Organized Retailing in India – A critical analysis

Organized Retail will NOT be as successful and profitable in India as is projected by Everybody

Now that is a very bold(someone will say stupid) prediction to make when everyone sees 100s of malls seemingly springing up every corner of town and full of thousands of shopping hungry people .

I have not come across any article on net which even remotely says that Organized Retail in India will NOT really be that successful as it is generally predicted to be. In fact after FDI in multibrand retail has been increased to 51% not one article came in any prominent newspaper which said that  the Walmarts , Tescos of the world may not succeed in India . Everyone just automatically does following conclusion from some facts –

  • India Growing country ( 7-8% + GDP growth)
  • Has young population and a huge middle class who are earning a lot
  • Organizedretail is just about 5%
    •  Directly implying that when Organized Retail becomes at least 15% there will be so  many players who will make tons of money .

But I doubt anybody really has thought that may be India’s Organized retail will at least for coming 2 decades will NOT have a penetration level as it is made out to be . Even if  penetration level does go up considerably still it will NOT be profitable enough for the players/investors in the market .

Business Consultants if they read this post are not going to like my thoughts at all. But I am writing this mainly warning to the prospective foreign retailers who plan to be entering India in coming months and years in the hope of growing profitably based on ONE SIDED ppts/docs given by the so called retail experts/consultants from India. I hope I am proven wrong in coming decade or two.

Stock performance of retailers in India for  last 4 years (though that is very very short term) .

http://www.google.com//finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1316433382200&chddm=460598&chls=IntervalBasedLine&cmpto=INDEXBOM:SENSEX;NSE:SHOPERSTOP;BOM:500251;NSE:IBRETAILS&cmptdms=0;0;0;0&q=BOM:523574&ntsp=0

The best performer among them – Sensex .(So much so for the great growth opportunity in Indian Organized Retail)

Myth of Organized Retail Success India

Reliance Retail

Fancy Predictions

Real Reality

2006– August- CLSA Asia-Pacific Markets, the brokerage, predicted that Reliance Retail could achieve sales of $20bn and profits of $1bn within six or seven years.http://www.telegraph.co.uk/finance/2945340/Indias-Wal-Mart.html Reliance’s total turnover from its retail business for FY 10 was around Rs 5310 crore or just about $1 Billion and had losses of around Rs.244 crore. I hope someone didn’t confuse revenue with profits. http://www.deccanherald.com/content/100404/reliance-retail-open-4000-stores.htmlhttp://www.livemint.com/2010/09/21215639/Reliance-Retail-mulls-opening.html
2006-Reliance Retail will be setting up close to 1,000 stores, most of them 2,000-5,000 sq ft, spread across major cities in 10 states by March 2007 . In all, the company will roll out 4,000 stores in 1,500 cities by the year 2010.http://www.fnbnews.com/article/detnews.asp?articleid=19214&sectionid=25 5 years later in till Jan-2011 they have 1050 stores.http://www.livemint.com/2011/01/07143220/Reliance-Retail-to-open-150-st.html
2010 September-We are looking at a rapid expansion and will be opening about 3,000-4,000 stores over the next 3-4 years.http://www.deccanherald.com/content/100404/reliance-retail-open-4000-stores.htmlJanuary 2011 –Reliance Retail…is set to open 150 stores by March-end and double the number of stores across the country in all formats within five years.The target of clocking revenues up to Rs 45,000 crore can be achieved only with doubling the number of stores over the next five years.http://www.business-standard.com/india/news/reliance-retailto-open-150-stores-by-march-end/421149/ At the time of the 2ndprediction there were 1050 stores generating about Rs. 4500 crore revenue.But double of 1050 will be around 2100 stores which is contradicted by the earlier statement of opening 3000-4000 stores.Someone please convince me that how can you double your store counts but at the same time increase your revenue by 10 times.

Infinity Retail (Tata Group)

Fancy Predictions

Real Reality

June 2007-Infinity to open 100 retail stores.Nov-2007-Infiniti Retail to open 100 storesJune 2009-Infiniti Retail plans to have over 100 Croma stores by ’11.May 2010-Infiniti Retail to open 100 Croma stores in two years (then store count 47).July 2007– Trent plans 15 Landmark stores in 1 year.http://www.financialexpress.com/news/infiniti-retail-plans-to-open-100-croma-stores-in-two-years/615570/http://www.cromaretail.com/news/newsnmedia.html Currently has about 63 Croma stores(will need to open 74 stores within next year to meet target set in May2010)http://www.cromaretail.com/news/newsnmedia.htmlAug’11– Total Number of Exclusive Landmark Stores- 16Apart from this Landmark has around 15 Hotel and airport Bookstores.http://www.landmarkonthenet.com/Business/aboutus.aspx

Pantaloons Retail

Rosy Predictions about future of Retail Vs Reality – Current share of Organized Retail is only around 5%-6.5%[1]

Critical Analysis of India’s Retail Industry

I am writing this blog entry after recently the government of India allowed 51% FDI in multi brand retail. Lot of people related to retail and general public seems to be really excited while there are kirana (mom-n-pop) store owners afraid as to what it will do to them. In fact Kaushik Basu, chief economic advisor, said FDI in retail will bring down inflation.[i]

This sentence really forced me to dig deeper into the matter as for last 3 years (2008-11) the inflation has been way above normal (greater than almost 8% whichever way the government wants to measure it). To say that inflation could be controlled by having more investments in Retail by foreigners seems a bit odd to me.

In the rest of the description I will try to find out following:

  • The advantages and disadvantages of Kirana Stores vs Supermarkets
  • Opening of Multi Brand retail-will it really make Walmarts and Tescos and Targets of the world to come in India and start making money profitably enough (even after say 5-10 years) ?
  • If Walmarts, Targets, Tescos open up in India will the Kirana(mom-n-pop) stores will have to close down? Will millions of small time retailers lose their only means of livelihood?
  • Will the supply chain for all products in India improve magically because Wal-Mart/Tesco is there?
  • Will FDI in retail help reduce inflation?
  • Indian customers- will they magically start getting food/groceries/non-food products at lower prices because a Wal-Mart or Tesco has come in? And even if the price was low will Indian consumer really go and buy from Wal-Mart instead of from Kirana Stores in a huge number?

All of the following is based on mainly on following important assumptions which I feel are true –

  • There is NO easy money to be made by anybody on this planet earth be it Wal-Mart or any company.
  • Nothing magical, revolutionary, amazing thing happens in this world (especially India) except mainly in technology areas (like internet, Telecom and medicine) which are almost completely free from government dependence. The moment something needs to become magical or amazing and it requires a lot of back and forth dealings with government approvals, land acquisition, power/electricity, real estate, roads, railways, ports believe me it does not happen.
  • The 5 year or 10 year projections on excel sheets and ppts by Consultants, Analysts and supposedly learned people are far away from what happens in real world.(Just ask them their own companies projected financial statements for last 10 years  and see their reactions🙂 )

Success of Retailers Worldwide

 

Let’s start off with a small history of the success of retail industry mostly in US and UK. Wal-Mart, Tesco, Target, Carrefour, Home-Depot, Metro etc come in mind the moment we think of really large retail chains. [ii]  All these retailers grew from almost 0 to present state over last 4-5 decades with their managements doing amazing innovations in bringing the goods to consumers by relentlessly improving supply chain and driving down costs. Hats off to the promoters and management of these companies.

The thing to note is that among the largest and best retailers not a single one of them is from a developing country or even say a less developed or almost developed country.

But if you look at the top 100 companies in the whole world there are at lot more companies from developing countries like China(9), Brazil(5), even India (1 Reliance Industries).[iii]

There would obviously be millions of reason which can be given for the fact that though top retailers are from developed countries ONLY but the top 100 companies almost 20% of them are from developing countries. I think that a part of success of the lot of top retailers in the world is contributed by the governments of the developed country by outstanding provisions of:

  • Roads
  • Railways
  • Power
  • Land
  • Ports

Mind you I am not for a second saying that Wal-Mart is successful only because US government has provided good infrastructure. All I am saying that if the above things were not available in abundance and of such high quality then Wal-Mart would not have been as successful as it has been.

India Retail Landscape-Predictions and Reality

It’s estimated that the total retail sales in India will grow from US$ 395.96 billion in 2011 to US$ 785.12 billion by 2015, according to the Business Monitor International (BMI) India Retail Report for the second-quarter of 2011. [iv]

In 2008 organized retail constituted around 5% of total retail market.[v] Three years later it probably is around 6.5%[vi] with the rest around 94-95% being run by unorganized sector with almost 35 million or 7.3% of India’s workforce being engaged in it.[vii]

Back in 2006-07 when stock markets were up and everything seemed hunky dory everyone predicted that the organized retail market share will grow from 4-5%(then in 2006-07) to almost 12-15% in 2011 predicting almost 30%+ compounded growth rate . [viii]

Unfortunately reality is almost always different from fancy projections on excel sheets/ppts.

The real growth rate from 2006-2010 has been 13.3% (according to CARE)[ix].

Here are various projections about organized retail in India (mind you the earlier the projections rosier the picture).

Of course nobody had seen the 2008-2009 worldwide recessions coming (ask Bernanke [x] or may be John Paulson or Michael Burry or read “The Big Short” about how many knew about this recession or best listen to Prem Watsa [xi] Ben Graham Centre for Value Investing speech in 2007 and check out how much money he spent to buy protection against mortgages defaulting, or read outstanding memos written by Howard Marks of Oakland capital warning about coming debacle and race to bottom) much less the Consulting companies and Retail Analysts.

  • But it begs to question as to how can almost everybody be on the same side of predictions and everybody go wrong by at least 50% in their predictions??
  • When was the last time anyone saw a 30%+ actual real life growth of any industry for 5-10 years which is fraught with so many government approvals and dependence on great infrastructure (except tech and telecom which are anyway invented, made and refined in US/Europe and India just copies)?? Easy Money to be made??
  • Should we trust all the rosy predictions about growth of retail which has started to gradually appear back in newspapers and TV again as of today (if you feel like déjà 2007 you are not alone)??

Vishal Retail. [i]

Koutons Retail [ii] [iii]

Subhikhsa was not listed but it was valued approximately at Rs. 2300 crore when Azim Premji bought 10% stake in 2008[iv]. And of course there was no love lost between them later as Azim Premji regretted having ever invested in Subhiksha[v] . Current Value of Subiksha is not available but ICICI has written off all its investments so I have assumed its current value to be 0.[vi]

Indiabulls Retail(Store One) bought Pyramid Retail for 208 crore in 2008 and Store One’s current market cap is 28 Crores.


[vi]http://www.livemint.com/2010/03/16234728/ICICI-VentureSubhiksha-stake.html

Why India cannot have credit card penetration levels of US and UK even in the coming 3 decades –

Result-> Walmarts, Tescos or for that matter any retailer cannot make as much money here as people are predicting

Source:USA – [i]

UK[ii]

India: Business Standard [iii]

A lot people assume that since Multi Brand FDI in retail also allows a person to use his Credit Card unlike the Kirana stores where you have to pay cash hence Kirana stores are going to be at a loss and Big organized retailers are at a benefit.

Well to a certain extent it is definitely true but if you look at the chart above you will see that the Wal-Marts and Tescos have been really successful in countries where the credit card penetration has been more than 50% of the population.  India’s credit card penetration – 1.51% of total population.

And yes now some intelligent person will again put forward same rhetoric – India is developing and will develop above 7% , middle class growing and hence number of credit cards will grow very fast and so on so that  Big Organized retail will grow exponentially.

No matter how much the credit card grows there is almost a physical limit to what % of Indian Population will be having credit cards which is based on following assumptions:

  • Banks will never ever issue a credit card to illiterate person. (I hope this assumption is true else …….God help the banks.)
  • The number of illiterates in India is around 40% of the population which is not going to change by any invention or technological breakthrough in coming 1 decade (maximum it can reduce is by 10%).(Unless someone makes a medical breakthrough which will implant something in the brain that all Indians will suddenly become literate).

Hence based on above assumptions I can safely say that it is impossible that India is going to see a 50% penetration of credit cards even in the coming 3-4 decades.

Consequence of Low Credit Card Penetration for Wal-Mart/Tesco and Indian Retailers in coming Decades- Above points directly imply that the so called advantage of Organized retail that Credit Card facility is actually more of a handicap rather than a benefit because they cannot scale up to a level whereby enough people who are having credit cards are going to come to their stores and make a lot of impulse purchase.

Advantage Kirana

Kirana stores and millions of them have been offering credit to their customers from the time kiranas came into being. The interest free period can range from 15 to 30 days without any penalty because they know their customers (without asking for KYC forms !!!!) . And god forbid if any customer is unable to pay even after 30 days but just explains and assures the Kirana shop owner that hey this month I had to pay for my children’s school uniforms and books can I pay you next month?? Well Kiranas take that case as well and some cases allow for almost 2 months of credit. And yes they don’t charge interest rates at 35%+ per annum and they don’t get bankrupt.

Walmarts and Tescos try beating Kiranas on the above points.

For more optimistic people who hope that in next 2 decades India achieves a credit card penetration rate of 50% here is some basic maths:

Basic Calculations for India to achieve Credit Card Penetration rate equal to that of US or UK
20 Years later India’s population (Assuming a 0.5% growth rate) 1.98 Billion
50 % credit card penetration target Almost 1 Billion people
Current Number of credit card Holders 18 million
Average Number of New Credit Card users to be added  to reach 1 Billion cards Almost 50 million per year
Compounded Annual Growth Rate Needed to achieve 1 Billion Credit Cards 22% for 20 years (Possible ???)

Oh yes new credit card issuances can grow per year at 22% per annum for 20 years but have a look below for the trend in credit card issuance in India in the last 5 years. After a huge growth came worldwide recession and number of credit cards went down by almost 30 percent within 2-3 years. Of course the optimist will say well you cannot factor recession while projecting hence lets believe that there will be no recession in the world in next 20 years and we will achieve a 50% credit card penetration rate by growing per annum at 22%.(Best of luck !!)

Source: Business Standard [i]

Size of House in Developed Countries & Relation to Organized Retail

 

Most of shoppers in US and UK at weekends go to Wal-Mart and Tesco and buy stuff for (groceries, food and beverages, et al) at one go for the next week or even two weeks. One of the reasons they can do that is they have big house to store those things which they have bought.  Following is the analysis of how much area is available for citizens in US, UK and India.

Average Size of a House in USA, UK, and India and Per Square Feet per person comparison

 

As you can see below for US, UK and India there is almost no comparison for the per square feet space in house per person at all. This is a huge factor in determining the success of Organized retail because for India 57% expenditure occurs on food and if Indians can’t store 1 week or 2 week worth of food items in their house they will NOT buy that if they go to Retail outlets.

People in US/UK just drive their cars to Walmarts , load up the week’s supply and put it back in their houses but for India this is just not possible because

  • Size of House(and thereby kitchen) is very small
  • Number of people living per house in  India(4.8)[ii]is higher compared to US(2.59)[iii]/UK(2.21)[iv]

No matter how much supply chain is improved by Wal-Mart for food there just isn’t enough space in Indian homes to stock up a even 1 week’s supply as people do in developed world. Indians even in next couple of decades will keep on buying food JIT way i.e. buy when you need else don’t buy.This directly implies that lot of food and almost all of  grocery(comprising almost 55% of expenditure of Indians) will be bought when needed from the nearby (within 1-2 kms) kirana shops only and NOT from (10km-1 or 2 hour) drive to malls .

If someone thinks that magically the size of houses for Indians is going to increase in a hurry in future best of luck.


[iv] http://www.greenenergyinvestors.com/index.php?showtopic=11696

Sources : USA [i] Table number 2-3. Though for US the data the median per person square feet available is 750 [ii]Average home sizes is 2300 sq feet. And average household size is 2.59. [iii] So it gives a value of 888

UK [iv] . I used the Table SST1.1 where average floor area is 91 square metres and multiplied it with 22335,000 which is the count of the number of houses and then divided by total population of UK which is around 62 million.

India – [v]

Number of Cars Per Person & Relation to Organized Retail

There is no point in even comparing the data of number of cars per 1000 people across USA , UK and India. One look at below mentioned Chart and you will agree. The basic assumption is that people  shop more of grocery , food and other items and load it up in cars to get back home and it contributes tremendously to the success of Retailers in developed countries. If a country like India does not have good enough car penetration level then the Organized Retail should not expect magic to happen (unless they think Organized Retail=Clothes/Accesories/Electronics).


[v] http://mospi.nic.in/Mospi_New/upload/press_note_535_15nov10.pdf

Let’s say there comes a time when in India the car penetration becomes around 500 per thousand people.

But here is a small math (my favorite analysis-compound interest example) about growth needed by car industry in India to reach the car ownership level of USA and UK:

Years Needed to Reach 500 cars per 1000(from present 12) Compounded Annual Growth Rate Needed

10

45%

20

20%

30

13.24%

SIAM has forecasted an 11-13 % growth rate in automobiles in India in next 5 years. So you do the math and estimate how many years realistically India will take to reach Car penetration level to that of US/UK and when millions of Indians will start using cars to go to Wal-Mart or Big Bazaar and load up on retail offerings.

Share of Spend by Indian Consumers and Organized Retail Penetration

The real success and scale of any business proposition is where are people currently spending and targeting the products/services to getting a big slice of it and doing it profitably enough.(of course if you are Steve Jobs you can make iPad and have sales of $10billion in 15 months for a product on which people were spending 0 , but seriously does anyone thinks any retailer anywhere in the world is Steve Jobs ??)

Let’s have a look at the facts about the spending pattern of average Indian Consumer and the Organized Retail Penetration.

One thing which immediately strikes by having a look at the above charts is how skewed the whole Organized Retail is in India.

  • Indians spend more than 50% of their expenditure on Food and Grocery but the Organized Retail penetration is 1% even after so called stupendous growth of organized retail over the decade.
  • The highest penetration of Organized Retail is in clothing and fashion at  23% but Indians do not spend even 10% of their income on that . No matter how much the Indian retailers keep on selling fashion items and clothes they are always going to be playing within just the 10% of spend of Indian Consumers.

Of course these things present a great opportunity for retailers to grab a large pie of Food and Grocery Retailing but the obstacles are just too tough to be taken care of by retailers.

Beating the nearby Kirana and Mom-n-pop stores in Food (grocery and perishable products like milk- which contributes almost 8% to expenses of Indian consumer) is almost like playing a loser’s game.

85% of Retail Space in only 10 cities

A country of 1.2 Billion(120 crores) has 85% retail space in 10 cities. (Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai,NCR, Pune, Chandigarh and Kochi). Total population of these cities is a mere 5.6 crore or less than 5% of total population of India. I agree that these are the most prosperous (money wise) cities in India and they would be targeted by retailers but I can’t see a pan-India retail footprint if the current retailers target just 5% of top richest population of India.

Again if someone is very positive about retail then lets assume that retailers will somehow target at least 30 % of Indian population in near future.

 How much time and at what growth rate organized retail needs to grow to target 30% of Indian population.

Growth rate per annum needed by retailers No of years for the growth rate to be sustained
17.4% 10

Above 17% growth per annum for 10 years continuously is it possible??? (when the real growth rate from 2006-2010 has been 13.3% (according to CARE)[i] )

Why Organized Retail cannot compete effectively in Food Products and Grocery (And hence cannot get a significant pie of an item which constitutes greater than 50% expenditure by Indian consumers)

The Kiranas have following advantages over the Organized Retailers:

  • Most Kiranas and Vegetable Sellers Don’t pay taxes and never will because either their income less than taxable or the big kiranas pay bribes to income tax officials to make sure they don’t file income taxes. This will remain true in foreseeable future. (India is a country with almost 1.2 billion people but less than 40 million pay taxes.)
  • Almost all Indians prefer fresh food to canned/packed/treated food. Indians mostly will keep on buying fresh vegetables and fruits in near future with a miniscule (negligible) percentage shifting to canned food.
  • There is such a huge market for out of home small snacks ( aloo paratha, pani puri, vada pav, idli , dosa , etc) and majority of them exist right on the road . They will keep doing business even for next 30 years and keep on beating the Organized Retailers hands down.
  • Most Kiranas do not have and don’t need power for 12 hours a day.
  • The vegetable/Food sellers offer credit for time varying from 1 day to 1 month to whatever depending on the relationship they have with the customer for amounts which can be even as low as 20-30 rupees. Organized retailers will NOT EVEN TRY TO beat this.
  • India can never be free from roadside stalls because it is convenient for customers, good for sellers and a huge source of bribery to Policeman and consequently to government through corruption. (Eg- Ask any vegetable/fruit seller on the road and he will say that he has to pay at least 100-200 per day to policeman/municipality people OR just sit at his stall one day and you will see it right in front of you) This directly implies Kirana/Vegetable sellers will always (even in next 30-50 years) will be close to where people live and hence beat the Organized retailers.
  • Pathetic roads/traffic conditions ensure that people will keep on shopping for food/grocery just near to their homes rather than go and waste 1 hour minimum to buy from organized retailer.
  •  The usual rhetoric of Supply Chain efficiencyboils down to following facts which just cannot be taken care by Private Players. For e.g.:
    • Cold Storages– Even the dumbest person on planet knows for last 100 years that cold storages should be there to avoid wastage of perishable goods – so why isn’t it becoming a reality whereby thousands of cold storages are opened throughout India and reduce wastage by 30-40-50%??
      • For a private sector the cost-benefit analysis does not warrant making a cold storage else we would have seen hundreds of cold storages by Pantaloons, Shopper’s Stop , etc . If it hasn’t been beneficial for last 10 years since Shopper’s Stop and Pantaloons started I doubt how it would suddenly become beneficial in near future and I cannot see a logical reason for Wal-Mart to suddenly start making cold storages when almost nobody has been building it in India.
      • Power– There just isn’t enough electricity in India to support the hundreds of cold storages dreamed by retailers and the situation is not going to improve in a jiffy. Optimists please go through our track record of adding power capacities over last 20 years and only then hope for a miracle in the next 20.
  • Roads– The pathetic condition of Indian roads means the big Volvos of Wal-Mart which zip around on great roads of US cannot do the same in India. And of course Shopper’s Stop/Wal-Mart cannot build roads, bridges, train tracks and flyovers.
  • Sourcing Directly from Farmers –Except the brilliant ITC (its e-choupal initiative) there has been just talk , talk and talk about sourcing directly from farmers and removing middlemen . Everybody knows that middlemen need to be removed but almost nobody has taken enough initiative to do that because it’s just not easy and benefits may not be worth the investments needed. Ask ITC how from early 2000 onwards it has been in that field with huge management effort and huge investment in getting the e-choupal going. If some player thinks they can just come and do quickly what ITC took almost a decade to accomplish with brilliant people on board(look at how ITC goes to top MBA colleges and hires the best of the breed, sends them across to rural India and check out how many hires were done by Pantaloons, Shopper’s Stop from IIMs or other top B-Schools). Even then, ITC which is arguably the best agri sourcer in India decided to exit fresh food retail business[i].

 

Share of Organized Retail Penetration. [ii]

Books/Music shops with Retailers and their Failures(in short they are doomed)

Almost all large retailers in India have a book/music section and they will keep on losing money on that due to following reasons :

  • Music is going to be pirated no matter what anyone on the planet does. It’s too simple.
  • Movie DVDs just are not going to sell enough but pirated/shared via Bit Torrent/DVD rental companies will eat up. I mean does anyone really expect millions of Indians to walk up and buy a Rs. 400 priced DVD of any film??
  • Books are priced atrociously high particularly books by foreign authors/publishers (which are seen in majority in any modern book store). I mean how can you price the book assuming the author lives in USA (where minimum wage is > $7 per hour or Rs. 300 per hour when the min wage for 8 hours in India is around Rs. 120 ) and he brings book to India and sells it at almost same price which is set in USA . It’s amazing the book companies just do NOT get it. Hence although there is huge demand for books in India but paying a rupee value which is almost direct conversion of Dollar/Pound price is never ever going to take off .
  • The Richie rich who can actually afford to buy the books are buying iPads and increasingly shifting to E-books. (Amazon  is shortly going to be launching in India) Best of luck Landmark and Crossword.
  • There is a reason why books sales via internet are not going to Landmark/Crossword or present retailers or to even Rediff and Indiatimes(who by the way seem to be in this business for eternity with really speaking nothing to show ) . The reason is they are NOT smart enough and do not have the management , hunger , passion , talent and enthusiasm to do it . Look at Flipkart and the way it is revolutionizing the e-commerce. Why because they have everything which the old thinking retail managers DO NOT have.
  • Broadband is so pathetic in India that it can only go up and become better. Watch out for entrepreneurs who would replicate Netflix and Hulu in India. 5 years from now when the broadband is hopefully “broad” watch out for the Landmark/crossword to be replaced with clothes – the only thing which retailers seem to be selling and making some money.

Retail Mall Oversupply (A curse in disguise)

A CRISIL Report [i] says there is huge supply of retail malls in coming years and bargaining power is shifting to Retail Companies. “Despite retail sales rising by around 25 per cent in 2010, retail lease

rentals increased only marginally by 3-4 per cent”  . This is amazing considering all the so called expansion plans by all the retailers. The meager increase in rentals is happening because there is more supply than demand for malls and the rentals had gone sky high during early 2008. In fact the report says that the rentals went down by almost 40% from 2008 peak.

One way to look at this data will say – This is a great opportunity for foreign retailers (and of course Indian retailers) to come in and get malls at cheaper price. But I think the real reason for the above scenario is that the new malls which are coming up are NOT in the PRIME locations of the cities making it unviable for the existing retail chains to open new mall at a not so favorable location even at rentals which are 50% down from 2008 value (incredible this is as the inflation has been almost 9% from 2008 till 2011 September. So in real terms its even cheaper to get a mall).

All the above oversupply points out to a simple fact that the top 10 major cities of India most of the prime locations have been already occupied and underdeveloped areas will take a long time to actually become prime enough for retailers to open malls . Again this points to a very long arduous road for entry of Foreign retailers because in US Walmart can afford to open stores just outside the  main city where rentals are cheap and people drive their cars to get cheap products but try doing that in India with its pathetic road  infrastructure everywhere . I bet nobody in India wants to travel 15 kms to buy things on weekends with maddening traffic and worst roads. This situation will remain same even in decades to come. So the only hope for retailers is that non-prime locations (fringe areas of city) somehow become prime quickly enough and then they start selling goods to them profitably enough.

Basic Financial Analysis-Comparison of Indian Retail with Wal-Mart

I know we cannot compare a less than 10 year industry in India with the best in the world but just for comparison sake

I was trying to see if there is any parameter where  Indian retailers can really match up to Wal-Mart and believe me I was disappointed .

Pantaloons Shopper’s Stop Trent(Westside) WalMart
Profitability Ratios
Operating Profit Margin(%) 8.5 13.3 6.8 5.8
Net Profit Margin(%) 2.9 2.1 8.1 3.5
Return On Capital Employed(%) 10.4 29.5 7.1 13.0
Return On Net Worth(%) 9.6 7.6 6.8 21.6
Management Efficiency Ratios
Inventory Turnover Ratio 3.9 8.6 6.3 8.3
Debtors Turnover Ratio 52.4 184.5 155.8 123.7
Fixed Assets Turnover Ratio 4.5 4.8 3.5 4.4
Asset Turnover Ratio 4.1 3.9 2.9 2.5


About amitkumarblog

Will update later !!!!!!

Posted on September 19, 2011, in Economy, Finance, India, Indian Retail Sector, Journalism, Organised Retail, Organized Retail, Pantaloons, Predictions, Reliance Retail, Uncategorized, Wal Mart and tagged , , , , , , , , , , , . Bookmark the permalink. 6 Comments.

  1. Really liked your estimation of the physical limits to which credit cards in India will grow. But what about debit cards(the elephant in the room!)? Also, about the housing space thing, I’m not sure about whether storage space is in shortage too, given the modular bins/built in storage etc.
    But really good article reminding us about the ground realities.

  2. Excellent thoughts. I am very much on the same path as you, with one difference: Kirana segment. The volume sales of food and grocery segment will grow – but it will never grow to the realms enjoyed by some other categories, as I spelled out in my posts on http://reflectionsvvk.blogspot.in/search/label/Retail. Kirana is far too diversified and entrenched

  3. Btw I liked your mall post… different approach to mine; I used observation and strategy; whereas you have used a very different approach… good one

  4. Hi Amit,

    Your analysis is indeed well thought out but i feel that you have not explored all areas that influence the success/faliure of retail. The points you have mentioned are absolutely valid but one must remember that retail is all about consumption. One of the most imp factors for retail is assortment of product and category depth. These determine the loyalty of any customer. You see, india is a growth story with rising income and aspiration levels. If you carefully observe, its not difficult to observe a gradual upgradation of customers in most of the categories. For ex toothpaste to mouthwash, soap to bathing gel, detergent to top load/front load, curry masalas to heat n eat stuff, garlic to garlic paste pkts, biscuits to cookies …………..and many more. With more additions to this list almost on a daily basis a great deal of data is generated and a specialised profile is slowly being created….. that of a category manager who is supposed to rationalise the inventory and maximize the return. This is where a good investment in backend software thru FDI can do wonders. If done properly the category manager can reduce the capital employed in the business since the payment of a vendor is not immediete but the sale can be realised before that. Now with such type of changing scenario it is almost impossible for kirana shops to match their pace with rapidly changing customer customer preferences, more so because almost none of them have access to high quality sales data and processing software. And customers are usually merciless when they are not satisfied. In addition to this, modern trade is an experience for the customers where they come in contact with so many products. There are many more reasons apart from these but I believe these are the more important ones for the future of modern trade in india. This phenomenon is limited to few cities as of now but with improving lifestyle will spread to many more and in the next 30 years to the rural areas too if not earlier.

    thanks
    tarun

    • Valid points raised by you. But look at now. The retailers have been squeezed by online retailers. The normal organized retailers badly. The pantaloons and shopper’s stop have been stopped.

  1. Pingback: Dish TV India Analysis- Bright Future ?? | amitkumarblog

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