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August 11, 2008
By Rasul Bailay
MINT (Exclusive Partner The Wall Street Journal)
NEW DELHI, 11 August 2008
As costs rise and economic growth slows,
Indian retailers are looking at ways to trim expenses and protect their profits.
Pantaloon
India Ltd, the country’s largest listed retailer, has begun integrating the
management, marketing, human resources, or HR, and information technology, or
IT, departments of its units into one. The company says this one step will help
it save around Rs. 165 crore (Rs. 1.65 billion) a year.
“It is
only cost and efficiency that we are focusing on now,” said Kishore Biyani,
managing director of Pantaloon. “Instead of having separate management, administration,
HR and IT teams for different business units, we are merging them. So all the
smaller businesses are getting managerially integrated into the larger ones.”
This
essentially means the company will have a common HR team, one IT team and one
management for all its business units. Pantaloon is also planning to prune its
advertising budget, reduce electricity bills and cut packaging costs.
The company recorded a revenue of Rs. 3,236 crore (Rs. 32.36 billion) and net profit of Rs. 120 crore (Rs. 1.2 billion) in the business year ended June 2007.
Inflation,
which has jumped to a more than a 13-year high of 12.01%, on the back of a surge
in food and fuel prices, increasing interest rates and concerns of a slowdown
in consumer spending, are for the first time casting a shadow on the ambitious
expansion plans of organized retail companies.
Rapid economic growth
in the past three years had prompted retailers to step up spending on opening
new outlets, hike marketing and advertising budgets and spurred a frenzied hiring
spree.
“Unlike mom-and-pop stores, large retail formats have
much higher cost obligations,” said Devangshu Dutta, chief executive of retail
consultancy firm Third Eyesight, based in Gurgaon. “Organizations with larger
cost heads will be first to get hit in case of a slowdown.”
Shoppers
Stop Ltd, the country’s No. 2 listed retailer, said it was studying options
for cost rationalization and will take steps to prune overheads. “If the
company fails to achieve its sales target, then there is a possibility of reducing
costs to that the company’s revenue target is protected,” said C.B.
Navalkar, chief financial officer at Shoppers Stop.
A recent study by Mumbai-based Edelweiss Securities Ltd said Pantaloon’s “same store”—stores that have existed for more than a year—grew between 11% and 12% during July 2007 and May 2008, compared with 16-17% a year ago.
Though Shoppers Stop
maintained the same stores growth was 20% in fiscal year ended March 2008, Edelweiss
says it came mainly from price increases rather than growth in volumes.
Subhiksha
Trading Services Ltd, which operates the country’s largest chain of discount
stores, said it had no special plans to prune costs. “We are a low-cost (retailer)
and cost- cutting is a perpetual part of our life,” said R. Subramanian,
its managing director.
Reliance Retail Ltd said the company is still in
investment mode and has no plans to launch any cost-cutting drive. “For us,
it’s business as usual,” said a top Reliance official, asking not to
be identified.
Some retailers are even seeing a silver lining in the economic
slowdown. Sky-rocketing real estate rentals, which had doubled in the last three
years, have stabilized. “There is a perception among the retailers that there
might be a slowdown and (rental) prices might cool off,” says Shubhranshu
Pani, president for retail services at real estate consultancy TrammellCrow Megharaj.
“Some of them are optimistic and feel that in some pockets the prices will
fall.”
