High debt forces Pantaloon to part with the best piece of its business, a sign of Big Retail?s continuing woes
Kishore Biyani must be hurting. It would be hard for any entrepreneur to cede control of a business painstakingly built from scratch, and Biyani?s was something of a labour-of-love kind of story. But earlier this week, the man who built up retail franchises across a whole host of formats virtually let go of the best piece?lifestyle apparel?to the Aditya Birla Group. Indeed, Biyani surprised everyone by hanging in there for such a long time given the kind of debt that he?s piled up of close to R6,000 crore?a net debt-to-equity of 1.8 times.
The interest bill alone is enough to kill the business?in the year to June 2012, it will account for more than half the Ebitda. And that will drive down Pantaloon Retail?s profits to an estimated R100 crore from close to R200 crore last year, although revenues would have grown by about 11.5%. That?s a net margin of less than 1% and even that will come through only because a couple of electronics stores are being closed down. The numbers are enough to tell you the business isn?t going anywhere. It could have been different but the problem for the organised retail industry in India has been and continues to be the top line; same store sales for Pantaloon?s lifestyle segment in the December 2012 quarter?coinciding with the festive season?were up just 5% y-o-y. That means it was not able to capture share from rivals despite its much larger scale at two million sq ft.
Given the stiff competition in the Indian apparel market, both from organised and unorganised retail, it?s never easy to push through sales, and things can get particularly rough at a time when the economy itself is slowing. The retailer that appears to have been most successful in wooing at least women shoppers, with its ethnic wear, is Westside. Westside decided early on it was going to have its own in-house collection of women?s wear and executed the plan beautifully. Shoppers Stop positioned itself more as a premium player while Westside?s merchandise was priced more as a value-for-money offering. Shoppers has struggled to make money while Pantaloon, unfortunately, wasn?t able to make a big headway in women?s wear, though it seemed to be getting its act together in the last couple of years. But even Biyani would concede that Westside has stolen a lead over the others with the brands being both affordable and stylish.
Again, international brands were not considered a threat to local players, given the top-end pricing and limited presence. But they too have learnt quickly that Indian customers can be very price conscious. For instance, a retailer like Marks & Spencer, which was initially struggling to sell volumes, rejigged its India model as it realised its merchandise was too expensive. M&S dropped prices by more than 20%, and in some segments like menswear by 30%, which made its merchandise far more affordable; the repositioning of M&S, as a mid-market player, has worked and helped it attract many more customers. Given the keen competition in the apparel space, both from the home-grown retailers as also the foreign players, the 15-20% hike in prices that Pantaloon undertook last year is telling on the turnover; revenues for the lifestyle segment are now just about R708 per sq ft per month.
But this isn?t enough because high rents, estimated at 8% of sales, are eating into the Ebitda margins; analysts estimate the operating profit margins for the apparel segment couldn?t be more than 12%, which leaves an operating profit of just R200 crore annually. Since this is the most profitable piece of Biyani?s empire, it?s sad he will be parting with most of it. The top line issue apart?revenues per sq ft at $181 in India are way below China?s $249?India?s organised retail space has also struggled because of poor infrastructure, which has thrown the logistics out of gear. Retailers have ended up holding higher-than-necessary inventories; a study by Citi Investment Research, a couple of years ago, showed that the inventory-carrying costs per sq ft, for department stores in India, compared poorly with those in other Asian countries: against just $7 for Indonesia and a mere $4 for China, the figure for India was $29. Working capital cost/per sq ft in India is almost $30, much higher than the Asian average. These metrics may have improved since then, with scale and efficiency, but not dramatically enough to make a difference. Also, the asset turn, which is about 10 times for China, is less than four times for India, whereas India?s retailers are forking out a capex per sq ft of $52, more than twice the amount that Chinese retailers are spending.
Given that infrastructure in India is poor and funding costly, it would have been better had Biyani not chosen to experiment with so many formats; the forays into insurance and consumer finance were completely unnecessary. Since he has been virtually a one-man show, he needed to have devoted more time to the flagship business. Biyani is always bursting with ideas and enthusiasm but, at the end of the day, a great business must make great profits.
shobhana.subramanian@expressindia.com
