Funds crunch and lower footfalls weighed in a tough year for retailers

?Financial stress? is the phrase that would sum up the retail sector in 2011. Market leader Pantaloon Retail India began to hawk non-core assets to raise money, debt-ridden Vishal Retail was sold to a private equity fund, kidswear maker Lilliput and its PE partners fought a legal battle, and smaller towns emerged as new retail destinations during the year.

To add to the woes of retailers, the hope of more capital inflow by way of foreign direct investment in multi-brand retail faded away as the government put the FDI proposal in cold storage for now. ?The rollback of FDI has added a lot of dampness in the sector and companies that were waiting to invest in India are now forced to wait and watch,? says Anil Talreja, partner at consulting firm Deloitte. ?Many domestic companies, too, have stalled their expansion at the moment.?

With consumers settling to spend less on purchases as inflation hit them hard, retail companies, which grew at the cost of profits, will have to either prune their expansion or shut down some of the non-profitable stores next year.

?During the retail boom in 2009-2010, companies expanded aggressively without focusing on profitability,? says Saloni Nangia, senior vice-president, retail & FMCG at Technopak Advisors, a retail consultancy. ?Now, they are looking at store-level economics and ways to cut costs by investing in backend and technoligical solutions.” Pantaloon’s debt rose by 57% to R2,173 crore until June 2011 from R1,386 crore in the same period a year ago, as it added more retail space. Shoppers Stop has a relatively lower debt of R149 crore as it rationalised its operations, while Vishal Retail, now owned by PE fund TPG Capital, needs to repay R766 crore to its lenders.

Besides expanding in smaller towns, companies also shut down their non-performing stores. ?Rationalisation has happened and loss-making stores were wound up,? says Pinaki Ranjan Misra, national leader for retail practice, Ernst & Young. ?This will be the strategy going forward.? Six retail consultants, brokerages and sector experts FE spoke to say, while some companies will continue to grow through the slowdown, the debt-ridden ones will be more cautious, as same-store sales dip will hit cash flows in 2012. Cash rich retail chains like Reliance Retail, Aditya Birla Retail (ABRL) and Bharti Retail will continue to grow unfazed by inflation, slowing economy and deferment of FDI.

Reliance Retail, owned by India’s largest company Reliance Industries which had a cash balance in excess of R42,000 crore as of June 2011, may ramp it up its operations as it can strike cheaper lease deals with real estate developers. ABRL, owned by the $30-billion Aditya Birla group, is cash rich too and the company is likely to turn cash positive by 2013.

?Bharti, Reliance and Aditya Birla Retail don’t have debt and will continue to expand steadily,? says Nangia. ?Pantaloon Retail, however, is burdened by debt and will have to go slow.?

The retail growth engine is also switching to smaller towns. ?Though volume growth has suffered due to high inflation, demand has grown in tier-II and III cities,” says Abheek Singhi, partner and direcor, Boston Consulting Group. “Retailers are looking outside the top 10 cities and opening more stores in small towns. Small town India is booming because the economics is better; demand is high and operation cost is lower.?

Retail chains are also tweaking contracts with suppliers by doing away with fixed margins and linking them to sales. ?They are variablising costs and signing result-oriented contracts with FMCG firms,? says Singhi. ?The margins they are offering depend on their sales performance.? Behind the sluggish growth, some retail companies changed track to build speciality formats in food, jewellery and home retailing.

?Jewellery and fast food grew by 40-45% with companies expanding aggressively,? says a retail analyst at a Mumbai-based brokerage. ?Titan Industries and Jubilant FoodWorks are debt-free companies and can grow fast.?

Retail chains will need a mix of both store and non-store sales. In the coming years, online retail or e-commerce, a trend that is emerging strongly, could be a challenge for brick-and-mortal retailers, as more shoppers buy online. “Digital commerce saves real estate costs and is a big gain for the retail sector,” feels Technopak’s Nangia. “It will continue to grow by 40-50% in the years to come.”