roping in DLF, Emaar,
MGF and Ansals to act as partners and developers.

BIYANI’S FUTURE GROUP

• They have announced plans to roll out 225 Big Bazaar stores and hundreds of other outlets in other formats in
the next four years.
• Biyani's Future group plans to increase its total retail space to 30 million sq ft from the current 3.2 million sq ft;
and take its turnover to Rs 2,500 crore (Rs 25 billion) by June 2010.
• Pantaloon has signed up with 100 of the 300-odd malls that will be developed over the next three years.
• Pantaloon Retail currently has 3.2 million sq ft spread across several formats and is expected to have 10 million
sq ft of space in the country by 2010. Again, in Tier-II cities, where lease rentals are 40-50% lower than those in
top tier cities, Pantaloon has been quick to establish its presence.
• Pantaloon has set aside a corpus of $80 million at its disposal to invest in projects in cities like Ahmedabad,
Baroda and Surat. Pantaloon expects to have nearly 400,000 sq ft of retail space in these destinations by 2008.
• The company is planning to spend Rs 400-500 crore (Rs 4-5 billion) on setting up logistics.
• Pantaloon has also tied up with leading manufacturers of various goods and sought 5% higher margins for
products sold at its Big Bazaar and Food Bazaar outlets.
• Pantaloon has undertaken a pilot project of RFID in one of their warehouses at Tarapur using 1000 RFID tags.
They want to automate the entire supply chain from suppliers to warehouses and stores, and make it transparent.
• Traceability and visibility of goods in the supply chain, lack of a unique identity at each item level, and human
intervention leading to errors were some of the issues faced by the company before this. Further, these
challenges led to a lack of co-ordination with the backend at the stores, hampering the company’s production
planning and inventory management.
• The time saved on the same is about 80 percent in inward warehouse processing and 12 percent in outward as
compared to the barcode reader. Real-time visibility of items during all stages of the supply chain improved to
98 percent.
• Future group’s strategy:
o Fashion will continue to be about 50% of their business.
o They will work to improve their ROI by about 300 to 400 basis points every year. After 2-3 years when
they will reach a critical size they plan to start putting more pressure on suppliers for higher discounts (i.e.
a slotting fees position). Right now they are concentrating on relationship-building exercise with suppliers.
 o They even provide mentoring and funding to the supplies if they need it.
o Pantaloon has focused on most cost-effective supply chain model rather than most efficient in time. This
has helped them keep the bottom-line in control.
o They have established Big Bazaar outlets in the suburbs where space is not a constraint.
o They have tried to backward integrate and tried to cut cost by pruning the use of intermediaries. E.g. they
buy its dry staples directly from millers for its Food Bazaar. It is also experimenting with contract farming
to lower its cost structure.
o They have tried to make garments more affordable and profitable through the use of private labels.
o They don’t rely on market research for their strategy. They build their own strategy based on the hypothesis
and test it in the market.

OTHERS
• The Tata group has also expanded its footprint (beyond the formats rolled out by group company Trent of
Westside fame) by entering the durables segment, in a tie-up with Australian retailer Woolworths, with the
launch of its Croma store.
o They planned to have 30 stores by March 2008 and double it to 60 by March 2009, with a capital of Rs 400
crore (Rs 4 billion)
• Other players like the Dubai-based Landmark group, with its Lifestyle and Max branded outlets, are also keen
to expand into the grocery segment.
• Players like the K Raheja group's Shopper's Stop and the Rajan Raheja-controlled Globus that are expanding
their reach in the apparel and accessories segments.
• Others like ITC (a big player in its own right), the Godrej group, Century Textiles and Raymond as well as mid-
size players like Vishal Megamart, Subhiksha and Sabka Bazaar are busy increasing their footprint.
• AV Birla Group is looking at pumping in Rs 15,000-20,000 crore (Rs 150-200 billion) -- with an initial
investment of Rs 5,000 crore (Rs 50 billion) in the next few years.