The biggest mistake Big Retail made was to compete with kiranas instead of playing to its strengths
This year, Kishore Biyani?s Future Group will celebrate its fifteenth anniversary. Biyani must be a happy man because although not everything has gone his way?in April, he sold off the apparel business to the Aditya Birla group?he has managed to build a business that any foreign retailer would love to get its hands on. Biyani was an early mover, having started out in 1997, and, given his talent for spotting prime real estate, very soon Pantaloon stores were mushrooming across the country. His success inspired several others to venture into the retail space, but most of them?Subhiksha, Vishal, Trumart? made a mess of it, leaving very few profitable enterprises. Even Reliance Industries, with all its access to resources?money and people?hasn?t quite got there yet. Whether Walmart, with its worldwide experience, wins remains to be seen, but chances are high it will; it is, after all, a pro at sourcing and will not want for capital. And it will stay with its Big Box formula.
In fact, the big mistake that retailers in India made was to think they could outsmart the kiranas?in hindsight, the biggest casualty has been the convenience stores that simply couldn?t match the convenience of kiranas in terms of home delivery and credit. Those that believed they could come up with private labels, so as to have a price advantage, realised that these can be be popular only in very few categories and that customers don?t really want to move away from the established brands. It?s not surprising then that so many small stores were shut down, some of them within months of being opened?the Aditya Birla Group closed down more than 50 stores.
Not that larger stores weren?t shut down. An exhaustive study by CLSA??Seven or Thirty??on the prospects for the organised retail sector in Chindonesia, points out that there was a 29% contraction in the modern grocery retail format store base in 2009 and since then retailers have stayed with hypermarkets, moving away even from supermarkets. CLSA, however, has come up with an interesting and somewhat intriguing statistic: it says Indian convenience store companies earned sales per sq ft of $273 in 2011, which is close to levels seen in China of $290 per sq ft and surprisingly also near levels of $292 recorded in the US. The number for India seems to be on the higher side given the relatively higher share of vegetarian stuff as also the relatively smaller share of ready-to-eat or pre-cooked foods that Indian stores stock. Anecdotal evidence suggests that most stores didn?t make as much: in fact, they were struggling to cross revenues of R700-800 per sq ft per month and, if the numbers had been better, so many of the KB Fair Price outlets, for instance, wouldn?t have shut shop.
In fact, the big problem for organised retailers in India, whether operating in the hypermarket, supermarket or department store spaces, seems to have been, or rather remains, the top line. There simply aren?t enough customers spending enough to drive up sales that, in turn, would help cover costs which again are disproportionately high because of the exorbitant rentals. Even a few of the upmarket kiranas have given up their shops to Hindustan Unilever for Bru Cafes because the margins aren?t good enough and because there are just too many smaller kiranas in the neighbourhood. So, the problem seems to be one of the revenues being too thinly spread across too many outlets.
With foreign multi-brand retailers now expected to come into the Indian market, the average size of hypermarkets too is expected to go up?currently, the average hypermarket store is relatively small at 47,000 sq ft?almost half the average of 94,000 sq ft in China. Future Group?s Big Bazaar has an average hypermarket store size of 30,000 sq ft. Since space is an issue, especially in the more congested metros, these may not come up in the heart of the city but they won?t be on the outskirts either because that simply won?t work in India where fuel prices are high and the traffic heavy. The CLSA report notes that the combination of large new-store openings, lower inflation and an easing in demand for non-staple items should result in a further fall in overall sales per sq ft this year. In fact, even before the economy started slowing so sharply, sales growth has never really sustained above 20% for any meaningful length of time?which, on a very small base, means Indian consumers aren?t exactly flocking to organised retail formats.
There?s no doubt that will change given that there are catalysts in the form of demographics?close to half of the country?s population is less than 30 years old?and growing aspirations leading to a change in spending patterns. But despite this, it could take a while before organised retail starts making good money since 40% of retail sales are accounted for by food and groceries, which command lower margins.
A PwC report says the total retail market will grow from around $500 billion currently to an estimated $1.3-1.5 trillion by 2020, with the organised piece expected to clock a compounded 19-20% annually. That looks tough even if the penetration right now of organised retail is less than 10%. CLSA believes the improvement in the annual sales per sq ft would be ?modest? over the longer term and that?s probably what it will be. As for profitability, so far organised retailers haven?t really had too much bargaining power with FMCG players because Indian retailers are still running sub-scale operations. Only scale can help bring down the cost of goods and help defray the operating costs, especially staff. Also, since gross margins on food and groceries are relatively small, retailers will look to devoting more shelf space to higher margin apparel, which can fetch them 30%-plus. That?s why hypermarket chains could be the best way to go.
shobhana.subramanian@expressindia.com
