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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%

0%
1997

2000
1998

1999

2001

2002

2003

2004

2005

2006

2007

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.
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This represents the current consumption pattern of India consumers-

Following diagram represents the projected consumption pattern-
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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
800
700
530
US$ Billion

600 486
500 445
373 408
400 342
300
200 200
100 87
26 39 59
0 12 18
2007 2008 2009 2010 2011 2012 2017

Total Retail 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%
3%
20% 20%
36% 30%
80% 40%
55%
60% 85% 81%

40%

20%

0%
US Taiwan Malaysia Thailand Brazil Indonesia Poland China India

Modern Channel 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?’
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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 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.
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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 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.
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Differentiating factors: A Fitch report on the outlook for the
retail industry in 2009 said that due
to factors such as slowing economic
According to the data available published by Ernst & Young, "An
growth, high interest rates and the
analysis of the EBITDA levels of the top 10 Indian retailers has shown a
liquidity crunch and high real estate
decline of 201 basis points between2003 and 2008”. According to
rates most retailers have experienced
Pinaki Mishra, Partner and Industry Leader, Retail and Consumer
a drop in footfalls and demand,
Product Practice, Ernst & Young, the trend of revenue reduction is
reflected in slowing same-store sales
quite old. So the basic facts are indicating that the retail chains are
(SSS) growth and greater time to
expending themselves on the basis of optimistic projections rather
break even for new stores. "We
than a full-proof business plan and the soaring real estate prices just
expect SSS growth in 2009 to be
magnified that cost. Economic downturn just evaporated the sources
weaker than in 2008 due to slow
of finances pushing these retailers into the corner. "The credit market
Indian GDP growth. In a deteriorating
completely froze up after Lehman," says R. Subramanian, Subhiksha's
macroeconomic climate, retailers
founder and managing
may be forced to give discounts and
director. "Money is like
promotional offers to maintain
blood. If the blood flow
“Money is like blood. If volumes, which will drive down
stops, the entire brain
margins. Consequently, Fitch expects
money flow stops, the stops working." As this
value retailers to have an edge over
huge expansion plans
entire brain stops lifestyle retailers due to the value-
largely debt funded
working.”- seeking approach of the Indian
current spending
consumer, although overall the
pattern of MIG and LIG
R. Subramainum, MD, just worsened the
operating environment for retailers
will remain challenging during FY09,"
Subhiksa’s situation.
says the report.
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%.
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Smaller chains like Sumangal, Shagun though remained
The factors that improved Sumangal’s
profitable their size of orders reduced significantly .But
numbers are as follows-
they countered that by improving numbers of orders.
 Offering discount up to the Some people like Ajay Rawla, director, Cocoon, are
optimal level of Brand Price pointing to a positive side of this bleak picture. According
Trade Off to him this retail downturn will actually stabilize the
 Intensified relationship retail industry as well as realty industry. Sky-high realty
marketing techniques such as prices will come down to acceptable level which in long
sending direct mailers, SMSes run help retail flourish.
to customers
Most of retail chains and new entrants support this idea
 Using database maintained by
including Kishore Biyani, CEO, Future Group and
the chain they are also sending
Managing Director of Pantaloon Retail. He considers this
personalized messages
just as a part of the growth story. Says he: "The current
regarding new stock arrival and
phase does not indicate any slowdown in modern retail
offers
even though for the time being it may look as if this is
 Cutting costs by using efficient
the end of the growth story. The industry is suffering
workforce, supply chain and
from the first
better inventory management
pangs of
 Reducing waste even to the growth. "The current phase does not
level of recycling cartons and indicate any slowdown in
boxes Favourable
modern retail even though
government
for the time being it may
policies will help in
creating and sustaining the demand." Many companies are look as if this is the end of
still ready to enter the retail business and some of them will the growth story. The
industry is suffering from the
be investing heavily. According to reports the retail players in
India would be investing close to Rs 1 trillion by 2012 in first pangs of growth.
developing the market. However, retail analysts believe that it Favourable government
is time to exercise caution against mindless expansion because policies will help in creating
the Indian retail scene could at best support 10 large players and sustaining the
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.
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"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
Conclusion: deal of learning in the Indian retail
story. There will be lot more
regional variation and mom-and-
So, according to the earlier discussion we can safely assume that this pop stores will continue to exist.
slowdown is just a combination of larger economic slowdown and bust of Largely, retailers have to develop a
retail and realty bubble. This does not signify the end of the retail growth format which will succeed in India.
story rather it would make retailers more aware of the basic concepts of And in my opinion, the best format
retail business and thus lead the retail industry towards a more stable for India will be a mix of
growth. 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

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