For Gopal Mane, 38, a veteran in the retail industry, the last two years have been one of the most dynamic phases in his professional life. It was a period when stores were constantly reinventing themselves and job roles demanded timely upgrade of skills like knowledge of new products and management of existing merchandise in less space.
Retail companies that were gung-ho about India’s shining consumption story and were aggressive about their expansion strategies till a couple of years ago suddenly found themselves on the other side of the spectrum. They started becoming prudent about opening new stores, while opting for smaller outlets and even closing ones they did not see becoming profitable soon.
India’s biggest retailer, Kishore Biyani’s Future Group, closed six Big Bazaar, four eZone, two Food Bazaar and two Home Town Express stores this year. It opened three new Big Bazaar and five eZone stores during that period. Last year, the company shut down nine Big Bazaar stores, five Food Bazaar supermarkets and 20 eZone stores that were not profitable.
“Profitability of stores is the main focus right now. This year, we will only open at places where we would be able to ramp up faster,” says Future Group joint managing director Rakesh Biyani.
Future Group is not alone. Tata’s retail arm Trent closed four Westside stores during FY13, of which one was shut down in the January-June period, in NCR. Trent, which is known to be a cautious player in the industry, did not open any Star Bazaar outlet last year. It opened seven new Westside stores though.
Aditya Birla’s More has closed about 50 supermarkets in the past one year after it went on an expansion spree in 2007. K Raheja’s Shoppers Stop has been cutting the frills at its bookstore chain, Crossword. The company has closed six Crossword stores since the beginning of the year, while opening four new ones. The company also shut one HyperCity store in Ludhiana.
“The market is still very uncertain with the sliding of the rupee and the lack of economic reforms. So, people are not too optimistic. We are working towards higher sales, but I would not bank upon higher growth for the next few quarters,” said Govind Shrikhande, managing director of Shoppers Stop.
RPG Group-owned Spencer’s Retail, which has 25 hypermarkets in the country, shut down nine stores in Pune in December. Rajan Raheja-owned Globus Stores closed its prominent Globus store in Mumbai’s upmarket Bandra area in May.
Fitch Ratings’ India Ratings & Research, which has maintained a negative outlook on the retail sector for the second half of the year, sees higher inflation and marginal nominal wage growth to act as major deterrents to consumer spending. “Margin pressures will continue to impact credit profile of retailers,” the agency said in a recent report.
Gutted shopping complexes with poorly planned structures are no longer a thing of the past. For example, in Mumbai’s Kanjurmarg area, people throng Huma Mall primarily due to its multiplex. Says local resident Ashita Aggarwal, “Most of the brands present here are not exciting. We come here to watch a movie only if no other place has tickets available.”
“In such situations, companies have to be prudent. We are being cautious in our approach to our expansion and even in picking properties. We are not being too aggressive right now,” Trent’s chief financial officer P Venkatesullu said.
As per, Mahindra Retail that runs Mom & Me is planning to shut ten stores due to sustained losses.
Slow and steady
The top three listed retailers, Future Group, Tata Trent and Shoppers Stop, will add about 1.98 million sq ft of total space this year, 22% lower than the space they added last year. “Retailers are looking at a moderate pace for additions under 10% in FY14 as against the range of 15-30%, seen in the past two-three years,” Fitch’s India Ratings believes.
“Retailers have started to look at their business model in a sensible way. They have realised that they should consolidate their operations first, before rolling out another set of stores,” said Mohit Bahl, director, transaction services at KPMG.
Over the last one and a half years, India’s slowing economy and rising inflation have taken a toll on discretionary spending by consumers. Slow economic growth—the lowest in a decade—has affected people’s appetite to buy clothes and consumer durables. This added to the woes of the organised retailers who were facing shrinking sales and inventory pile-up after the economic slowdown, which started in late 2008.
The FY13 private final consumption expenditure (PFCE) growth rate was at an eight-year low. Fitch’s India Ratings does not expect any significant improvement in PFCE for the second half of this year.
During FY14, Future Retail will add 1.25 million sq ft of space, lower than the 2 million sq ft it added last year. The company will invest R400 crore on expanding its formats, 33% lower than its investment levels last year.
Tata Group’s retail arm Trent said it is on track to open eight Westside stores this year at a store size of roughly 20,000 sq ft. This amounts to space of 0.16 million sq ft being added this year, compared to an area of 0.21 million sq ft it added last year. K Raheja Group’s Shoppers Stop will be adding roughly 0.32 million to its total area as it plans to add eight to nine stores this year but of smaller sizes. This would be slightly lower than the 0.35 million sq ft that the company added through seven stores last year. Shoppers Stop has earmarked R125 crore this year on expanding, a tad lower than its last year’s investment levels.
Small is smart
In addition to shutting down unprofitable stores and opening fewer new ones, retailers are shrinking the size of stores to save on rental cost. For example, Shoppers Stop has now reduced the store size of its loss-making hypermarket chain of stores, HyperCity, for the third time. The company has now opened a store of 30,000 sq ft, way lower than the 1,50,000 sq ft size the HyperCity stores began with.
Future Retail has also merged the operations of eZone and Hometown, while reducing the size of Hometown. Last year, the company also halved eZone store size to 6,000 sq ft. During the April-June period, the company opened five eZone stores ranging from 500-5,000 sq ft—these small stores are expected to deliver higher productivity and operate on lower operating cost.
The Collective stores, Madura Garments’ multi-brand luxury retail outlets in Delhi, Mumbai and Bangalore, have been reduced to 10,000-12,000 sq ft from the original 17,000 sq ft.
Consumers have a mixed reaction to the smaller store sizes. “When I go to an electronics store, I expect to see the devices on display. With smaller stores, this is not possible,” says Swagata Sharma, a 27-year old marketer. “But on the other hand, in supermarkets, smaller size cuts the chaos.”
Real estate costs remain a sore point for most retailers, who have been grappling with high rental costs in big cities. Rentals in metropolitan cities are three to four times higher than that in smaller cities. Rents in India account for 9-15% of retailers’ revenue, higher than the global average of 4-10%, according to a report by real estate consultant Jones Lang LaSalle.
“Lease rentals in many high-street locations have witnessed an increase in rates in the recent quarters despite the economic headwinds, and may continue to remain at levels that make the locations unviable for new retail operations,” a Trent spokesperson said.
The company has indicated that it will look to have stores outside of malls, especially for Star Bazaar, as costs for common area maintenance have been too high. Apart from a general slowdown in the economy, local factors like development around malls and brands that are housed in them play an important factor in determining their success. High common area maintenance cost in malls leading to fewer budget retailers and poor mall management has led to the closure of 20 malls in the last one year.
About 52% of the malls in Mumbai are vacant partly due to the economic slowdown, poor designing, lack of a robust revenue-generation model and being located in an unattractive location, according to a study conducted by the Associated Chambers of Commerce and Industry of India (Assocham) in December.
According to DTZ India, vacancy levels for top seven cities (Mumbai, Delhi-NCR, Bangalore, Chennai, Kolkata, Pune and Hyderabad) stand at around 13%.