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| Retailers ride out the storm |
| Raghavendra Kamath & Neeraj Thakur / Mumbai/New Delhi Aug 24, 2009, 00:37 IST |
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Future no longer tense as consumer confidence improves and firms emerge leaner and more efficient.
Kishore Biyani says consumer sentiment is almost near its peak and Pantaloon Retail is looking at a 30 per cent revenue growth this year. The retail king’s optimism is based on solid ground realities: same-store sales, which declined an average 9 per cent in December last year, grew over 8 per cent over the May-July period. And Biyani expects same-store sales to improve to double digits this year.
Biyani’s optimism is shared by many others in a sector that saw several few tough quarters of dwindling margins and red ink all around. Things, however, are stabilising now. Take the Raheja group-owned Shoppers Stop, which runs department stores and speciality outlets. The retailer turned profitable in the first quarter of this financial year after posting losses of over Rs 63 crore in FY09. The company's operating profits also rose 650 basis points.
That the market believes in the retail turnaround story is evident from the 50 to 90 per cent rise in the stock price of retailers such as Pantaloon, Shoppers Stop and the Tata group-owned Trent since April this year.
If retailers are riding out the storm, the reasons are simple: consumers are feeling more confident of spending and the industry has been cutting costs aggressively, restructuring debt and expanding cautiously. Analysts say retailers' operating margins are growing 50 to 100 basis points every quarter.
Shoppers Stop took drastic steps to cut employee and administrative costs to begin with. Its top management took 15 per cent salary cuts while 300 floor-level staff were not replaced. The company shrank its office space 20 per cent, power bill 12 per cent and corporate office expenses 40 per cent to cut losses.
"I believe management efficiencies and depreciation policies helped us turn around. We will try and maintain costs at the same levels at which we have brought them down,'' said Govind Shrikhande, president and CEO of Shoppers Stop.
The company has also changed its depreciation strategy. It will write off its assets in seven to 10 years, depending on the products, instead of the three to five years till now, which has contributed to improvement in profits in the June quarter.
Madura Garments, part of Aditya Birla Nuvo that retails brands like Allen Solly, Louis Philippe and others, also turned profitable in July this year after making losses for 15 long months.
It did so by closing unviable stores, right-sizing stores and other cost-cutting measures. The company has closed 12 stores in the first quarter of this year.
Madura is also taking other cost-cutting measures in apparel which are expected to save it Rs 100 crore in fiscal 2010. “We will align all growing businesses and close the loss-making stores. Moreover, we have a plan to reduce the store area in some cases,” Pranab Barua, chief executive of the textile and apparel business, Aditya Birla Group, said.
Almost everybody is doing the same. In fact, retailers have closed more stores than they have opened over the past year. Shoppers Stop has closed a dozen stores under speciality formats like Crossword bookstore and airport retail store “Stop & Go” in the last fiscal.
It has also pulled out of a catalogue retailing venture with UK’s Home Retail group under the Hypercity-Argos brand and moved out of the food business after replacing Café Brio outlets with Café Coffee Day outlets.
Delhi-based Vishal Retail, which has been battling cash woes and mounting debt, has relocated 25 stores in fiscal 2009 and 10 stores since April 2009. It is now planning to close 20 more and go only through franchisee route.
“Retailers are exiting stores that are not profitable as they release more cash for their operations. They are clearly looking at profits and costs at the store level. Instead of concentrating in one catchment, they are trying to spread in different markets,’’ Ajay D’Souza, head of research at Crisil, said.
Analysts say the downturn helped retailers relook at their businesses, cut flab, moderate plans which brought down their costs and improved profitability. “There was a lot of growth inventory on their balance sheets. Since growth has moderated, inventory has come down and their working capital requirement is also coming down,’’ Pranshu Mittal, a research analyst with Centrum Broking, said.
Added D’Souza of Crisil: “Retailers are reorienting their businesses towards better margins either with product mix or with private labels. Cost rationalisation in lease rentals, wages and logistics is also helping them with better margins,’’ he said.
Vishal Retail, for example, has restructured debt, reducing its monthly outgo 25 per cent. Its cost of debt has gone down from 15 per cent to 9.75 per cent. The company has also rolled over Rs 250 crore worth of short-term debt from various lenders.
‘’We have told the bankers that ours is a profit-making business model. All we need is some leniency in the rate of interest, so that we can make a comeback,” Ambeek Khemka, group president, Vishal Retail, said.
Vishal borrowed Rs 200 crore in fiscal 2009 to fund its expansion spree to achieve its target of 3 million sq ft of space, which led to a debt pile up of Rs 730 crore on its books.
According to Khemka, Vishal is reducing its employee costs, closing stores, reducing inventories to turn profitable by fiscal 2011. In fiscal 2009, it posted losses of Rs 94.49 crore. The company reduced the number of products per store. “Now we are placing only those products that are required by our customer. This way we have been able to bring down our working capital requirement as well as operating cost per store,’’ Khemka said.
Such long and hard look at their business models has made retailers confident of the future. Shoppers Stop’s Srikhande said while the economy was clearly reviving, the base of the higher middle class and above, who are our main customers, is growing. “Their incomes are growing and we are ready to tackle this demand,’’ Shrikhande said. The company plans to invest Rs 150 crore in opening around 12 to 20 stores in the next three years.
“We expect things to pick up after Diwali this year and a good year thereafter,’’ Shrikhande said. Others hope his predictions will prove correct.
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