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Tuesday, September 15, 2009

Is Organised Retail a Great Business or a Mediocre Business?

Organised retail business is a comparatively new phenomenon in India, and is still in the process of finding its feet in terms of location, size, format, product ranges, and segment targetting.

Before figuring out whether organised retail is a great business or a mediocre one, let me digress a bit and relate an interesting bit of news that appeared in the local newspapers.

South City Mall is one of the flashy new edifices in Calcutta's retail industry, with flagship large-format stores like Pantaloon and Shopper's Stop. With the city's four-day annual celebration of Durga Puja round the corner, the Mall has been teeming with shoppers of all ages.

Many shopper's were confounded recently by a closed Pantaloon store. Several smaller stores were also closed. Even the food court had most shutters down. This, at a time of peak shopping in the city.

The next day's papers were all agog with the inside scoop. Reportedly, the mall authorities had turned off the power supply to the Pantaloon store for non-payment of a large electric bill. The smaller stores and the food court - which apparently were part-owned by Pantaloon - had shut down in 'sympathy'.

Turns out that the mall authorities had agreed to lower the 'astronomical' store rents for a few months because of the economic down turn, after representation by a group of retailers allegedly led by Pantaloon. Raising of the rents back to the earlier levels caused the non-payment of bills. Wonder what they were thinking, when they agreed to the high rents before moving in!

That Pantaloon is badly in need of money, and they are not finding anyone who will give them a loan, is not news any more. (All their 'profits' are accounting fiction - negative cash flows from operations on each of the last 4 years paint the true picture.)

Neither is the story of losses incurred by the likes of Shopper's Stop, Subhiksha, Spencer's, Vishal Retail. Even a big company like ITC is incurring losses on its retail garment stores.

What went wrong? Organised retail was supposed to be the ideal service industry for the future of India, with a huge potential of employment of an unskilled but literate work force.

Several things. The most basic being the business fundamentals. You need to spend several Rupees to earn one. Real estate has to be purchased or leased at exhorbitant rates in large cities - where small format stores are not viable. In smaller towns with cheaper real estate, large format stores may not draw adequate footfalls.

Stores need to be air-conditioned, well lit, frequently remodelled. New products and fashions have to be constantly introduced and the older models and shop-soiled garments sold off at highly discounted prices.

Margins are wafer thin. The constant requirement of cash sooner or later overwhelms the business because of the large interest burden. Add to that, the competition from mom-and-pop outfits that have lower infrastructure costs and have long established customer relationships.

Highly streamlined bulk procurement processes, tight inventory control, live assessment of customer preferences are some of the ways by which some actual profits can be generated. Such activities require expensive computer hardware and software, further adding to the cost.

The banning of overseas retail businesses - except in single product stores - has ensured that Indian retail companies will not benefit from established processes at Walmart, Krogers, Asda, Costco, Target.

Is there any hope for organised retail businesses in India? Will they ever make any real profits?

What do readers think?

12 comments:

Venky said...

Nice post Subhankar. It is worth pondering as to how the biggies in the West that you have mentioned have "succedded" in the business. One reason I can think of is the consumption pattern itself. That of spending more than earning. Additionally, the corporates here riding on stories and biting off more than they could chew. Somehow i-bankers sold them the retail hype and they took on a lot of loans on their books that started to haunt them when demand collapsed. The tested process of taking one step at a time and expanding only from cash of internal accruals will always help in a steady but sure growth - Retail or no Retail.

Thanks,

Venkat

Bharath said...

Good article, but I go against your thoughts. Probably pantloon is hiding things or may be really suffering as of now, but for sure some day or later retail stores will boom. As far as I have seen, in any developed country, most of the stores/shops are chain business. Retail sector wins most of the customers even in low populated highly competitive peers. I see retail segment to see a great future in India.

Li Bin said...

Sir, the issues that Indian retail faces are well brought up in your article. I actually work for Target :) The downturn has seen everybody across the board taking a hit (except Walmart, with their emphasis on daily needs ), whether they have a great system in place or not. I believe India is yet to see organised retail come in, in a big way. We are still 97-98% unorganised. So the potential is huge, and with time, processes and companies will mature to handle the business much better. Will the current crop survive till then, is what needs to be seen... There are huge expectations from the Bharti-Walmart retail tie up. Lets see how that goes.

Regards,
Libin

Subhankar said...

@Venky: Appreciate your comment. Retail business is no rocket science. The Biyanis of this country tried to re-invent the wheel, and fell in a rut.

@Bharath: Thanks for the feedback. I look forward to opposing view points. That is the only way to start a discussion and learn from it.

You've not argued a case, but expressed a 'hope' that Indian retail has a good future. How will that 'hope' turn into 'reality? Worth pondering.

@Li Bin: Good comment, Li. Pioneers usually get killed! So chances of the existing lot surviving is slim - unless they can continue to lobby with the government and ensure the banning of large overseas retail entities.

Sooner than later, the big boys will move in - either in partnership with locals, or by themselves. Computerised processes and systems, well-honed through the years, will start squeezing out some real profits.

Retail is a real-estate and logistics business which requires deep pockets. The sooner the entrepreneurs and investors understand that, the better.

Madhu said...

Nice posting.
You have correctly mentioned that retail is nothing but real estate and logistic play in India while in developed countries it is predominantly a logistic play.
Now we understand the need for high capex in India.
If someone had access to old balancesheets of global retailers we can check whether they too were in a similar situation in the earlier days of launch.

Walmart is better identified as an efficient logistics player than a retailer.
Answer to your question: It is a medicre business but can be made great if we have a state of the art back end support and deep pockets.

SG Money Mind said...

As Warren Buffett said, "To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers", it is important for any business leader to take one step at a time. But I doubt whether some of the companies you mentioned are doing that. Atleast they need to have deep pockets like Reliance, that would help them to learn as the years go by.

Aping what other companies did in the western world is not going to help the Indian companies as the local environment is totally different from the western world.

From investment point of view, retail is not a great business and hence I am happy to give it a miss.

Rishi said...

Dear Subhankarji,

Nice article.
Here is how i see retail store.

1. Retail stores attract large crowd, for many reasons. Does purchasing one of the reasons, many a times its not. Many feel its a good place to hang-out, window-shop, people staying in hot place - would prefer it to avoid heat :) .

2. Personally, retail stores, are a frustrating experience. To start with drive down a few kms, wait in the long queue to enter the mall, figure out a place to park, walk thru all floors to pick up a few items, stand in the queue, pay the bills and check whether u have picked up all the items u have purchased, come back home. This whole effort drains off my energy and weekend too. Instead of this I prefer the mom & pop store nearby which gives me the option of purchase now and pay later. No hassles of driving/parking - i can walk [Healthy too :)] and purchase.

To attract a person like me, retail stores have to offer something attractive to add value for the frustrating experience. I am sure this would keep the cost up vs the income.

Moreover, good infrastructure is a must for growth of retail stores. Maybe this would be the reason, in developed countries, large retail stores are a growth story.

As Venkyji pointed out, the consumption pattern also makes a big difference.

Would i invest in a business which requires cost year after year and dependent on so many external factors - i would think twice.

But how WALMART does it and keeps growing is a big question that needs to be pondered.

Thanks
Rishi

Subhankar said...

@Madhu: Even with deep pockets and sophisticated IT systems, I doubt that retail can ever become a truly great business in India. At best, it will be a wonderful generator of employment for India's youth.

@SGMM: Deep pockets alone may not be enough. There is a limit to 'learning by losing money'.

Merely aping the west won't generate profits. Adopting their systems and processes might.

Agree with you about giving the retail sector a miss from the investment point of view.

@Rishi: Very practical observations, Rishi. My retail experience is no different than yours.

Walmart adopted several questionable business practices over the years - for which they have been hauled up by the authorities a few times. Still, their procurement and logistics handling is a lesson for all retailers.

I had attended a presentation by the Walmart.com VP of Engineering at the Stanford Barn in Palo Alto in 1999. The sheer scope of their vision in embracing the Internet into organised retail was awe inspiring.

Sumanta said...

Another interesting post!

Taking cues from Don Soderquist's The Walmart Way, primarily there are 3 reasons for Walmart's phenomenal & legendary growth:
1. Cutting edge technology: Were the first ones to launch UBC and then recently RFID

2. Frugal Corpo culture: It seems their big execs even travel by economies and share hotel rooms. Basically this has been engrained in every employee of Walmart such that they keep track of every expense.

3. Pushing suppliers to lower prices: This has helped them quite a lot for their biz model of low prices but kind of wiped off many suppliers from the market. In fact, i was reading that Target generates more sales per store than that of Walmart.

Now coming to Indian retailers, i guess one place where Indian retailers lack is retail systems (software apps) & efficient processes. In US there's an eco-system of market research & analytics on retail data where companies like IRI & AC Nielsen score. Being in this business, i know how such insights into such data helps both the manufacturers as well as the retailers. Indian retailers need to embrace technology more to stay competitive.

Another point we need to consider is that Walmart took almost 50 years since its first store to reach where it is today. In fact it overtook Sears and other big retailers only in early 90s. Considering Indian retail is not even a decade old, i guess the next decade would shape its future direction. I guess as one of the readers mentioned Bharti-Walmart tie up could show some way.

Indian retailers started expanding fast (growing fast) without scaling up their systems & processes (suuply chain, logistics, inventory mgmt etc.)

Thanks,
Sumanta

Subhankar said...

Yes, Sumanta, Indian retail has a long way to go as far as systems and processes are concerned.

The Bharti-Walmart tie-up makes sense. It would make the learning curve less steep. The 'build-and-they-will-come' syndrome doesn't generate profits.

After 2 hours of shopping at the South City Mall last weekend, we had to carry several heavy packages up 3 flights of the escalator, followed by a 100 metres walk to the car. Why? Because the mall authorities do not allow shopping carts to be carried up the elevator to the parking lot. I'm unlikely to repeat that experience in a hurry!

Rishi said...

Dear All,
Please find the link about Walmart in moneycontrol

http://www.moneycontrol.com/news/business/walmart-has-big-plans-for-india-do-we-have-enough-space_419906-0.html

Check out Page 3 & 4 for Walmart strategies.

Wondering how retail stores can survive with a 2re margin in big metros.

Awaiting your valuable comments.

Thanks
Rishi

Subhankar said...

Thanks for the link, Rishi.

The laws of the land has forced Walmart to become a wholesaler rather than a retailer in India. But they are learning fast and deftly bypassed the Rs 2 arbitrage issue.

It is also interesting how they have used the Internet to take care of stock-out problems.