The Hindu Business Line : Is the retail romance over?

“The current phase does not indicate any slowdown in modern retail even though for the time being it may look as if this is the end of the growth story. The industry is suffering from the first pangs of growth. Favourable government policies will help in creating and sustaining the demand.” _ Kishore Biyani, CEO, Future Group

V Sreenivasa Murthy

The end of the dream?

Bindu D. Menon

It’s the Valentine weekend and Select City Walk Mall in the posh south Delhi area is all decked up with red and white heart-shaped balloons and festoons. It is that time of the year when everyone from card shop owner to jewellery retailer solic its attention for their products with a volley of offers. But this year, retailers were doubly keen to make most of the season and despite lucrative offers there were not many takers for their goods.

Games, couple contests and massive discounts are not attracting enough footfalls. Worried retailers have been extending ‘end-of-season sales’ for the last two months at least to meet their sales targets for the current financial year.

In Mumbai’s western suburb Malad, which houses the popular InOrbit Mall, by far the largest mall in terms of space occupancy, it’s the same story.

“Weekdays are even worse. Customers are postponing purchases of not just high ticket items but also downshifting their purchases. Everybody is cautious and high discount tags are finding few takers,” says an apparel retailer, who is busy renegotiating the rent with his landlord.

Touted as the next big thing after IT and telecom, retail in India is facing trouble moving ahead. Malls, which had sprung up all over urban India in anticipation of a consumption boom, are fighting for survival.

Shoppers stop shopping

Customers such as Chennai-based Bhargavi Mohan, who has a choice of shopping at Big Bazaar, Spencer’s, Reliance Fresh or even a now beleaguered Subhiksha, all in a radius of 3 km, are going back to basics — the local kirana shop.

Explains Mohan, “Visual merchandising can be disastrous for your monthly budgets. One has a tendency to pick up anything and everything in an organised retail format. But in a neighbourhood provision store you just stick to your list without being lured.” Words of wisdom in times of slowdown, indeed.

According to Pinaki Mishra, Partner and Industry Leader, Retail and Consumer Product Practice, Ernst & Young, “An analysis of the EBITDA levels of the top 10 Indian retailers has shown a decline of 201 basis points between 2003 and 2008. One of the key trends being observed is that retailers who were till now focusing on expansions centreing on increasing retail presence are now focusing on an optimisation-driven strategy.”

Growing pains

Currently, the eighth largest retail market in the world in dollar terms, India too does not seem to be insulated against the adverse impact of the global slowdown. Year 2008, has, in fact, not been a significant growth story for Indian retail. Marginal increase in sales coupled with burgeoning cost pressures has resulted in shrinking bottom lines and large number of retailers shutting shops and slamming the brakes on further expansions.

However, Kishore Biyani, CEO, Future Group and Managing Director of Pantaloon Retail has a different take. Says he: “The current phase does not indicate any slowdown in modern retail even though for the time being it may look as if this is the end of the growth story. The industry is suffering from the first pangs of growth. Favourable government policies will help in creating and sustaining the demand.” The group operates over 12 million square feet of retail space in 70 cities and towns.

Current retail scenario

At present, organised retail stands at less than five per cent. Huge investments that have been pumped in by large business houses such as Reliance, Bharti, Tatas, Mahindras, the Future Group and scores of other wannabes would necessarily need to have numerous footfalls and conversions in order to be viable in the long run. A large number of multinational giants entering India too have set their eyes on the growing young workforce and consuming class.

According to reports, the retail players in India would be investing close to Rs 1 trillion by 2012 in developing the market. However, retail analysts believe that it is time to exercise caution against mindless expansion. “The Indian retail scene could at best support 10 large players with revenues in excess of $2 billion each by 2015. This would mean that the weaker players would be flushed out in the evolutionary cycle,” they point out.

No sales, no gain

Discount store chain Subhiksha Trading Services Ltd has shuttered its 1,600 stores and laid off most of its workers. Many like Subhiksha are struggling to stay in business now that financial backing has dried up.

Until late last year, Subhiksha was opening stores at the rate of 50 a month. But plans for an initial public offering to raise funds fell throughas the stock market slid. Then, in September, just as the company was about to bring in an international investor to finance further expansion, Lehman Brothers Holdings Inc collapsed and the investor walked out. “The credit market completely froze up after Lehman,” says R. Subramanian, Subhiksha’s founder and managing director. “Money is like blood. If the blood flow stops, the entire brain stops working.”

Subhiksha had to perforce stop paying salaries, rents and suppliers. It is now in the process of restructuring its Rs 750 crore in debt with its 13 lenders.

A Fitch report on the outlook for the retail industry in 2009 said that due to factors such as slowing economic growth, high interest rates and the liquidity crunch and high real estate rates most retailers have experienced a drop in footfalls and demand, reflected in slowing same-store sales (SSS) growth and greater time to break even for new stores.

“We expect SSS growth in 2009 to be weaker than in 2008 due to slow Indian GDP growth. In a deteriorating macroeconomic climate, retailers may be forced to give discounts and promotional offers to maintain volumes, which will drive down margins. Consequently, Fitch expects value retailers to have an edge over lifestyle retailers due to the value-seeking approach of the Indian consumer, although overall the operating environment for retailers will remain challenging during FY09,” says the report.

Footfalls in shopping areas dropped year-on-year (December 2007 to December 2008) and maintaining conversion ratios has become a challenge. Controlling costs will be a key area of focus to offset margin compression from top line pressures, increasing competition and promotional activity. As a result, retailers are likely to focus on inventory management, supply chain efficiencies and labour productivity, Fitch says in its report.

The retailers’ response

Retailers will also look at options to reduce rental costs on both existing and new store locations. However, while Fitch expects lower rents to benefit retailers during calendar year 2009, the benefits may be curtailed by fixed rental agreements signed in the past one to two years.

Public listed company Vishal Retail said the group is undertaking re-negotiation of rent agreements with property owners for a 25-50 per cent reduction in rentals and also plans to close down, relocate and resize stores to achieve economic viability.

“We are in the process of re-negotiating rentals with many of our property owners and are looking at achieving 25-50 per cent reduction in rentals, in line with the downslide in realty prices. We are also planning to relocate stores which are economically not viable or whose rentals are more than market rates and resize others to make them more profitable,” Vishal Retail Group president Ambeek Khemka said. The company has also slashed its turnover target to Rs 1,500 crore for the current fiscal, down from Rs 1,800 crore initially planned.

Slowing sales resulting in lower inventory turnover and increasing working capital requirements to fuel growth have resulted in liquidity pressures for many domestic retailers. According to Fitch, this pressure would continue during 2009 as inventory levels are expected to increase, as new stores will generate good run rates only after 12-15 months and sales will remain slow at the existing stores.

Fitch expects retailers’ free cash flows to remain negative during the current calendar year, which, coupled with large short-term debt maturities could also expose them to refinancing risks.

Says Dr Richard Cuthbertson, Senior Researcher, Said Business School, University of Oxford, “The rapid expansion in retail space in recent years was largely debt-funded. This has resulted in substantial leverage at retailers during the last two to three years, which could add to their refinancing risks. There is a great deal of learning in the Indian retail story. There will be lot more regional variation and mom-and-pop stores will continue to exist. Largely, retailers have to develop a format which will succeed in India. And in my opinion, the best format for India will be a mix of everything — right kind of stores, pricing and even consumer loyalty. Though logistics and supply chain issues will remain a constraint, in the long run, it will ease.”

Related Stories:
Retailers falter as same-store sales skid
A lacklustre year for retail industry