Weigh it for the long term

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The Rs 10,00,000 crore retail sector in India is demonstrating a rush of optimism and is turning out to be good investment ground. Pantaloon (now Future) has planned a pilot project of a 5,000-acre area near Indore and similar projects in 25,000 acres each in Gujarat, Rajasthan and Punjab. Provogue has plans to open studios with an average frequency of three months.

In fact, considering such big plans from retail behemoths, there are new players foraying into the retailing market to grab a larger pie of the retail market that has a shallow penetration of less than 3%. A case in point is two-wheeler maker Hero Honda's plans to foray into retail sector.

Given the diverse needs of Indian customers, companies structure their business models in such a way that the diverse and unique needs of customers are met quite easily. Models like "cash and carry", "department stores", speciality stores, hypermarkets and supermarkets.

The cash and carry is a wholesale format that involves shopping of retailers and shopkeepers. The format has a ballpark margin of 2-3% and volumes quite high. Consider Bangalore-based retailer Metro. For this, a retailer needs to subscribe for membership of "Metro" and give in requisite information.

Department stores are multi-brand outlets that include apparel, lifestyle products, except food and grocery. The format generates a margin of 30-40%, if strong brands are kept for selling. Also if private-label like a company's own brands are sold, it could generate a margin of 50-60%.

While speciality stores are single concept outlet. They can be a jewellery stores or a footwear stores. Again here if the stores sell their own brand, the margins are around 40-50% or else it is around 20-30%.

Hypermarkets and supermarket are analogous. Both include household and general merchandising stuffs like food and groceries. The only difference is pricing. Also, though volumes are high the margins that this format gives are around 15%. Despite such positive developments, what needs an immediate attention is whether this is the real case. There are challenges that may negate the positive impact of such developments.

Fragmented nature