Asked which books were selling the most at his stall at the India Retail Forum, TS Ashwin, managing director of the Odyssey chain of book stores, replied that there seemed to be a big demand for a book called Understanding Retail. Ashwin added that every consultant was asking for it. At the same forum a consultant put out a series of slides: they talked about the kind of revenues the organised retail sector would post over the next few years, what share of total retail it would account for, how fast the various segments were growing and in general how good it all looked. But there wasn’t a word on profits. Asked why, the consultant first said he felt the question was “loaded”. He then went on to say that “his guess” would be that they would be 3-4 per cent.
Right now, almost everyone’s guessing which way organised retail in the country is headed. Forget the profits, even the kind of top line numbers talked about a couple of years back aren’t coming through. Same store sales have tapered off to high single digits from 20 per cent-plus a couple of years back. For Vishal Retail, same store sales were up just 7 per cent in the year to March 2008, from 12 per cent in the previous year. Spencer’s, which retails mainly food and groceries, saw a lower asset-turnover ratio in FY08 than in the previous year. The last six months have seen customers holding back on even small ticket items like mobile phones. Net sales for Pantaloon in the June 2008 quarter were up 36 per cent compared with 56 per cent for the full year. So it’s not surprising that few retailers believe they will see a top line growth rate of over 10 per cent over the next months. Vikram Rao of the Aditya Birla Group was most candid when, at a round table of top retailers earlier this month, he said that he had never seen the kind of price discounting in his life as he had in the last four months. “I have my doubts about consumption,” he added.
Even without the gloom of the last six months, estimates on consumer spends appear to have been overly optimistic. To begin with, every retailer has nearly doubled or even trebled the space they occupied. So, the already value-conscious Indian consumer has even more to choose from. Nowhere has this played out more brutally than in Ahmedabad — now called a “graveyard” — where retailers are rushing to cut their losses; two Big Bazaar outlets have downed their shutters.
It’s time, therefore, to go back to the spreadsheet. A CLSA study notes that higher rentals in cities like Mumbai or Delhi do not seem to be delivering significantly higher profitability — possibly all other costs are proportionately higher. Also, while format is perhaps the most important determinant of profitability, there’s evidence to show that larger retailers are able to derive efficiency from scale; Trent, for instance, has better gross margins than Shoppers Stop though the latter’s operating profit (Rs/sq foot) is 1.5 times higher. Small-size food and grocery formats are apparently not viable, that’s probably why HyperCity Express has decided to shelve its plans for smaller food stores.
Again, it’s the product mix — how much one sells of apparel, food and other products — as also the right share of private labels in the basket that determines margins. Trent has got this spot on — about 70 per cent of its merchandise comprises apparel, and of that, 90 per cent is sold as store brands. That’s why its gross margins, at around Rs 3,000 per sq foot, are among the highest in the industry. Spencer’s, on the other hand, which sells more food and personal care products, has amongst the lowest gross margins at around Rs 1,700 per sq foot.
With rentals coming down, as confirmed by Kabir Lumba of Lifestyle, things should begin to look up for retailers. Rentals, as a share of revenues, were climbing to 8 and 9 per cent and threatening to derail the business. Now there are acres of mall space and no one there to pay the rent. With developers now clearly on the back foot, many might now settle for a revenue-sharing option. Of course the financial impact of lower rents will be felt only with a lag after the current leases are re-negotiated, which they are typically every three years.
In the meantime, retailers need to cut back on expansion plans — even close down stores or formats that don’t work — and cajole customers to spend more at their existing outlets. They cannot hope to roll out more stores in an environment in which they’re not able to sell enough and, at the same time, will have to cough up huge amounts on interest. They may claim to be breaking even in 18-24 months at the store level but as the CLSA study shows, if all costs are taken into account, it takes anywhere between three to five years to recover capital expenditure. And they simply don’t have that kind of time.
