The detail in retail

How big is organised retail today?

Between the dozen or so big chains including Pantaloon and Reliance Retail and all outlets that do a VAT billing, organised retail is estimated to be around $22 billion, a figure that?s around 5-6% of the total retail market of close to $400 billion in the country today. In August 2008, McKinsey had estimated that by 2015, India would become a $450 billion retail market, comparable in size to Italy ($462 billion). The total retail market is estimated to be growing at 7-8% and the share of organised retail is projected to touch 15% by 2015, from 2% in 2006 when the market was estimated at $250 billion.

Is this in keeping with the projections for retail sales?

The organised retail space is estimated to have scaled up 3 times in 3 years, or at a compounded 40% to $18 billion by March 2009, although growth was a very slow 4-5% in 2008-09, following the economic downturn. About 50 million sq ft of space was added during this period. In 2009-10, the organised retail sector is estimated to have grown at 25% or thereabouts, a growth rate that could sustain over the next few years and help revenues hit $35 billion by March 2012 and $75 billion by 2015, according to IDFC Capital.

Is Big Retail making money?

Not too much. The casualties have been several: Subhiksha, Indiabulls Retail, RK Foodland and Vishal Retail. Others like Koutons and Spinach are in trouble. Vishal Retail lost Rs 414 crore in 2009-10; it had piled up a debt of Rs 700 crore and written off Rs 350 crore of inventory before it went bankrupt. Many retailers were in the red between 2006-09 and Spencers, amongst the first to get off the ground, posted a loss of Rs 300 crore in 2008-09. It is still unprofitable, losing an estimated Rs 12-13 crore a month.

Reliance Retail, which runs 667 stores across 80+ cities, reported a loss of Rs 450 crore in 2009-10, down from Rs 700 crore in the previous year.

Shoppers Stop?s losses in 2008-09 were Rs 64 crore but the company turned the corner in 2009-10. The Aditya Birla Group?s more. chain, which kicked off business in 2007 after buying out the Trinethra chain, hopes to become ebitda positive in 2012-13; it reported revenues of close to Rs 1,500 crore for 2009-10. Players like Pantaloon, with close to Rs 4,000 crore of debt, are highly leveraged.

Others like Spencers, which now has less than a million sq ft after closing down 150 outlets, are downsizing.

Reliance now operates 667 stores in total, down from the peak of around 900 in the September 2009 quarter.

Is Big Retail growing well?

In the June 2010 quarter, same-store sales (SSS) for lifestyle retailing at Pantaloon were 19% year-on year, while the figure was11.5% for value retailing . During the same time, lifestyle SSS for Shoppers Stop was 21%, though that came off a very low base of minus 6%.

Has Big Retail finally got the mantra worked out?

Retailers have been looking to straddle formats in a market offering limited breadth. Home retailing, for instance, is a popular choice across retailers. Post the downturn, there has been a move to consolidate. Shoppers Stop, primarily in the department store format, has abandoned its catalogue and food and beverages retailing. Store expansions have been dramatically curtailed. At Pantaloon, the plan, 2 years back, was to have 25 million sq ft by March 2011; that has been cut back to 14 million sq ft. Niche formats like Crossword or Music World make little money. But in segments like electronic goods, where the Croma chain is doing exceptionally well, niche formats have paid off. The convenience store format has suffered the most, though chains like more. chain are attempting to get it right by opting for a high share of private labels. With a high share?approximately 80%?of store brands, Westside has done well and is able to control both cost and quality.

Why does organised retail?s share of the market remain small?

The biggest category is food and groceries, which accounts for 55-60% of spends and the kiranas do a good job of providing both service and credit. Besides, the FMCG companies do a good job of servicing the kiranas so that stockouts are low. Also, most cities just don?t have enough space for organised retail and rentals are prohibitively high.

Why do you need FDI in retail, surely local firms like Reliance have enough capital, and they can buy the technology?

No one firm has enough capital or management bandwidth to do a good job. Fresh vegetable and fruit retail, for instance, requires a cold chain of trucks and refrigerated warehouses connecting most major growing areas with retail markets. Globally, supply chains are developed by third party logistics firms, not retailers. But these firms come in only when there are enough big chains they can supply to. Whether this requires FDI or not is unclear, but you do need a lot of players to create an efficient supply chain that is vital for organised retail to start doing well. Effectively, the capital needed to address 50 million sq ft would be $2.1-3.2 billion over 3 years at the front-end of the business. The cold chain and other back-end infrastructure could cost a lot more, maybe requiring an investment of $15-20 billion over 10 years. FDI flows into India over the past 5 years have been $156 billion, so the amounts required are manageable .

So a Wal-Mart alone can?t change things?

No, it can?t.

How will the entry of Big Retail change the farm sector?

When enough chains buy directly from the farm sector (and this will take decades), the 20-30% loss that takes place in fruits and vegetables, in terms of both theft and the shrinkage that occurs due to the long farm-to-fork time taken, will come down to say 4-5%. Conservatively, this could result in a saving of $8-10 billion annually. More importantly, farmers should get a better price for their produce.

How will the entry of Big Retail affect the aam aadmi?

First, let?s keep in mind that even if Big Retail comes in in a big way, it?s not going to finish off the kirana shops?Big Bazaar and its peers have been around for 10 years now, but their market share is minuscule. The better kiranas operate on a negative cash flow (they get credit from FMCG firms and sell their produce within the required period if they?re efficient). To the extent that the kiranas look tacky, FMCG firms like Hindustan Unilever are beginning to spend money to help them refurbish?don?t forget that a Lever makes more money from kiranas than from selling to Big Retail. Once Big Retail takes off, it will reduce the difference between wholesale and retail prices; consumers will benefit from choice (private labels), hygiene and better prices.

Won?t Big Retail hit employment?

The traditional argument is that it will. Wal-Mart alone has a turnover that?s equal to that of the entire retail industry in India and it employs around 5% of the labour that India?s retail industry does. So, the argument goes, Big Retail will mean Big Unemployment. That?s not necessarily true. For one, any impact will depend upon the market share of Big Retail and that?s not going to grow suddenly. Second, with the economy growing at 8% and inflation at 6%, that?s a 14-15% growth in nominal sales each year, or a doubling of the retail market every 5 years. So, if in 5 years the market grows from 100 to 200 and the share of retail trebles from 4% to 12%, that still leaves a market of 176 for kiranas in 5 years or a growth of around 13% per year. McKinsey estimated that organised retail would create over 1.6 million jobs between 2009-2014. But if FDI into multi-brand retailing is permitted, this number could be higher.