Time for non-core retailers to exit

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: Retail has been the widely heralded as the next big opportunity post telecom. As industry watched large fortunes originally getting created by the new IT companies and then by the telecom operators, there was a mad rush by all to get a share of the pie in the retail cake.

Cut back to 2005-06 and anyone and everyone was announcing grand plans of entering retail. Of course, the fact that partial FDI seemed on the anvil obviously meant that many were front running the potential overseas retailers and others were hoping to ride the gravy train as JV partners alongside the foreignmega retailers.

The last two years have been turbulent years to say the least. This was a period of great economic boom. However, the boom meant that both the key pieces of cost for a retailer — space and people —were highly overpriced. Retail per se did not exist as an industry and as such the talent pool was getting churned madly over. And with realty anyway riding a boom thanks to Foreign Direct Investment (FDI) and lower interest rates, the mad chase by the emerging retailers for the limited property options and a signing frenzy like no tomorrow meant getting stuck with high costs.

With the current economic state where there is a clear slowdown, high interest rates and runaway inflation and lower consumer confidence, there is a need for a rethink. Many hopefuls stayed away seeing the fact that FDI was not happening and the easy profit was anyway not on, at least not anytime soon.

The violent protests that came in from many quarters against organised retail also meant that the risks of the business were coming to the fore. The few who got themselves in with strong hopes were left more nursing their broken ambitions than celebrating success. Neither did the desired toplines and bottomlines happen, nor did the rollouts move anywhere as well as planned.

What is the crux of the problem? Though it may seem simple from the outside, retail is a challenging business. The real crux of the retail business is all cost and scale. When you get the cost piece right in a mad frenzy of growth, but the growth does not span out and therefore the scale does not happen, you are surely looking down the barrel of the gun.

The key piece to realise is that mass retail is low margin and high asset velocity. For companies with a background of high margins and low asset velocities, retailing is in complete contrast to their basic business models.

With the chickens coming home to roost, one can expect a lot of change in the next 12-18 months. The market will split substantially between players who see retail as their core business and those who see retail as one more business. Many of what we see as non-core retailers will quite slow down or move on to the next big opportunity.

Core retailers, who anyway know nothing else, will fight and put in place their plans for survival and growth. In fact, as the economy weakens, this is possibly the best time for aggressive retailers who have the business understanding right and the cost structure and processes in place. In a way the weakened realty market is the best time for retailers to sign properties.

After all you sign properties for 15 years and if you can get properties deadbeat over next 1-2 years, you have the opportunity to shape your costs for the better.

Foreign Direct Investment (FDI) is clearly on the backburner. There is no hope in sight of FDI at all and the weak stock market anyway makes market cap in billions a distant.

In a way the high inflation times are great for organised retailers. Consumers aggressively watch prices even more in such times and the value add of retailers who can get their act right is perceived even stronger in such times. At Subhiksha we see the current environment as a golden opportunity.

High inflation anyway increases the appeal of the discounter. And in tough times the cost structures matter even more. We are wholly geared for growth. If the last year was 1,000 store-year, this will be 2,000 store-year for us.

After storming the mobile retail market and gaining leadership we now have our guns trained on leadership in the consumer durable IT retailing space. More blood to sweat but more smiles to see.