Retailers Tighten Purse Strings Amid Economic Slowdown


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.”