Growth of Organized retail in India
Another reason for the losses is the aggressive growth of stores. This strategy has both positive and negative implications. Says Nagesh: “Today, the backend infrastructure we have built up can support a larger number of stores per city, than what we currently have. If a new store is opened in the same city, where an earlier store existed – such as Andheri and Ghatkopar in case of Shoppers’ Stop – the marketing costs increase from 1-1.5. The same holds true for most of the other costs like salaries and other overheads.”
Says Raghu Pillai, managing director, Foodworld: “First of all, we are at break-even today. But I don’t think that is particularly relevant.
We have incurred costs in setting up regional hubs, distribution centres and corporate sourcing, and are investing heavily in training, retail institute and IT. What is relevant is store level profitabilty, growths on same store basis and the trend in difference in store level margins and store level costs. We believe our profitability will solely depend on how fast we decide to expand. We can make the project profitable next year by stopping expansion. But that would be myopic. We need to focus on growing the size of the business in the current phase, and that will entail incurring short term losses due to the investments required and the gestation periods involved. Once we have 100-plus stores in place, we believe that the project will deliver the required returns on investment as originally envisaged.”
Still there are players in the market who prefer organic growth over aggressive growth. Shoppers’ Stop itself did not set up a second store for six years. “The idea is not about whether you should have an organic or an aggressive growth. The idea is how fast you want to achieve your break-even.
To my mind, aggressive growth is an answer – as it ensures best utilisation of your resources. Maybe some of the stores might not turn profitable due to wrong location, and these can be closed down. But one cannot slow down the pace just because one is scared of making mistakes,” says Singhal.
Shoppers’ Stop looks at operational break-even of 12-18 months, while Pantaloon looks 6 months. Westside also looks at 1 year break-even. For the supermarket segment, the break-even levels are slightly lower at six months operational store level break-even for players like Foodworld and 2-3 months for discount stores like Subhiksha. “When a store is not profitable, it’s either because of customer entry or merchandise mix”, says Nagesh. So it comes back to the same story on formats and merchandise planning, which are a key to performance. Yes a company getting into retail might not make profits for some time due to aggressive growth, but in no way store level profitability can be affected in case of aggressive growth.
Is the doomsay theory working for organised retail? Not really. Yes, there have been hiccups, but these have been more internal than external. Many retailers crib about declining consumer spending, real-estate prices and government regulations, but the key is to get your act right – as many of them are trying to do (see box ‘Chasing the Dream’). “Retailing is not a goldmine; it’s a long-haul business where you can see some money only at the end of 3-5 years,” says Mathur. Adds Singhal: “It took Thailand 12 years to reach about 40 per cent share in organised retail. Corresponding numbers for Brazil are 12 years to reach 37 per cent, and China took 10 years to reach 20 per cent.”
That’s hardly any reason to write off this industry. But one thing is clear: the next stage is a stage of consolidation, where there might be new entries and exits – but retailing in the country is still a nascent industry, and can only go up.
Chasing an Elusive Dream
Retailers may have made many mistakes over the past few years, but many of them have also taken corrective actions. Explains R Subramanian, director, Subhiksha Trading Services: “Back to the basics is the answer. Focus on the customer and think how you’re adding value to him. Experience and fun shopping are all okay but is this what the customer is looking for? Indian consumers have a large choice of retail and are not necessarily waiting – unlike, say, in Eastern Europe or China – for organised retailers to open their doors. Thus the answer lies in managing costs efficiently. Pass on good deals to the consumers to ensure that you can build goodwill for the store; relook at how every rupee you spend adds value to your business.”
Players like Globus have moved to an all-apparel store. The idea is to give larger options at competitive prices – a clear positioning as competition to the small, unorganised retailer operating in 2,000-5,000 sft. Shoppers’ Stop has moved to promotional events not related to markdowns but related to increasing customer entry, such as the ‘101 days around the seven wonders of the world’. Even players like Ebony have taken definite steps in strengthening customer relationship management and supply chain management. Indeed, most of the players have recently implemented IT solutions to better manage their inventory.
Clearly, there’s been a move from uncontrolled growth to more planned growth. Says Birinder Singh Narula, executive director, Ebony Retail Holdings: “Our expansion strategy for the future, like in the past, will be with strong emphasis on consolidation in the regions. This will result in lowering of marketing and HR related costs.” Agrees Nagesh: “Our backend costs increase almost 7 times if we open stores in different cities. But if the store is located in the same city, they increase only 1.5 times.”