Subhiksha, one of the earliest home-grown grocery, pharmacy and mobile retail chains, has been in the news for the last several months. The murmurs started surfacing many months ago relating to a brewing financial crisis but were resolutely denied by the company till a few days ago. Then in a striking mea culpa, the company’s management has now not only admitted that it has indeed been in serious financial mess for many months but has even gone to the press with an extraordinary claim that over 600 of its outlets have been vandalized but the company is still not pressing any charges against anyone or filing any FIRs. With the Satyam saga still making headlines, the cynics are already reading between the lines as the Subhiksha management makes more disclosures about its financial health.
With not so encouraging news reports on the financial performance of some other large Indian retailers including Future Group, Reliance Retail, Aditya Birla Retail and Vishal Retail, many may already be tempted to write an epitaph for the organized, modern retail sector in India. It would be wrong to do so. Yes, it is true that many of the earlier entrants are finding it difficult to maintain the scorching pace of growth they had set for themselves in the last few years and some of the newer ones are discovering the challenges involved in meeting the extraordinarily ambitious growth trajectories they has set for themselves at the time of their entry into this very promising business sector. However, this is a much-needed pause for these players and for the nascent organized Indian retail sector. The serious players are now busy refining their business models and carrying out the much-needed course correction, be it in terms of formats, locations, supply chains or overall business operation costs. Most will succeed in doing so since they have the entrepreneurial and managerial talent and financial capability to carry out these changes fairly quickly.
What has gone wrong with retailers like Subhiksha? On the surface, such retailers had a tailor-made retail model for India which was to be a deep discount, no-frills retail format focusing on the very primary consumption basket of the middle and lower middle income groups. However, Subhiksha and some others ignored, to their great peril, the immense financial and managerial investment needed in building a super-efficient supply chain, and a super-efficient retail operations organization which can, while competing with the traditionally low-operating cost kirana stores and chemists on the price platform, generate adequate margins for themselves. Reckless growth that was probably driven by the desire to drive up valuations of the business rather than creating sustainable value for all the stakeholders became their undoing. In this quest for reckless growth, just about every basic paradigm of a successful retail business was ignored or compromised upon, be it supply chain-efficient clusters of retail expansion, optimized store locations and store rentals, or enhanced customer service.
While the fate of Subhiksha and a few others will be known in the coming months, the overall health and future of the modern Indian retail sector should not be judged by these outcomes. Some fundamental facts have to be kept in mind while re-evaluating the Indian retail opportunity. Firstly, India is still experiencing one of the strongest economic growth it has in the last 60 years. At about 7 per cent GDP growth in 2008-9, and perhaps between 5 and 6 per cent in 2009-10, the current year and the next one will be better than the “India Shining” years of the NDA government not so long ago. Real consumer spending will grow in tandem with this strong GDP growth, and this can be easily validated by the growth of various constituents of consumer spending, be it food and grocery, cooking oils, FMCG products, consumer durables and electronics, and even clothing and other textiles.
Secondly, modern retail still accounts for less than 5 per cent of the total retail channel in India. The so-called mom & pop stores continue to show growth and profitability that is again, by and large, in line with the growth in consumer spending.
Thirdly, the consumer spending basket has been showing a consistent shift in components over the last 20 years or so. Hence, while some organized retailers may be facing certain growth or profitability challenges, there are others including Trent (Westside, Landmark, Others), Fabindia, Shoppers Stop, Reebok, Esprit, Tommy Hilfiger, Tanishq, Croma, The Mobile Store, Guardian Pharmacy, Bharti Retail, Metro Cash & Carry, Café Coffee Day, McDonald’s and others continue to grow steadily and, in most cases, profitably. Many other international retailers like Tesco and Zara are poised to debut in the next 24 months, and others such as Marks & Spencer are poised to make a strong recovery and growth.
And finally, the much-needed correction in retail real estate rentals and other operating costs is already under way which should restore the profitability of many current players and encourage them and the new ones to continue to plan further expansion.
Hence, the Indian retail story and its business promise are still very much intact.