Seven years on, retailers still see red

Raghavendra Kamath, Business Standard

Mumbai, June 22, 2014

Aditya Birla Retail, which started operations in 2007 with the brand ‘more’, was looking to break even in FY 2013. The wish remains unfulfilled — still.

Spencer’s Retail, part of the Sanjiv Goenka group which started in 1990s and opened stores in the modern format in 2006, was originally looking at a breakeven in financial year 2010-11. After missing two fresh goal posts, the retailer now says it hopes to break even in the next couple of quarters.

Birla and Spencer’s are just two of “the many supermarket chains, promoted by big corporates during 2006-08, are still making losses. While Star Bazaar opened its first store in 2004, it began expanding only post 2006. Sunil Mittal’s Bharti Retail, Raheja-owned Hypercity, Tata-owned Star Bazaar are also yet to turn profitable.

Consultants said ideally, retail ventures should break even in five to six years, but the tough economic environment and some not-so-prudent decisions have put paid to any such efforts.

According to a recent report by Crisil, the top 10 food and grocery retailers such as Aditya Birla’s more, Bharti Retail, Raheja owned Hypercity, the food and grocery business of Reliance Retail, accumulated losses worth Rs 13,000 crore in FY 2014. Crisil estimated that these retailers have invested about Rs 19,000 crore.

According to the report, Avenue Supermarts, which runs D Mart stores and Future Value Retail which runs Big Bazaar and Food Bazaar, are the major retailers which are profitable. Crisil said Future had the first mover advantage and Avenue had a low cost model which helped them to break even.

So what is holding back these chains from being profitable?

Besides the competition from kirana stores and the inherent low margins in food and grocery retail, costs associated with people, property and supply chain seem to the major issues that posed challenges to the chains floated by corporates.

While the retailers did not respond to mails, consultants say they were doing many things to achieve faster profitability. Hypercity is reducing the sizes of stores from 1, 00,000 sq ft to 40,000-50,000 sq ft and increasing share of fashion which carries high margins. Star Bazaar is also halving store sizes of large format stores and coming out with mid-sized and small sized stores to achieve faster profits. Spencer’s is looking to open 80 stores and focusing on improving its supply chain.

Crisil says the losses of the top grocery retailers will mount by about 30% over the medium term and may peak in 2017. After that, half of the players will start break even. Apart from Spencer’s which is looking to break even this financial year, even Hypercity is looking at Ebitda level profits this year. Since the developers have deep pockets and they see potential in the retailing business, they will continue to invest in retail, it said.

Some say one of the major reasons for the failure to have a consistent strategy over the years is the many changes at the top. Sanjay Badhe, former head of marketing at Aditya Birla Retail, says Birla Retail has seen too many changes in management and operations. “They need clarity in management,” he adds.

While Birla made Sumant Sinha, the group’s M&A specialist as CEO when it launched the business, Sinha quit within one and a half years. Thomas Varghese was then made CEO but in 2012 he was shifted to the textiles business and replaced by Pranab Barua, who came from Aditya Birla Nuvo. Late last year, the retailer named Vishak Kumar, CEO of its both formats.

Reliance Retail has also changed its top leadership frequently. While it debuted with Raghu Pillai as CEO of value formats. He was replaced by Gwyn Sundhagul who came from Tesco, Thailand in 2010. In a major rejig next year, Reliance Retail named Rob Cissell, former chief operating officer of Walmart China, as CEO.

But retail consultancy Technopak Advisors chairman Arvind Singhal said Reliance was firm on getting the right people on board. “Some people worked and some did not. But now they have good team in place,” Singhal said, adding some retailers stuck to people who did not deliver or stuck for too long.

Dipankar Halder, CEO at PingStripe and former head of supermarkets at Bharti Retail believes that some retailers are making losses due to their top heavy organizations with costs that are disproportionate to their store level costs. “Successful retailers abroad pay very good salaries to store managers because they are the people who drive the sales. But here we get cheapest guy at stores and have number of presidents and vice presidents at top,” he adds.

Indian retailers had to deal with expensive properties while running their stores. Indian grocery retailers pay rents which are almost double of what retailers pay abroad. But the chains earn 2-3% net margins in food and grocery. Ideally, hypermarket chains should pay 2.5 to 3% as% of rents to revenues to make them viable and supermarket chains should pay five to six% as% of revenues.

“Once you build a high cost base that is created for rapid expansion, it is easy not to reduce it. The quickest option available then is to scale down operations,” said Devangshu Dutta, chief executive of Third Eyesight, a retail consultant.

Though retailers such as Aditya Birla, Reliance, Spencer’s expanded aggressively between 2006 and 2010 to build scale, most of them exited unviable stores.

Aditya Birla shut over 150 super market stores in the last five years while Spencer’s exited cities such as Pune to focus on profitability. Even Reliance closed 50 shops, and exited three formats —Reliance Kitchen, which sold modular kitchen furniture, Reliance Wellness, a beauty and lifestyle chain and Delight, its non-veg store.

There are supply chain issues as well. According to Badhe, retailers such as Star Bazaar and Aditya Birla’s More are still sorting out their supply chain issues and could see improvements soon while Reliance has got its processes right. Pingstripe’s Halder says many retailers make the mistake of not treating unbranded items such as fresh produce, and meat as a separate category.

“You buy products such as meat, fish and fresh produce from middlemen, obviously the store level profits will come down. The more you do it, you have to share the profits,” said Halder.

Kumar Rajagopalan, chief executive of retailers body Retailers Association of India, says that inability of retailers to build scale at state levels and local taxes are posing challenges to retailers to be profitable. “It is scale per state, or in many cases per city, and not scale per nation thanks to the cascading effect of taxation like local sales tax, local entry tax, etc. It takes time to build that kind of scale.” Rajagopalan states.

Though retailers such as Reliance Retail tried a ‘farm to fork’ strategy, it did not take off the way it wanted due to opposition in many states. “Most of them open their distribution centres according to taxation and not according to transportation,” says Kumar, adding ”once GST comes in, they can set up large DCs at one place instead of multiple DCs."

(Published in Business Standard .)