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Raymond to focus on growth, profitability in current fiscal

Madhurima Nandy , MINT (A Wall Street Journal Partner)

Bangalore, April 30, 2013

After focusing on consolidation and margin improvement for a year, apparel maker Raymond Ltd intends to return its sights to growth and higher profitability in the current fiscal year.

Top Raymond executives sent out the signal in a conference call with analysts on Monday in which Raymond’s newly appointed chief financial officer M. Shivkumar indicated that the company’s net debt may go up by Rs.150-200 crore this financial year owing to the company’s capital expenditure plans.

Around Rs.342 crore of debt is due for repayment in the third and fourth quarters of 2013-14 which will be replaced by long-term debt, or other loans, he said.

Raymond appointed consultancy Accenture Plc last year for a margin improvement programme and consolidated its apparel business structure to improve cost efficiency. These measures have resulted in the firm boosting cash flow from operations by 42% to Rs.326 crore in the year ended March, according to brokerage PhillipCapital (India) Pvt. Ltd.

The management indicated that 2013-14 will see a lower proportion of discounted sales and better control over inventory levels, two factors that analysts say typically eat into profitability and dent cash flows.

“The company has been focusing on improving cash flows and margin improvement. While the net debt, at Rs.1,347 crore, has remained almost same compared to a year before, investors would ask for reduction in debt by sale of non-core assets,” said Ankur Agarwal, an analyst at Nomura Equity Research.

On the analysts’ call, Raymond executives said a team is exploring options to realize value from its 120 acres of land in Thane on the outskirts of Mumbai.

The inventory days—a measure of efficiency based on the number of days that a company holds its inventory before selling it—declined from 155 days to 144 days in FY13 and the improvement is largely led by textile business as well as liquidation of inventory in branded apparel business, said a report by PhillipCapital.

In the March quarter, Raymond opened 22 new stores and closed 14 stores.

Raymond has restructured its top management, splitting its portfolio and separating the strategy and finance divisions in March. H. Sunder, who was the chief financial officer and headed both finance and strategy portfolios, will now focus on strategy, while Shivkumar, who joined Raymond last year from Jet Airways (India) Ltd, was made CFO.

Robert Lobo, who earlier headed the brands ColorPlus and Raymond Premium Apparel is now president-group apparel at Raymond, and will oversee all the four brands in the branded apparel business segment such as Park Avenue, Parx, Raymond Premium Apparel and ColorPlus.

“The company has initiated a restructuring process for its apparel business structure which involves getting a distinct strategy for each of its brands. It only helped that the company has put one person in complete charge, instead of two people heading the brands earlier,” said an analyst, who didn’t want to be named.

Last Friday, Raymond posted an 80.75% drop in net profit for the March-ended quarter from the year-ago period to Rs.61 lakh, while revenue rose 13% to Rs.1,081.36 crore. The firm said that the net profit falling to Rs.61 lakh was “mainly due to reversal of deferred tax asset provisioning”. The fall in profit came after adjusting for exceptional items and taxes.

A Nomura Equities Research report said the streamlining of Raymond’s branded apparel business includes fine-tuning the communication strategy for each brand and focus on sales channels that would help in brand visibility.

One of the key measures that Raymond has taken up in branded apparel business is the transitioning of Park Avenue from The Raymond Shop (TRS), a retail store format, to exclusive brand outlets (EBO). Raymond Premium Apparel, the high-end segment will be sold through TRS.

Raymond executives mentioned on Monday that while the first phase of transitioning Park Avenue to exclusive outlets has been completed, the company will decide on the second phase depending on consumer demand for the brand and Raymond Premium Apparel.

Gautam Hari Singhania, chairman and managing director, said in a statement that the focus has been on improving the operational efficiencies, through supply chain management initiatives, cost rationalization and consolidation of apparel business operations, which resulted in pull back of profitability and improvement in cash flows.

Raymond shares rose 5.43% to close at Rs.281.3 on Monday on the BSE while the benchmark Sensex gained 0.52% to close at 19,387.5 points.

Apparel companies have been struggling to garner sales, along with high levels of inventory of unsold stock and discounted sales eating into healthy margins, said analysts.

“The key challenges for apparel brands today are to get adequate sales per outlet and maintaining an excitement about product ranges to pull (in) consumers. Discounted sales have also put the margin mix of companies and their cash flows out of balance for a while now, including promotions that are done to drive footfalls,” said Devangshu Dutta, chief executive of retail consultancy Third Eyesight.

Step By Step

Amrita Roy, Ankita Rai & Masoom Gupte, Business Standard

New Delhi/ Mumbai April 29, 2013

On an unremarkable day in 1991, Ramnath Nalli, grandson of Nalli Chinnasami Chetty, who set up the first Nalli Silk store in Chennai in 1928, decided to check out if there was a market for Kanjivaram silk saris in the country’s fashion capital. He organised an exhibition-cum-sale of its products at New Delhi’s Pragati Maidan and showcased an exquisitely crafted range carefully picked from his enviable repertoire. The event was a sell-out, and spurred him on to step out of his stronghold and set up his first Delhi store that year. Today, Delhi is the second largest market for Nalli after Chennai.

Nalli Silk’s journey from Chennai’s T Nagar to locations across the subcontinent and beyond mirrors the growth curve of many other home-grown, family-run retail chain brands in India. Indeed, if in the early days of national television regional and local brands scrambled for a national presence, recent years have seen ambitious local retail outfits take the leap of faith. A whole host of factors have come together to encourage them to leave their comfort zones and explore new markets.

Devangshu Dutta, chief executive, Third Eyesight, a consulting firm focused on the retail and consumer products ecosystem, explains why in the last decade or so, so many stand-alone, single-store brands have set about building critical mass. "One reason is ambition. By itself it can be a great enabler," says Dutta. The arrival in India of global chains fuelled the ambitions of the local players. This ambition has been driven by exposure to modern retail and the media focus on it, creating an environment for the family-run enterprises to grow, he says.

The significant growth in commercial real estate over the past decade has provided ground for the ambition to spread roots. "In the last few years so much more retail real estate has become available, bringing down capital investment and improving the profit multiplier significantly," adds Dutta. Earlier, a retailer seeking to open a new branch would have to typically invest in building the physical infrastructure ground up. The growth of malls and modern commercial complexes even in tier II cities, however, offers opportunity to set up bare-bone kiosks. What has accelerated the process is easier access to capital. "Apart from institutional capital, even before you become a serious contender for PE funding, there are investors you can approach," points out Dutta. Then there is the changing profile of the entrepreneurs – many are second and third generation members of the promoter family and young, often with foreign degrees in technology or management. "These people are loath to come back to the family shop and sit at the cash counter. They have global exposure and have, quite often, started their careers in the corporate sector. For them, just running a store or two offers no challenge. They will return to the fold only if they can script a growth story," says Dutta.

However, many entrepreneurs with successful single store operations dither over questions such as when is the right time to do it, what would be the best route forward – do it alone or with franchisees? We studied a dozen such chains, which grew from being single stores, for answers. Here we would like to put together a road map for expansion for brands looking to establish a chain across markets.

The liberalisation proved to be a turning point of sorts for many established Indian single-store brands. Some perished, unable to adapt to the changing times and tastes and ceded ground to the bigger brands and multinationals. The more nimble ones – such as Nalli Silk, Lawrence & Mayo or Vijay Sales – saw opportunity for brand building. The cases we will discuss started their journey as single-store enterprises; they had one other thing in common – unmatched brand equity, which they cashed on as the markets opened up.

Start from the beginning

According to Vivek Mendonsa, director, Lawrence & Mayo, the foundation of a successful chain rests on the four pillars of location, understanding of the market, concept or value proposition, and the knowledge to execute, or LUCK for short. If you are a successful one-shop enterprise looking to make the transition, the first question to ask is, whether your business – its format or model or its very nature – is amenable to the chain format. If the nature of the business is such that its brand equity is solely dependent on a unique factor that cannot be replicated across multiple outlets, then developing it into a chain will adversely affect the brand. For example, if you run an adventure camp in a Himachal valley, it’s unlikely that you could replicate the same model in Goa. Another question to consider, particularly for the service-oriented enterprises, where the main differentiator is the quality of the customer’s experience of being served, is how to maintain standards across multiple locations. For a beauty chain, or a restaurant, where reputations can be made or marred by a hairdresser’s attitude or a waiter’s promptness, it is difficult to ensure the same standard across locations. With continuous training of personnel and strict monitoring mechanism in place such risks can be mitigated to an extent, as the success of chains like Shahnaz Husain salons or the Oh! Calcutta and Mainland China brands of restaurants run by Speciality Restaurants Ltd (SRL) testify.

Also, the economies of scale are not equally applicable. According to Nilesh Gupta, managing partner and CEO of Vijay Sales, a white goods and electronic gadgets retailer, economies of scale don’t work beyond a point in this segment. Once you have crossed the threshold of 15-20 stores, returns tend to diminish as certain costs – like that of inventory – don’t go down. What goes down is the time taken to draw in the customers. "We are in the technology space and every time a new technology comes, it has to be made available to the customer," he says. "Even now we take 45-50 days for a physical store opening. But where earlier it took us about two to three months to start attracting customers, we now have them coming in from day one at any of the new stores."

After you have figured if it is a good idea to establish a chain, the next big task is to identify the best location/market you should head for. Being in the right location is crucial for the survival of any business, especially in the retail, service or hospitality sectors, where accessibility of the store and the demography of the potential customer base directly impact footfalls, avers Kamal Tandon, CEO, Nalli Group. Lawrence & Mayo, which was started during the British rule to serve an exclusive clientele of royals, industrialists and high ranking civil servants, operated five stores across undivided India. When much of its client base vanished with Independence, it changed tactics and targeted a wider base of customers and expanded into a chain. The 94 stores it currently runs are located near established markets. Mendonsa says more than 25 per cent of the assets are completely owned by Lawrence & Mayo and some of these are high street and marquee properties, given the brand’s aspirational positioning.

Aspirational or not, not doing due diligence while looking at a location or site could be a fatal mistake, warns SRL founder and CEO Anjan Chatterjee. "It is important not to over commit on fixed outgoings in developing locations where actual population is not enough to generate the kind of footfalls that will justify the rent," he adds. SRL has roped in Jones Long LaSalle and Knight Frank to research the demography of a new city/location before zeroing in on properties. For her salons, Husain’s company insists on properties on ground floors with good frontage or first floors with easy accessibility.

Being in the right market is an absolute must. "Apart from understanding the overall potential of a city, a good strategic location is also important," says Gupta of Vijay Sales. For its part, L&M does not venture into cities with less than 10 lakh population, while the Nalli brass believes that if the size of a market is right, there may even be several Nalli stores in the same market. "The metro cities are expanding very fast, making it difficult for customers to commute from one end to the other. People are cutting down on destination shopping. So we see potential even in cities where we are already present. In Bangalore alone we have four stores now. We are also expanding in tier II cities; we have opened in Kanchipuram and Coimbatore. We looking at Gurgaon and Chandigarh in north India," says Tandon.

Know your market

Needless to say, the nature and quirks of individual markets is another factor that determines how successful a chain is likely to be. "Credit cards and EMIs don’t work much outside big cities and one can’t bank on these to push sales," says Gupta. Another important lesson to remember, he warns, is that even in today’s highly connected world, brand equity takes time to build. "When we entered Surat, we had advertised fairly heavily. Yet we had to contend with questions like ‘Who are you? How do I trust you?’ I asked the customer who posed this question if he had relatives or friends in Mumbai. They could tell him whether he could trust us or not. It was a lesson that brand equity cannot be transferred automatically," adds Gupta.

Besides, in new markets with established local players, consumers take a lot of convincing and aligning with local festivals is a smart way to generate trust.

The next question to ask is whether to go it alone or scout for franchisees. After much deliberation Vijay Sales opted for the company-owned-company-operated (COCO) route. "We find that the franchise model doesn’t work in our business because we are not selling our own brands. There is no value addition since we work more as amalgamators of brands. If we were to bring on franchisees, they’d quickly learn the ropes of our business, gather the necessary experience and branch out on their own," says Gupta.

SRL follows a combination model. A large number of its stores are under COCO and it also has a few franchises. Even when the restaurants are owned by the franchisee, the operations are managed by the company (franchisee owned, company operated).

"We are in the fine-dining business and hence our main offerings – food and service – cannot be mechanised like you can do in the quick service space," explains Chatterjee. He says the franchise model was looked at only to help speedy expansions primarily in smaller cities and bridge the gap of initial capital requirements needed to set up a new outlet.

The next big question is how to raise the capital required for fresh investments. While most brands have said that the initial funding came from internal accruals and bank loans, once a standalone store brand has established brand value and demonstrated scalability, raising funds gets easier. If the sector you operate in is growing fast, the job is 75 per cent done. The rest depends on how you sell your dream to the potential investor.

Take the eye care segment. The size of the organised industry is about Rs 1,000 crore and the unorganised segment makes up another Rs 2,000 crore. There are national chains like Lawrence & Mayo, Titan Eye+, Vision Express, besides regional players like Gangar (in Mumbai and Pune) and Dayal Optics in New Delhi. The opportunity is huge and what can work for large regional players is the kind of trust they enjoy in their home base. That’s precisely the lever that players such as GKB and Himalaya have used to their advantage and that’s the reason why we have seen specialty eyewear becoming such a hotbed of competition in recent years.

Chatterjee says VCs find the restaurant sector quite attractive. Macro factors like the growing quality of life and the scalable nature of the business make it an attractive bet. The organised segment would be Rs 28,000 crore by 2015 with a CAGR of 30-32 per cent, he points out. But profitability at the store level is a key challenge. Food inflation has been in double digits in the last three years, affecting the margins.

In sum, the going won’t be easy even though you feel you are ready to stretch the equity of your brand across markets. Whichever market you might be in, it is a good idea to remember the first rule that every business text book propounds: that sound market knowledge underpins success and all business ideas must be tested thoroughly before launch.

The Return Of Retail

Vishal Krishna, Businessworld

Bangalore, April 25, 2013

Despite the gloom about the slow growth of the Indian economy, Renuka Jagtiani, vice-chairperson of the $4-billion Landmark Group is remarkably upbeat about its immediate future. In fact, Jagtiani is chalking out a massive expansion plan for India with the help of two of her deputies — Kabir Lumba, chief executive officer of Lifestyle, and Viney Singh, CEO of Auchan Hypermarkets. “You will have to be positive about the future,” she says. “India is going to be one of the most important markets for us.” She adds that while the Landmark Group has created a Rs 3,000 crore business in the country over a decade, it will double that in just five years.

Over the coming fiscal, the Landmark Group says it will add at least 400,000 sq. ft of retail space to the existing 3 million sq. ft under its belt. Apart from the Rs 200 crore budget earmarked for its main formats, Jagtiani plans to spend another Rs 100 crore on a premium apparel format called Splash.

Jagtiani’s plans for India are actually rather modest when compared to those of her other retail peers. For instance, Reliance Retail has committed over Rs 4,500 crore for expansion over the next three years — and it might actually end up spending far more, according to insiders. Of course, a bulk of this will go to the flagship Reliance Fresh, but the other units, such as the recently launched cash-and-carry format Reliance Market, will also be expanded.

Randy Guttery, CEO of Reliance Market, says in the current quarter alone the company is going to open six cash-and-carry stores of 53,000 sq. ft each. Sources say that the total investment could be around Rs 150 crore.

Reliance has kept costs low because the next three months will determine whether the model will succeed or not and, therefore, it can learn valuable lessons to scale the business quickly. Guttery has signed on properties that nobody else will dare take possession of. For instance, he has been able to sign on a city council’s bus repair shop in Bangalore and an old shoe company’s warehouse in the North-east. “It’s all about converting them into great places for kirana owners to shop at,” says Guttery. “There are at least half a million kiranas we can service in three years.”

Meanwhile, the Future Group, set up and headed by entrepreneur Kishore Biyani, and the Bharti Group, controlled by the Mittal brothers, are expected to spend more than Rs 2,000 crore each over the next couple of years on their retail expansion. Biyani hopes to become the first retailer in India to have over 20 million sq. ft of retail space under operations this year. Reliance Retail plans to dethrone it in a few years. Currently, with little over 9 million sq. ft under various stores, it has plans to grow to 60 million sq. ft within this decade.

The Bull Is Back

After four years of licking their wounds, chopping and changing formats and, in some cases, shuttering stores, India’s big retailers are bullish again. Most of them are ready to dip into their reserves and even borrow money to build up scale for both future opportunities and threats.

You could say the wheel has turned full circle. Between 2005 and 2009, Indian retailers had expanded frenetically, with the big players — the Future Group, Reliance Retail, Landmark Group (Lifestyle), Shoppers Stop, AV Birla Group, the RP-SG Group’s ­Spencer’s and Tata’s Trent — ­together going from five million sq. ft under operations in 2005 to 25 million sq. ft in 2009. And then the Indian retail dream came crashing after the global financial meltdown triggered by the bankruptcy of Lehman Brothers.

Suddenly, the organised retail players in India were caught in a world of slowing sales, dipping profits, increasing costs and higher debt servicing costs. Predictably, the biggest retailer in India, Biyani’s Future Group, was the worst hit.

Over the next two years, the pioneers of Indian retail concentrated on closing stores and rejigging formats. Aditya Birla Group’s More closed 50 stores adding up to 180,000 sq. ft of space; Future Group shuttered 20 stores while Reliance shut down 50 to 60 stores. For every store shut, these brands chalked out plans to relocate or open new stores. Lifestyle and Shoppers Stop did not shut any store but they slowed expansion plans. To get out of debt, Biyani even sold parts of his empire.

By the end of 2011, the shrinking of operations had been largely completed and some of the retailers had started exhibiting a cautious optimism. Last year, the Aditya Birla Group picked up 49 per cent stake in the Pantaloons store format from Pantaloon Retail for Rs 1,600 crore to expand their operations to smaller cities. Biyani, on his part, completely reworked his plans after reducing much of his debt.

But for the big guns of Indian retail, the real trigger for a new round of ambitious expansion came after the UPA government managed to clear the measure allowing 51 per cent foreign direct investment (FDI) in multi-brand retail in September 2012. For the retailers, FDI in the sector presented both an opportunity and a threat.

Some of the big groups hope to stay independent in the long run and, for them, it became imperative to scale up quickly before competition came in from abroad. For most others, FDI is a big opportunity — because of the assumption that many global giants interested in India would like to either acquire an existing group or form a joint venture. After all, few global retailers can hope to come in and match the scale already achieved by the Future Group or Reliance Retail in the short run.

Also, as retail consultant Devangshu Dutta of Third Eyesight explains, quality real estate is in short supply — and that is likely to hamper global retailers’ plans in this market. Joining hands with an Indian retailer makes sense because many of the stores opened by big domestic players are located in prime locations.

Analysts feel that any new global retailer looking for a partner would first approach either the Future Group (the biggest so far, in terms of stores and formats under operation) or Shoppers Stop, which has consistently been the most profitable retailer in the industry.

Shoppers Stop, which commands a higher price-to-equity ratio than all the other retailers, says that it values FDI, but is not scouting for a partner as of now. It’s vice-chairman B.S. Nagesh says the retail business is a great asset to the real estate business of the K. Raheja family. “Our retail business is cash rich, has great processes; so why would a great business look for a foreign partner,” he asks.

That is also why his colleague and the current CEO, Govind Shrikhande, is planning to take the current number of stores from 55 to 90 in three years’ time. The company has already committed Rs 300 crore to expanding all formats under it. It is also going to open a couple of HyperCity, the grocery format, stores every year. Currently, there are 12 HyperCity stores and they contribute 30 per cent to Shoppers Stop’s revenues of Rs 2,500 crore. The company says it plans to add at least 800,000 sq. ft of retail space in the current financial year.

A Measured Charge

The expansion plans this time around are very different from those at the height of the last boom. In 2006-08, most retailers were expanding in all formats and in all sizes. More importantly, almost all of them focused on the half a dozen big cities — and fought pitched battles for customers in the biggest urban centres. One fallout was the high real estate costs as big retailers got into bidding wars. Equally, the cost of setting up a new store skyrocketed.

This time around, most of the plans are focused around two areas — groceries/food and apparel/fashion. In most others, plans have either been put on hold or formats are still being resized and business plans reworked.

For example, Shoppers Stop says it is reducing the size of most Crossword stores and changing the product mix. Similarly, the Future Group is concentrating on the Big Bazaar and KB’s Fair Price formats and the rollout of Central and Brand Factory apparel stores, which are part of its newly created Future Lifestyle Fashion vertical. For Reliance Retail, more than 50 per cent of the operations are concentrated on the Reliance Fresh brand, which runs the food and groceries stores. It is currently slowing down on formats such as books, footwear, fashion and automobile accessories. It says it will add at least a million sq. ft of space in the current financial year.

RP-SG is focusing on Spencer’s hypermarkets and is rumoured to be scouting for partners, though the group refused to comment on this. Spencer’s plans to open 30 hypermarket stores in the next 12 months, adding a total of 300,000 sq. ft. It is spending over Rs 300 crore on the exercise. “This is our single largest expansion plan in a financial year,” says Mohit Kampani, CEO of Spencer’s Retail. “Moreover, we have about 25 hypermarkets signed up for rollout in the next 36 months.” He expects the business to be in the black by the end of fiscal 2013-14. Spencer’s currently has 106 supermarket stores and 25 hypermarkets.

Even the AV Birla Group is largely concentrating its efforts on the More stores (groceries) and apparel, especially after the Pantaloons takeover. The More operation has seen three CEOs in double quick time. The first, Sumant Sinha, expanded rapidly, but burnt a lot of cash. The second, Thomas Verghese, rationalised operations and built a large private label business, but could not make the business profitable. Now, Pranab Barua is focusing on doing that while expanding cautiously.

More has close to 534 stores and plans to open 100 supermarkets and six hypermarkets every year, with an outlay of Rs 150 crore. The group has one million sq. ft of space currently and plans to add another two million sq. ft in the financial year. “We want to be a top-three retailer in the country,” says Barua, business director for retail apparel and food business for the Aditya Birla Group.

New Shopping Destinations

The bigger change, though, is that a lot of the retail expansion is moving out of metros and into smaller towns, which are emerging as hot retail destinations. Analysts proffer two explanations for this. First, of course, springs from the clauses of the FDI policy, which has made Indian retailers consider many smaller cities. The FDI regulations in multi-brand retail restrict operations of retailers with 51 per cent foreign ownership to cities with 10 lakh-plus population. The stores can also be set up in a 10-km radius of such cities or urban agglomerations. An ICICI Securities report calculates that 79 cities/urban agglomerations would qualify under this clause. Of these, 53 are cities with a population of 10 lakh or more, while others qualify even with lower populations because they fall within the 10-km radius of larger cities (Gurgaon vis-a-vis Delhi, for example). Of them, most of the bigger cities already have a good organised retail representation — but there are many others that have not yet been tapped by the big Indian retailers, and that is where the retailers are now headed. The new hotspots include business hubs such as Coimbatore, Visakhapatnam, Lucknow and Ahmedabad, among many others.

That apart, Bharat Chhoda, analyst at ICICI Securities, points out another powerful imperative to go into these towns. The cost of experimentation and opening stores in these areas is considerably lower than in bigger metros. As a result, stores tend to break even quickly and, even if they fail, retailers can shut shop with relatively lower losses. That pragmatism, he points out, was missing during the heady 2006-08 era.

But even as big retail has started scouting for new locations, reports suggest that mall-building activity is actually going down. In 2005-06, everyone wanted to build a mall. Now, fewer malls are being built, though these are much bigger in scale than earlier. As real estate consultancy CB Richard Ellis points out in a report, retail enquiries have gone up sharply in the past two years, but fresh supply of malls has come down dramatically in the same period. The report adds that despite an 83 per cent drop in supply of organised retail space across key cities in the country, 2012 continued to witness an increase in transaction activity and retail expansion.

“Retail expansion is starting once again — except that it is not the same as in 2006. The retailers are now much more mature,” says Pinakiranjan Mishra, national leader of consumer markets at Ernst & Young. Looks like the retail gladiators are marking out their territory once again.

RETAIL’S NEWEST HOT SPOTS
COIMBATORE: The emerging IT and auto parts hub saw two malls totalling 500,000 sq. ft come up in the past 18 months. It will add 3 million sq. ft of retail space over the next two years
VISAKHAPATNAM: The port town and SME hub has seen 400,000 sq. ft of retail space added through two malls in the past two years
AHMEDABAD: The home of Reliance Retail’s first ever cash-and-carry outlet. Five malls came up since 2011, adding 4 million sq. ft of space
LUCKNOW: Six malls have opened up in the past three years, adding over 1.5 million sq. ft of retail space

(This story was published in the Businessworld Issue Dated 6 May 2013)

Tesco treads cautiously in India

Raghavendra Kamath, Business Standard

Mumbai, April 23, 2013

While talking about Tesco’s plans for India, China and Turkey last week after the announcement of the retailer’s 2012-13 results, Chief Executive Philip Clarke was particularly silent on its India plans.

Save for a passing reference, there was no word on opening stores in India or the size of the potential investment.

Tesco insiders say even though rules were relaxed to allow foreigner to own a majority stake in an Indian retailer early this year, the world’s third largest retailer has not been able to make much headway, largely because of the clauses on local sourcing and infrastructure investments.

Multi-brand retailers with foreign investment are required to source 30 per cent of goods from small-and-medium enterprises locally, and invest $100 million in the first three years of setting up shop.

"The riders put by the government such as $100 million investment in back-end operations, city-specific restrictions and approval by states have been a dampener for global retailers," says Arvind Singhal, chairman of retail consultancy Technopak Advisors.

Tesco entered India in 2008 after striking a deal with Tata’s Trent to provide back-end support to its Star Bazaar hypermarkets. However, the company has failed to bring its whole gamut of IT services into the country because of the limited scale at which Trent’s hypermarkets operate.

Tesco has also put its plans to enter the wholesale market in India with 50 cash-and-carry stores on hold.The company, for now, is treading cautiously and focusing on boosting its international sourcing and tech services. It hopes to increase sourcing from India and hire 1,000 more people for its tech service centre in Bangalore.

The company is clearly finding it hard to replicate the success of its global models here. Its private labels, which account for 40-45 per cent of total sales in the UK, make up for only a small fraction of Star Bazaar’s sales. In contrast, in its home market, Tesco has thousands of stock keeping units in private labels in almost all conceivable categories from wine to baby diapers.

"It (Star Bazaar) does not have that much scale to bring many of Tesco products here," says an industry executive. Tesco has brought in over 250 stock keeping units of its private brands in Star Bazaar which it wants to double in the next couple of years.

The executive adds that laws on standard weights and measurements and maximum retail price, which are peculiar to India, have also been a deterrent in the success of private labels. In India, products cannot be sold at arbitrary pack sizes such as 61 grams or say 73 grams.

Consultants say Tesco also could not introduce its good-better-best (value, premium and finest segments) approach in India. "It could bring either one or two range due to limited opportunities here. Ideally, it would want to bring more but volumes would not justify," says Naimish Dave, director at OC&C Consultants, a global management consultancy.

A Tesco India spokesperson says: "Tesco products which suit the tastes and preferences of Indian consumers and meet the price-point expectations prevalent in the market are introduced on an on-going basis."

The limited scale of operations has led to the company foregoing many of its international best practices in India. For instance, Tesco is not using the services of "dunnhumby", its subsidiary which specialises in data analysis, although it has an office in India. Dunnhumby’s services could have helped Star Bazaar in tailoring offerings according to the needs of local customers, consultants say.

In international markets, 60 per cent of Tesco’s food range is differentiated by socio-demographic groupings across its stores with the help of dunnhumby.

"We did not use dunnhumby’s expertise in this venture as Star Bazaar operations were not commensurate with the scale with which dunnhumby operates," says the executive, while adding that Tesco will use it once India business achieves scale. The company has also not launched its e-commerce portal in India for the same reason.

"Tesco believes in providing global know-how and expertise that is appropriate to the needs of the market and the stage at which the business is," says the company’s spokesperson.

Devangshu Dutta, chief executive of retail consultancy Third Eyesight, says Tesco has not been able to utilise its various strengths due to policy restrictions. "Policy restrictions limit the freedom with which they can operate. If they had full control on the business, maybe they would have had a freer hand in the product mix and also other elements of strategy," Dutta says.

However, executives at Star Bazaar say despite the limitations, Tesco has been able to bring a lot to the partnership. Tesco’s back-end and technology support have enhanced customer experience at its stores. For instance, its "planogram" software, which helps retailers display products, might have helped Star Bazaar, says Sanjay Badhe, an independent retail consultant.

Tesco has also helped Star Bazaar develop its own private labels in many categories such as noodles and ketchups.

"Compared to others, Star Bazaar is doing reasonably well, they have not gone overboard. They went in a measured way with appropriate sizes. They have many processes and systems in place because of Tesco," says Dave of OC&C.

However, unless doubly sure, Tesco is unlikely to go solo or scale up its business in India. A former Tesco employee says: "Tesco has reached this level in the UK after 80-90 years. In India, these are initial years for the company. Till the time it doesn’t see viability in business, it will remain the way it is today."

TESCO IN INDIA

• Tesco Hindustan Service Centre: The 6,000-strong centre in Bangalore churns out technological innovations for Tesco’s operations in India

• Tesco International Sourcing: Sources goods worth $ 500 million from India

• Tesco Hindustan Wholesaling: In a franchise agreement with Trent, it provides support in IT and supply chain management

• Tesco has put its cash and carry operations on hold and is yet to apply for retail operations in the country

Damp squib

Vandana, The Week
Mumbai, April 22, 2013

It has been six months since the Indian government allowed 51 per cent FDI (foreign direct investment) in multi-brand retail. However, in spite of numerous attempts at wooing foreign retailers, there has hardly been any investment. Global retailers who had lobbied for access to India’s multi-brand market have, so far, shied away from entering. “It is not enough to criticise the government,” said Finance Minister P. Chidambaram. “India Inc. should go back and loosen their purse strings.”

Commerce Minister Anand Sharma and his team at the department of industrial policy and promotion (DIPP) have been meeting foreign retailers, consultants and industry representatives. They networked with the who’s who of global trade at the World Economic Forum in Davos in January, but FDI in multi-brand retail in India remains elusive.

“India is not an easy market to do business,” said Devangshu Dutta, CEO of Third Eyesight, a specialist management consulting firm focusing on consumer products and retail. “Retailers will have to put infrastructure in place along with a host of government clearances. A calibrated opening would have been better. China took 11 to 12 years to open up its retail sector. They [the government] should have consulted people across the spectrum, rather than hasten the process. They have overstated economic benefits and understated adverse effects.”

None of the global retail giants—Sainsbury’s, Walmart, Carrefour and Tesco—has expressed a desire to enter the Indian multi-brand retail sector. “We have not received any proposal for relaxation of norms,” said Saurabh Chandra, secretary, DIPP.

Sainsbury’s and Tesco have opened sourcing offices in India but are still noncommittal on multi-brand entry. “We have no plans to open stores in India as we are continuing to focus on growing our business in the UK,” said Tom Parker, spokesperson for Sainsbury’s.

A reason for the reluctance of prospective investors is the continuing protests by local traders and politicians. “The presence of global retailers will lead to loss of jobs and local shops will not survive,” said Praveen Khandelwal, secretary general of Confederation of All India Traders. “They will bring predatory pricing and end competition. Even in the case of cash-and-carry, they have been flouting norms. We will continue our opposition.”

India’s first wholesale joint venture Bharti Walmart’s cash-and-carry store in Agra has 48,000 registered members. The store is abuzz with activity as local shopkeepers and traders pour in to stock up their shops. They make impressive margins. “I save Rs.8 to Rs.100 on various products,” said a shop owner. Seeing its popularity, Carrefour has opened a store in another part of Agra.

The cash-and-carry business serves as a learning ground for global retailers, who first want to get comfortable with wholesale operations, infrastructure and supply chains before venturing into multi-brand retail. However, there are other reasons, too.

The FDI policy states that each state can decide if it wants to allow foreign retailers into its territory. With Gujarat, Kerala, Odisha, Uttar Pradesh, West Bengal, Madhya Pradesh and Bihar expressing their reservations, retailers are left with few options.

“Allowing foreign investment in the retail sector is clearly in violation of Gandhian principles and ideology,” said Odisha Chief Minister Naveen Patnaik. “FDI in retail will also lead to loss of income for small traders across the country.”

Even in states that have welcomed FDI, the opposition’s stand on the subject is key as retailers are at risk of losing their investment if the government changes.

“While a lot of background work is being done by global retailers looking to enter the Indian market, the uncertain political environment makes them jittery,” says Darshana Shah, business head of marketing and visual merchandising, HyperCity Retail. “With elections round the corner, people are still waiting and watching. Many foreign retailers are visiting stores, doing surveys and due diligence, but it will take time.”

The policy states that foreign retailers can open their outlets only in cities with a population of more than 10 lakh. Going by the 2011 census, there are 45 cities that make the cut. Of these, only 19 can attract FDI as the remaining 26 are in states that oppose it.

The sourcing clause is also a contentious issue. Under the policy, multi-brand retailers should source 30 per cent of manufactured or processed products from Indian ‘small industries’ with investment in plant and machinery not exceeding $1 million. “Apart from worries over quality, the mandatory sourcing norm will restrict retailers in getting products with technical specialisations,” says Pinakiranjan Mishra, partner and head of retail and consumer products at Ernst & Young, India. “Retail players will have to incur high costs towards training a large number of small suppliers, with the brand reputation at stake. Foreign retailers can’t keep monitoring whether the small industry has exceeded $1 million.”

The policy also requires foreign retailers to invest 50 per cent in ‘back-end infrastructure’ within three years. The government’s argument for the clause is that it wants to strengthen supply chain infrastructure. Globally, however, the supply chain is either outsourced or shared between various players.

“Everyone investing in their own supply chain is a highly inefficient model,” said Arvind Singhal, managing director of retail consultancy Technopak. “There are concepts of third-party and fourth-party logistics wherein the third party builds the cold chains and warehouses that are used by several players.” The major chunk of back-end cost will comprise land cost and rent of warehouses, but many foreign retailers already have back-end facilities for their existing wholesale ventures.

The slowdown of the world economy has made foreign retailers all the more cautious. Most are from countries currently under severe financial strain. So, they would rather put their house in order before venturing out.

Deterrents to foreign multi-brand retailers
* Mandatory 30 per cent sourcing from Indian small industries
* Political uncertainty
* Mandatory large investment in back-end infrastructure
* Violent protests from trade unions and shop owners
* Global slowdown and reputation issues. Walmart’s Indian unit under the government scanner

Global Report: India

Caroline Perry, Drapers
London, April 20, 2013

With a youthful population, and growing affluent middle class that is projected to grow tenfold by 2025, retailers have long eyed up this vast country as one ripe for expansion, but it has remained a complex proposition with many challenges.

"There is still a lot of low-hanging fruit in India," says Ira Kalish, head of consumer business at consultancy Deloitte. "But the retail market is still dominated by family-owned stores. Only about 15% of the market is modern retailing."

This slow growth has been due to India previously being closed to foreign direct investment. Until the beginning of 2012, retailers interested in opening in India had to do so with a partner, as regulations only allowed them to own 51% of their Indian business.

While such regulations remain in place for multi-brand retailers, single-brand retailers can now own 100% of their operation, although there is a stipulation that the Indian arm of the business sources 30% of its stock from small to medium-sized Indian suppliers.

Devangshu Dutta, chief executive of management retail consultancy Third Eyesight, says India accounts for about 10% of total sourcing for most international fashion brands: "We shouldn’t expect any dramatic changes, though we do expect the growth in joint ventures and subsidiaries to continue in the coming months and years."

Having a local partnership can also be key to navigating India’s complex foreign trade and legal regulations, says Jonathan Coates, relationship director for fashion, retail and wholesale at Natwest/RBS banks. "Local expertise is key if you’re looking to export to India but you must research potential partners properly first."

According to Dutta, there are about 10 groups that work as franchisees, licensees and joint-venture partners to a substantial number of international brands in the market, including franchise operator Future Group, retail giant Reliance, textile business Arvind and smaller entrepreneurial companies such as Genesis Luxury.

Footwear retailer Clarks formed a joint venture with Future, India’s largest retailer, for its launch into the market in 2011. Although that predates the regulation change, Andrew Martland, Clarks’ president for Asia Pacific, says it has no plans to change strategy: "We wanted a partner that understood the dynamics of the market, such as where to actually locate the stores. There was so much mall development at the time – we wanted to make sure we picked the right malls. Plus a local partner has bargaining power with the landlords."

Clarks has 26 stores across nine major cities, including Delhi, Mumbai and Bangalore. The majority are located in shopping malls, although it does have some high street locations. Its first store opened on a big shopping destination street in Delhi, which Martland said was a statement location for Clarks when it opened.

Clarks’ experience mirrors the kind of property availability there is in India, with malls and shopping centres increasingly popular. During the boom years, from 2004-08, retailers had to speculatively rent space to ensure they would get into the right locations, but real-estate costs have risen and more conservative growth in recent years means retailers have become more selective.

Meanwhile, Dutta adds: "I would say the ability to evaluate site feasibility is a bigger issue than availability of sites."

Clarks’ partnership with Future also gave it access to its logistics business, FutureLogistics, which handles its physical stores. This allowed Clarks to avoid dealing with India’s fragmented logistics market. Although, the footwear retailer recently appointed a specialist ecommerce logistic partner to service its website, which launched at the end of last year.

Dutta says it is common for retailers and brands to use a combination of logistics operators. "A majority of retailers blend services of large and small third-party logistics operators, especially if their store network is dispersed across the country."

There are mixed reports on the reliability of India’s infrastructure, with the majority suggesting it is comparatively poor, although Martland contests it is developing quickly with a motorway network "of sorts" and improved airlines.

Anita Balchandani, partner at OC&C Strategy Consultants, believes the non-food infrastructure is at an early stage, which means there are difficulties in the last-mile service for retailers considering online as a way of testing the market. India has a nascent ecommerce business, which is expected to be driven by mobiles rather than desktop PCs.

Import duties are quite high, particularly for footwear because it has a big domestic manufacturing market and is seeking to protect it. "Customs and import is complicated," says Martland, who adds that it is a difficult regulatory market, even for getting shops and establishment licences for each store. There is also a complex tax structure and, for many retailers, the level of bureaucracy can be overwhelming.

To succeed in India, there are certain things specific to Indian consumers such as the demand for a range of styles driven by the regional differences in weather, says Martland. "There are lots of brands that have come to India – some that are successful and some that aren’t," he explains. "It is those willing to adapt that survive."

Women driving demand for branded sunglasses

Suneera Tandon, MINT (A Wall Street Journal Partner)
April 16, 2013

Radio jockey Alisha Anand, 26, is ready to spend Rs.26,000 on a pair sunglasses from American luxury label Tom Ford this summer. The Delhi-based Anand, who works for 94.3 FM, budgets for a pair of new shades every summer, although she agrees that this year, “it’s a bit expensive”.

Women like Anand are driving up sales for companies such as Luxottica India Eyewear Pvt. Ltd. The local subsidiary of the Luxottica Group, which sells brands such as Ray-Ban and Oakley, has seen the number of women consumers double in the last four years, spurring demand for branded sunglasses.

“It’s largely an urban-centric consumption, driven by lifestyle changes, exposure to media and higher disposable incomes. Women are gaining more economic independence and can afford multiple ownership of products such as sunglasses,” said Amitabh Sehdev, head of marketing at Luxottica India, which also retails sunglasses branded Prada, Burberry and Vogue through 600 outlets across 90 cities.

Currently 40-45% of the collection in terms of volume is devoted to women’s products by Luxottica. The category is growing at 30% compared with 20% for men’s sunglasses, the company said.

According to a March 2012 report on the sector by the Associated Chambers of Commerce and Industry of India (Assocham), the sunglasses market was estimated at Rs.2,200 crore in 2012. The report suggested that premium sunglasses—brands such as Esprit, Giorgio Armani, Cartier, Tommy Hilfiger, Ray-Ban, Dolce and Gabbana, Calvin Klein and Police—are growing at 40% a year and that high-end eyewear accounts for about 30% of the market.

Maui Jim, the American eyewear brand that has been present in India since 2009, has increased the proportion of women’s sunglasses to 30% from 5%.

“We are seeing a big demand from women consumers coming from cities such as Mumbai, Delhi, Bangalore,” said I. Rahumathullah, managing director, Maui Jim India. Higher disposable incomes and the need to match occasion and ensemble are among the reasons for this, he said.

While women are adding to the growing consumer base, the availability of multiple brands and a marked shift towards them are driving growth in the category, according to experts.

The availability and visibility of such products in retail areas such as malls is helping boost demand for sungalsses, said Devangshu Dutta, chief executive of New Delhi-based management consulting firm Third Eyesight. The difference in the growth rates is also because men generally go with one look that combines style and practicality, while women have a keener eye for style.

“Men would buy shades for protection and quality while women would go for multiple brands to suit different occasions,” Dutta said.

The availability of branded products has helped push sales, said Ravi Kant, chief executive officer, eyewear business at Titan Industries Ltd, which operates 220 Titan Eye+ stores in 72 cities that sell brands such as Vogue, Cabana, Esprit, Fastrack and Ray-Ban, among others.

“Earlier, the optical outlet was the brand, but today consumers differentiate one brand from another,” he said, adding that people who come into the stores now ask for brands by name.

Preferences differ by region, according to the trade. In the north, women like glasses with logos prominently emblazoned on them. Consequently, luxury labels such as Armani and Dolce and Gabbana are popular there.

Kolkata-based retailer GKB Opticals has seen demand for brands at its 60 stories across the country, with customers seeking out sunglasses carrying names such as Jimmy Choo, Vogue, Ray-Ban and Prada.

Over the past two years, women sunglasses buyers have doubled at GKB, according to Dibyendu Roy, national sales manager, who feels that the presence of dedicated multi-brand retail outlets have improved the sales scope of the item.

The growing number of women consumers is good news for companies as they tend to spend more than men, according to Amit Chaudhary, co-founder and chief operating officer at Lenskart.com, the online retailer that said it gets up to 2,000 orders per day for products such as frames and sunglasses.

He said the average price of sunglasses bought by women is higher than that purchased by men. “They spend more time reviewing the product and are more focused on quality. Men are impulsive buyers,” he said.

The site sells brands such as Prada, Burberry, Ray-Ban, Maui Jim and Vogue. The proportion of women online shoppers has risen to 35% from 25% about two years back.

“Consumers are spending more on the category overall,” said Roy of GKB, which also witnessed a rise in average price tags of sunglasses sold, especially to women.

Marks & Spencer’s boosts sub-brands

Raghavendra Kamath, Business Standard

April 10, 2013

The newly opened 23,000-square-feet-standalone flagship store of UK’s department store chain Marks & Spencer (M&S) at Koramangala in Bangalore has a different look from the existing stores of the chain in the city.

Each of the eight brands of the British retailer are clearly segmented and displayed using props and visual merchandising. For instance, its brand ‘Limited Collection’ has been given a fashion-focused feel with an illuminated catwalk, while women’s casual-wear brand ‘Indigo Collection’ has been displayed with trestle tables and denim mannequins. Another women’s wear brand ‘per una’ is presented with white-washed wooden wardrobes and chandeliers.

"The new format is a part of our global strategy of upgraded stores. Sub-brands have been relaunched with clearer differentiation so that navigation becomes easier," says Venu Nair, managing director, Marks & Spencer Reliance India.

In fact, the £600 million-revamp, involving 800 stores, started in its home market UK in September 2011 after a study that reflected the difficulty faced by customers in moving around in the stores.

M&S, which has a 51:49 joint venture with Mukesh Ambani’s Reliance Retail, has opened half-a-dozen new format stores like the one in Bangalore with an average size of 20,000 sq ft to 23,000 sq ft. The chain wants to open five more in the next couple of months. Currently, it has 29 stores.

Consultants say the government allowing foreign direct investment (FDI) in multi brand retail has partly played a role in M&S focusing on sub-brands.

"Earlier, under the single brand regime, the rule was that besides having your brand name on the store, every product should have the brand name of the company. With FDI allowed, it would be easier for foreign retailers to launch sub-brands here," says Devangshu Dutta, chief executive, Third Eyesight, a retail consultant.

However, M&S’s Nair says it wants customers to have the same store experience as they would have seen in its stores in international destinations.

But, will this strategy work?

Dutta says sub-brands help target more specific segments (by age, gender, usage occasion etc.), if they are handled well. "This can help fine tune not just product needs, but also create specific or limited promotions without it being carried over to other parts of the store or other sub-brands," he adds.

Even home grown fashion retailers such as Shoppers Stop, Future Group are focusing on their sub-brands to drive sales. For instance, Shoppers Stop has run specific activations around its apparel brand Haute Curry and extended that to jewellery and footwear. But that can’t be strictly compared with M&S, as unlike them, M&S only sells brands that are owned by it.

Such revamps are crucial for established brands such as M&S given that the Indian fashion scene is changing fast with the entry of fast fashion brands such as Zara and Mango, and the expected foray of fashion brands such as H&M, Uniqlo and others.

For M&S, the revamp is the second such major experiment in its 12-odd year presence in India. In 2007, it cut prices of its merchandise by 35 per cent to reposition itself as a mid-market retailer. It also introduced more lines as customers perceived its prices to be too high and designs limited and not suitable for Indian context

While its rivals say M&S was stuck between premium department stores such as Shoppers Stop and mass market retailer such as Big Bazaar, executives at M&S Reliance say that the strategy was well thought out. "If you are a premium retailer, and have prices more than Rs 3,000 apiece, the volumes are going to be low. We thought it is better to be a mid-market player here," an executive adds.

M&S has also increased sourcing from India and south Asia significantly. It sources around 61 per cent of its merchandise from the region which helped it to offer lower prices here.

Marks & Spencer Reliance made losses of Rs 18.66 crore and Rs 9.13 crore in FY 2010, FY 2011 respectively, and the company is still making losses. But same-store sales growth is good at all stores. Nair says many of the chain’s categories are doing very well. For instance, men’swear sales jumped 31 per cent during the December quarter and lingerie went up 28 per cent.

While the chain is reportedly set to bring its food section here, its peers and ad consultants say this could be challenging given that food is normally associated with hypermarkets.

(With inputs from Sounak Mitra)

Decathlon sets off with 100% FDI in sports retail

Nilofer D’Souza, Forbes India
April 2, 2013

In what could put the government’s controversial new foreign investment policy in retail to an impact test, French group Auchan has announced its first retail store, Decathlon, in Bangalore. It is the first big-format niche retail chain to open in an increasingly fitness-conscious urban India that craves for sporting space and quality equipment.
The Euro 43 billion French group’s venture is one of the early bird licences under a new investment policy which allows 100 per cent foreign funding of single-brand retail stores. Though the government had cleared the policy in November, some niggling issues regarding local sourcing had remained and it was finally notified in January. Auchan’s proposal to invest Rs 700 crore went through on February 13, the same day that the FIPB also cleared single-brand retail plans of Promod SAS, Le Creuset and Fossil.

Most of Decathlon’s stores now sport an ‘open to all’ sign to indicate the change in its policy. It states the change on its Facebook page too. In a comment to customers, Decathlon Mumbai, says, “FDI in retail did not allow foreign retailers to sell to individuals directly. We were respecting the law of the land by being a wholesaler.”

Decathlon does not have a clear competitor as the sports goods retail market in India is populated with small over-the-counter stores or a few hundred square feet space in department stores. It has been present in the wholesale market with a cash-and-carry model for the past three years. This would be the first test of big-format retail’s impact on small merchants in a niche segment.

Decathlon stores are big—sprawling over at least 4000 square feet. In comparison, sports goods shops in the country are tiny. Even in malls or supermarkets, sports goods get only a corner, about half the area of a typical Decathalon store. It uses the extra space for indoor sporting facilities.

“It could turn out to be a category killer, and create and define the category because of the experience and product mix it has,” says Devangshu Dutta, chief executive, Third Eyesight, a retail consultancy, “Even with wholesale operation in Bangalore, they have done fairly well. They broke even fairly quickly,” he says.

The company opened a store in Mumbai last week and plans to open in Hyderabad and Chandigarh too. About 3000 customers thronged the store on the first day. That is a big draw for a niche segment currently valued at Rs 2,500 crore but estimated to grow to $6 billion by 2025 in India.

In cities, people are starved for entertainment beyond movies, restaurants and malls. Decathlon has potential to provide weekend entertainment alternatives. That fits with its own target audience – the family.