Not Out Of The Woods


September 21, 2009

By Vishal Krishna


September 21, 2009

Normally, the performance of the market leader is a fair indicator of which way the wind is blowing in a sector. But there are always exceptions, and this is one such. According to data from JP Morgan, Pantaloon’s store sales have been on a steady rise since March this year (see ‘Scaling Heights’). Another big player in retail, Shoppers Stop, has also declared a profit of Rs 3 crore for the April-June 2009 quarter, after making a Rs 40-crore loss in 2008-09 fiscal.

These signs of hope, however, stand starkly against overall consumption trends. Although the real GDP numbers for June show a resilient Indian economy growing at 6 per cent, consumption has fallen. According to Kotak Mahindra Bank Treasury Services, private consumption expenditure was at Rs 4,91,000 crore in the first quarter of 2009-10, down 2.6 per cent from Rs 5,04,342 crore in the fourth quarter of 2008-09. Compared to the same periods last year, consumer spending grew 1.6 per cent for the first quarter this fiscal, down from 2.7 per cent in the fourth quarter of 2008-09.

Nobody understands the mixed signals better than Pantaloon. “The sentiment has improved, but we are cautious on expansion,” says Rajan Malhotra, president of strategy and convergence in Big Bazaar, the food and grocery hyper format of the Future Group “Only festival sales could improve the second quarter’s results.”

Analysts say that the delayed monsoon has already begun to impact the earnings of FMCG companies — the main suppliers to organised retail. Combined with slowing consumption, the organised retail industry, especially those in the food and grocery space, will continue to struggle. In such a situation, retailers are adopting a variety of strategies to ease the pressure on margins.
Apparel Versus Food

“Retailers have been focusing on value items and private labels to sustain their margins,” says Abheek Singhi, partner and director of Boston Consulting Group (BCG) in Mumbai, adding that apparel retailers would fare better because of higher margins of up to 45 per cent. This move is apparent in Pantaloon’s strategy of expanding its value sports apparel format, Planet Sports, ahead of food and grocery retail. Currently functioning with 94 stores across the country, the company will add 10 more by the end of the second quarter. “We have seen a 22 per cent rise in sales over last year and there is potential in opening larger format stores,” says Ravdeep Singh, CEO of Planet Sports, attributing the trend to affordable sports apparel gaining in sales. Also intending to expand is Shoppers Stop, which primarily deals in apparel and accessories. “We will be adding four stores in the next four months, thanks largely due to rationalised rents,” says Govind Shirkhande, CEO of Shoppers Stop. “But our older properties need to further rationalise rents.”

What about the food retailers? Apart from the poor consumer sentiment, they were hit because of other reasons. In the past three years, top food retailers such as Reliance Retail, Big Bazaar, Aditya Birla Retail and Spencer’s Retail added more than 2,000 stores. Many of these stores were in poor locations where sales remained low and rentals were steep.

Rent rationalisation, therefore, has been a critical component of strategy for retailers in recent times. And it has begun to show results. According to a recent KPMG report, retailers are now getting less expensive rates when signing properties. As a result, rentals now comprise 5-6 per cent of operating costs, compared to 7-10 per cent earlier. “Retailers have reviewed their strategies in cutting costs, and benefits will show up in the next quarter,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy in Delhi. Besides, some analysts feel that despite the dipping consumption numbers, discretionary spends have actually begun to rise marginally, aided by a variety of factors.

“Consumption has shown some nascent signs of recovery,” says Ajay D’Souza, head of Crisil Research. The positive performances of Pantaloon and Shoppers Stop are initial indicators. Analysts say that the growth has not been driven by promotional activity as witnessed during the early part of this year. “Rising consumer confidence, recent tax cuts, lower interest rates, stable wages and overall improvement in the economy are the catalysts,” says D’Souza. With the festival season about to kick in, hope runs high.

Waiting To Expand

“Although margins took a dip from December 2008, the situation has improved during July-August and we have had a sales growth of 25 per cent over March to June 2009,” says Dipali Goenka, director of Welspun Retail in Mumbai, which runs over 200 stores across the country.

Smaller retailers who had decided to ride out the downturn storm by holding on to expansion plans last year, are now preparing to add stores because they anticipate sales to pick up over the next six months. Blackberry’s, an apparel retailer, says sales grew by 40 per cent in the first quarter of FY10 over the fourth quarter of 2008-09. “We were lucky not to have expanded last year,” says Sunil Goklani, general manager of Blackberry’s Retail. “Now that the market is beginning to see signs of a recovery, we are looking at new properties.” Blackberry’s plans to add 20 stores to its current count of 35.

A similar expansion strategy is being followed by Basecamp, an adventure-travel accessories retailer, which had only one store when the downturn set in. Now it has four stores, and plans to open another three in three cities. “We are a niche retailer and have experienced a rise in sales,” says Anish Goel, managing director of Victorinox India, who also runs Basecamp in Mumbai. “It is important for us to be in the right geographies to run the retail business.” Being in the right places, with the right rents, and the right products are what retailers, big and small, are focusing on. Besides fervently praying for the consumer to return to her high-spending ways.

(From BusinessWorld, Issue of September 21, 2009)