Trent's JVs grapple with bottom lines

Inditex Trent posted a jump of 21% in sales to Rs 1,023 cr in FY17 compared to Rs 842.5 cr in FY16

Net earnings of Tata-led Trent’s joint ventures with global brands could be a matter of concern for the company, despite a significant growth in their revenues.

Inditex Trent, a joint venture (JV) of Zara-owner Inditex and Trent, posted a jump of 21 per cent in sales to Rs 1,023 crore in 2016-17 (FY17) compared to Rs 842.5 crore in FY16. However, its profit after tax fell to Rs 48 crore in FY17, from Rs 80 crore in the year-ago period, according to Trent’s latest annual report. The JV runs 21 stores.

Zara, the Spanish retailer which opened its first store in India in 2010, is one of the fastest and biggest fast fashion brands in the country. Zara cut prices by 10-12 per cent to become more affordable in the Indian market and introduced wider merchandise.

“It has not been an easy market for the past few years, and demonetisation had its impact,” said Devangshu Dutta, chief executive at Third Eyesight, a retail consultant.

“In the JV, Zara is a majority partner and driving the business. From the Tata group perspective, retail is a long-term business. But, even if Zara wants to completely own the business at a later date, it would be a fairly attractive exit for Tata,” Dutta said.

Trent’s JV with Zara’s sister brand Massimo Dutti posted a loss of Rs 1.03 crore on sales of Rs 30.24 crore in FY17. The JV runs two stores.

In its annual report, Trent said it planned to open a few more Zara stores in major cities over the next three to four years. The primary challenge to faster expansion, it said, was the availability of high-quality retail space that could generate reasonable sales. 

“The company views its commitment to this JV primarily as a financial investment and, consequently, it may be appropriate not to consider this as a long-term strategic investment integral to other retail operations,” the report said.

Dutta said the market for premium apparel was limited in the country and it made sense to chalk out a profitable growth plan.

Similarly, Trent Hypermarket, a joint venture between Trent and UK’s Tesco, posted a six per cent jump in sales to Rs 892.57 crore in FY17. The company’s losses came down from Rs 54.76 crore to Rs 52.39 crore.

Tesco signed the JV with Trent in March 2014 and runs stores under formats such as Star Hyper, Star Market and Star Daily. It runs 45 stores across formats.

Raman Mangalorkar, former chief executive at Jubilant Retail, said the D-Mart effect multiplied by online models and hyper-competitiveness of kiranas were putting pressure on the margins of organised grocery chains such as Star. 

“Existing players are using only pricing as a strategy to gain market share. So, I feel the margins will remain anaemic. The situation will remain the same for the next two to three years, unless consolidation takes place and retailers rationalise their costs and establish a clear positioning in the minds of customers,” Mangalorkar said.