There?ve been two bits of good news in the retailing space this week; at the macro level, the government is apparently ready to allow foreign direct investment in multi-brand retailing, while at the micro level, beleaguered Vishal Retail managed to put through a deal to sell its business?the wholesale arm to private equity player TPG Capital, and the retail operations to the Chennai-based Shriram Group. Although the Vishal stock rallied 16% to Rs 56 after the announcement, its shareholders must be a weary lot. When the IPO happened in June 2007, it was oversubscribed some 80 times and the stock hit a price of Rs 753 the day it listed, while price band for the issue had been fixed at Rs 230-270. Fortunately, Subhiksha, the other chain in a tearing hurry to roll out stores, wasn?t listed, though it?s unlikely that its lenders or large shareholders will ever see their money again.
Unless one has Rs 5,000 crore or more to write off, or loads of luck, retailing can be a hard grind in this country. Not having been disciplined enough about managing inventories and making sure that the back-end is in place so that the supply chain works effectively, most Indian retailers have struggled to make ends meet. Having gone overboard on expansion plans, retailers have spent the past couple of years putting their houses in order. But the ambitions are resurfacing. After closing down unviable stores so that it now has less than one million square feet across outlets, Spencers now wants to double the space by 2010. The RPG group has invested Rs 2,000 crore in Spencers operations in the last two years alone and one wonders if this isn?t good money being thrown after bad; the business is still unprofitable, losing estimated Rs 12-13 crore a month and the management hopes to achieve an Ebitda break-even at the company level by 2012-13. Smaller chains like Koutons are struggling even after having shut down non-performing outlets and attempting the franchisee route, which helps push up operating profits since the retailer doesn?t bear costs relating to pilferage and labour. In the three months to June 2010, Koutons?s profits halved, thanks to falling revenues and that too at a time when consumer demand is believed to be looking up. Even the bigger chains like Shoppers Stop aren?t really raking it in, even though they?ve been around for 15 years.
High rentals have all along plagued modern retail?at times amounting to as much as 10% of revenues as against desired levels of 5-6%. This has been particularly true for small format stores where the retailer is often competing with banks, auto retailers and sundry others with the result that the capex costs per sq ft that have at times been higher than what a 60,000 sq ft apparel retailer would have forked out in a mall. So, there have been cases where rentals for convenience stores were Rs 65-70 per sq ft per month while a store in a mall paid Rs 40-50 per sq ft per month.
But the management of working capital too hasn?t been as good as it could have been. As Citigroup Global Markets analyses it, the working capital per sq ft for modern retail in India is close to $30 per sq ft, way higher than in other parts of Asia, where it is $3-7 per sq ft. Some of this is thanks to inter-state taxes: companies are required to have more in-state distribution centres resulting in higher than necessary inventories. That apart, vendors aren?t always as responsive as they should be so that order fulfilment rates are between 75% and 80%. While supply chain costs have dropped to 1% of revenues from 2% in the last few years, they?re unlikely to fall further, given the large variety of SKUs that retailers need to stock in order to satisfy customers? tastes. That?s why it makes sense to allow foreign multi-brand retailers to set up shop in India. And as the discussion paper put out by the Department of Industrial Policy & Promotion suggested, MNC retailers should be asked to spend a certain minimum to develop the back-end; 50% may be too high, 35-40% seems reasonable. That would reduce wastage of farm produce, estimated at Rs 1 trillion a year and make the supply chain more efficient, bringing down inflation.
While the two casualties in the Indian retailing space?Subhiksha and Vishal?were the result of mismanagement, it?s also true that the cost of capital in India is high. Capital expenditure in India is estimated at $54 per sq ft compared with $24 per sq ft in China. Balance sheets of retailers aren?t too strong. Pantaloon Retail?s debt, for instance, is nudging Rs 3,000 crore. It won?t be surprising if retailers promoted by big industrial houses like the Birlas team up with foreign players because they need the money to grow. That FDI in retail will help isn?t really in doubt and this is true especially in the fruits and vegetables category, where more than 50% of wastage can be avoided with better storage facilities. Given where food inflation is, there couldn?t be a better time for the government to open the doors to foreign players.
?shobhana.subramanian@expressindia.com