Shoppers Stop Analysis – Investors in for a Low Return over long term– Guaranteed !!

Shopper’s Stop Analysis and Future Expected Returns (Investors Stop???)

Here is kind of analysis which I guarantee that you would have never read or heard anywhere else on Shoppers Stop (Organized Retail), its future growth potential limits and the expected return from point of view of equity investor in Shoppers Stop or Pantaloons or Trent (Westside).

For a better read download this Shopper’s Stop   and Data Shopper’s Stopwith data in it :

Please read the below analysis and always keep in mind the following 4 simple facts:
• Indians on an average spend close to 60% of their expenditure on FOOD.
• Organized Retail have just 1% or even less share of FOOD sales in India.
• Indians spend around 10%-11% only on clothes, beauty products and footwear.
• Almost 80%-90% of sales of Shoppers Stop or Pantaloons or Trent (Westside) are clothes , beauty , accessories and footwear products and less than 10%-15% comes from food sales and that too comes from great brands of food (Nestle-Maggi , Cold Drinks , Biscuits ,Milk products ,etc which are razor thin margin business)or commodities which are again almost zero margin products.

With the above thoughts firmly in mind here goes my analysis.

With Organized Retail currently being around 6-7% of total retail sales I am predicting that in next decade or two it will not reach even close to 18-20% of total retail sales and I’ll back it up with logic.

This prediction is completely opposite (downright negative if you want to say) compared to every single projection available in India and abroad by any institution on future of Organized Retail. The prevailing wisdom is Organized Retail will soon by 2015 or so (add 1-2 years more if you like) capture almost 15%-18% of total retail sales in India and in the process the companies like Shoppers Stop or Pantaloons or Trent (Westside) are great buys even at P/E of 35+. Again I have not seen sell ratings on any of these companies except one by Nirmal Bang. Rest all are positive on this sector as a whole factoring in years of future growth at a return on capital which is at least twice of what these companies have shown in last decade of phenomenal growth when in fact for 4-6 years credit was as cheap as air.

The consultants , analysts , investment bankers and investors may have got it all wrong in trying to figure out how much expansion can the Organized Retail logically have in India given India’s unique expenditure pattern , infrastructure , real estate and electricity situation which is completely different from anywhere in the world .

This happens because a typical person who is consultant/analyst working in a company which brings out studies on growth potential of Indian retail may have say a package of minimum 12/15 lakhs per annum and his spending is less than 10% on food but he buys jeans at Rs. 4000, shirts at 2000 ,shoes at Rs. 5000 , perfumes at 3000 , LED TV at 50000 and some furniture at 25000 from the mall and he just cannot connect with how real India spends money on even though the data is right infront of his eyes.

These guys’ brains just short circuit and use System 1 (part of type of thinking of brain which uses shortcuts to make things easy) as opposed to System 2 (which is purely rational and calculative) as explained brilliantly by Daniel Kahneman in his amazing book

Infact there would actually be a complete limit on how much Organized Retail can ever grow and capture the total retail expenditure in India (My guess is around from 6-7% today to 18-22% in coming 2 decades and that’s being too positive)

Having written a blog entry on Organized retailing in India which now features on top page of Google search results when anybody searches terms like “Organized Retailing Critical Analysis India” I decided I would now look at a particular company and give a broad overview on why Shopper’s Stop(and you can safely extrapolate to other retail players) may not become what almost everybody thinks even in next decade both for stock investors and for company .

Try this search and you will see my earlier blog which details about Retail Industry as a whole

Most importantly the return expected by investors in the retail companies like Shopper’s Stop , Pantaloons , etc are not going to be something to brag about if bought at current valuations >35 P/E . Nifty, in my opinion will outperform these retail stocks handsomely in next decade just as NIFTY has already outperformed over last 5 years when these retail stocks were going through exponential growth in revenues/stores.

Here is a comparison on Shopper’s Stop, Pantaloons, Trent (Westside) with NIFTY. As you can see you would have been better off closing your eyes to retail stocks and just picking up NIFTY.

Most probably even when I will take chart in 2017 almost similar results would be there.   Retail stocks Return comparison with Nifty .

Having made such a bold, contrary (someone might call stupid) prediction of future of retail stocks of India I have to back it up with some logic. (I would have made same predictions even in 2005-07 because almost 99% of facts presented in analysis below would not differ materially at all from 2005 to 2012 .So it is not just looking in rear view mirror and having a 20/20 hindsight)

Shopper’s Stop
One of the leading Organized Retailing players in India Shopper’s Stop is almost synonymous with India’s organized retail and has a great brand. It has had phenomenal growth in last decade and looks poised to grow to even bigger levels in coming decade.

Shopper’s Stop was started in 1991 and in 2004-05 it got to sales of Rs. 500 Crores and PAT of Rs. 19 Crores.
2010-11 it had close to Rs. 2000 Crores of sales and Rs. 75 Crores of profit.

Here is a brief Snapshot of Shopper’s Stop in last 5 years which will give you an idea of its growth. I have attached the excel sheet which has all the financial data I have collected from various sources whose link is here .

Investors Returns in Shopper’s Stop in last 7 years since IPO-
Let me start by looking into the rear view mirror because it’s a fact and vision is 20/20.

After its IPO the returns got by investors by holding SS till December 31st 2011 would have been this with:
• A 100 rupee invested in Shopper’s Stop for last 7 years would have grown to about 151.
• A 100 rupee invested in NIFTY for last 7 years would have grown to about 230.
• So NIFTY has beaten Shopper’s Stop handsomely over 7 long years.
• Or someone really conservative would have easily beaten returns of Shoppers Stop by putting money in FD with ZERO downside risk.
Madness of Investors and Liquidity Sloshing Around makes investors pay 70+ P/E for Shoppers Stop

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
Average Market Price 459 650 611 283 304 336 260
Average Market Cap Rs. Crore 1577 2233 2131 987 1061 2764 2136
PAT (Rs. Crores) 19 27 26 7 -64 50 75
Price to Earning 83 82 81 142 -17 55 28

Shopper’s Stop Future Returns over Next Decade-Prediction
Now as Yogi Berra said “It’s tough to make predictions, especially about the future” but I would like to stick my neck out and say that in next 5-10 years in between a buy and hold of Shopper’s Stop and Nifty starting 2012 values the second option Nifty will beat Shopper’s Stop handsomely. Maybe a Fixed Deposit (some are giving 9.75% for 5-10 years) and its pre-tax return can almost match what Shopper’s Stop will give to investors in next decade with zero volatility and zero risk of loss of principal. (Inflation, government money printing notwithstanding).
How on earth can somebody make a decade long prediction of such a fast growing company when the 95% of unorganized retail in India is there for the taking?
Below I will mention my analysis for the low returns which people are going to get if they invest in Shopper’s Stop at current valuations (P/E >35) . My analysis is NOT about the revenues/profits/number of stores/great shopping experience/low prices for customers of Shopper’s Stop but it’s about the returns to be expected by investors if he invests in Shopper’s Stop starting Jan-Feb 2012 valuation.
As Warren Buffet has said – “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage”
I would add Howard Marks words to it “For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough.”

You may buy a great company but pay a wrong price. Shopper’s Stop I believe is not at an attractive price with P/E greater than 35 and same goes for Pantaloons or Trent (Westside). It would be a good buy if P/E became close to high single digit which it was during late 2008-and early 2009.
Just have a look at the return on asset (return on capital) and Return on Equity for Shoppers Stop and Pantaloons . They are even lower than a meager than even a 7% return which any tom , dick or harry can get post tax on his Fixed Deposit/Savings account .

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” – Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter

Brilliant interpretation of which are bad businesses and how to not get happy because the EPS has increased sharply without looking at how much capital has been employed to generate that EPS .

“When returns on capital are ordinary an earn by more by putting up more record is no greate managerial achievement .You can get the same result while operating from your rocking chair .Just quadruple the capital you commit to savings account and you will quadruple your earnings… A savings account in which interest was reinvested would achieve the same year-by-year increase in earnings – and at only 8% interest, would quadruple its annual earnings in 18 years” Buffet in annual shareholder letters .
“To sum up there are 3 types of savings account. The great one pays extraordinary high interest rate that will rise as years pass. The good one pays an attractive rates of interest that will be earned on deposits that are added . Finally the gruesome account pays and inadequate rate of interest and requires you to keep adding money at those disappointing returns.”
I am afraid Organized retail in India is the 3rd type of savings account looking at the meager return on the capital employed . It says something about what returns investors can expect in future from these companies which are just low quality and below 6%.
I guess if managerial brilliance is shown in Shoppers stop or Pantaloons based on EPS or profit increase only then sitting in my arm chair and doing Fixed Deposit for next 10 years are 9.5% today (in March 2012) should also entitle me to the same praise heaped on Mr. Biyani and Rahejas .

If anybody wants to do some kind of DCF analysis to persuade himself to buy Shoppers Stop or Pantaloons or Westside with any kind of goodie good assumptions –they are free to do that . But remember you must account for everything keeping in mind the return on total capital of 5% for any retail company and cost of capital can never be 5% . And please don’t even talk about EBIDTA . (Do you think tooth fairy pays for depreciation/capex ??)
I have NOT done DCF because I don’t believe these companies need to be considered for investment by any rational investor who understand a basic thing as mentioned below by

Charlie Munger –
“If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% o¬n capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.” – Charlie Munger at USC Business School in 1994

Organized Retail Industry in India
I have not come across any article which even remotely says that Organized Retail in India will NOT really be that successful as it is generally predicted to be from point of view of investors (they just say there are challenges as if there are some businesses which don’t have challenges). In fact after FDI in multibrand retail has been increased (later pulled back) 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 based on some facts –

  •  India Growing country ( 7-8% + GDP growth)
  •  Has young population and a huge middle class who are earning a lot
  •  Organized retail is just about 5-6%

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 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 in the market and most importantly the investors in Retail Stocks will not have earned high enough risk adjusted returns as compared to just holding the benchmark NIFTY.
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 retail experts/consultants and analyst of brokerage houses from India where all graphs go one way – up. I hope I am proven wrong in coming decade or two.

All of the following explanations are 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 Shoppers Stop, 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 on great infrastructure. 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.
  • If the underlying business does not have high enough return on equity/capital employed then the stock investors over a long period (say a decade) cannot expect to earn returns which are greater than what the business itself can earn on the invested capital.
  •  The 5 year or 10 year projections on excel sheets and ppts by Consultants, Analysts, and MBAs are far away from what happens in real world.
  • Some business can completely change the way people go about doing things but that does not make the business a rewarding one for investors. E.g.: Airlines industry-lesser said the better it is.

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.

In 2008 organized retail constituted around 5% of total retail market. Three years later it probably is around 6.5% 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.

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 .

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) .
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 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 Ben Graham Centre for Value Investing speech in 2007 on you tube 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 of 2008-09 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 the last time was 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 (exceptions being tech and telecom)?
  • 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)??

Here are some of the projections made by listed entities. Read carefully about them as it would clearly show how different reality is from predictions and hope for Reliance Retail, Pantaloons and Trent.

Fancy Predictions Real Reality

Reliance Retail Prediction Vs Reality

Predictions of Pantaloons

Predictions of Trent (West Side)

How Much Cash Investment needed for Organized Retail to Become 20% of total Retail
• The per square feet paid by shopper’s stop will be more or less same for other retailers(if not please give logical reason if anybody in India can really buy land/building/mall cheaper than Rahejas )
• For sake of easy calculation I assume 0 growth in the total retail sales itself .(I know it’s wrong but you can easily add a 10% per annum growth rate for total retail and re-calculate using my logic)
• I assume a linear relationship between sales growth and retail space because people are not going to open Louis Vuitton or Apple stores rather most probably they will open stores selling real apple and vegetables/cereals.

From Con Call 2011 of Shoppers Stop on CapEx per square feet
Govind Shrikhande No, basically this has been constant and if you look at departmental store space and HyperCITY space, one is in the region of 1700 per square feet and the other is in the region of 2000 per square feet overall including working capital.
Amnish Agarwal: And excluding working capital purely CapEx?
Govind Shrikhande: If you look at department store about 1400 and 1500 for Hyper.
Amnish Agarwal: Okay and does it include any spend which you do on the back end or IT.
Govind Shrikhande: It includes all that.

• So you can take 1800 rupees per square feet on an average expense for a retailer including working capital and back end expense.
• Current Total Sq feet available as Organized Retail approximately 75 million sq feet.
• Current organized retail market is approximately 6% of total retail.

So 75 million square feet is approximately equal to 6% of organized retail.

Hence to reach a retail penetration of 20% it would need approximately need another 250 million square feet of retail space.

To put the number 250 mn of extra retail space in perspective India will have to almost triple the number of malls it has currently on offer .

At Rs. 1800 per square feet of capital expenditure for 250 million square feet it India will need approximately Rs. 400 billion or around Rs.40000 Crores or $8 billion investments. Is that easy?

To answer whether Rs.40k crores of investment is easy or tough using a bit of logic we have here is small summary of Total Investments (Equity Debt) i.e. Assets in top 3 largest listed retail companies in India:
• Shoppers Stop – 746 Crores
• Pantaloons – 5000 Crores
• Westside (Trent) – 1356 Crores

Total coming is around Rs. 7000 crore and we can double it for rest of players so a total of Rs. 14000 Crores have been invested in India till date in total organized retail.

So to invest another Rs. 40000 Crores of additional money would mean simply that India will have to almost triple investments what it has done over last decade in retail (and all this investment was when cheap credit was available from US and Europe courtesy of mortgage mess with FIIs falling over each other to invest and Indian banks were not far behind notwithstanding spectacular failures of Vishal Retail , Subhiksha , Kuotons , and even Lilliput now with all those court cases etc ).

It’s anybody’s guess to how many years it’s going to take to triple investments in a business which is not priority sector (hence bankers don’t really love it now) and which has very low return on capital invested.

Here’s my guess to get Rs.40k crore and 20% penetration – another 20 years. You can have yours and be positive.

Investors and Shopper’s Stop

I will start off this analysis by quoting the real Guru (Benjamin Graham) who laid down rules of investment around 80 years ago which are:
“You may take it as an axiom that you cannot profit on Wall Street (or Dalal Street) by continuously doing the obvious or the popular thing.
“What seems to be obvious and simple to the people in Wall Street, as well as to their customers, is not really Obvious and simple at all. You are not going to get good results in security analysis by doing the simple, obvious thing of picking out the companies that apparently have good prospects — whether it be the automobile industry, or the building industry, or any such combination of companies which almost everybody can tell you are going to enjoy good business for a number of years to come. That method is just too simple and too obvious — and the main fact about it is that it does not work well.”
Out of 3-4 main listed entities which are pure play organized retail (Pantaloons, Trent, etc) available for investors – some would pick Shoppers Stop for whatever reason they can justify. Everybody “knows” this:
1. India is going to grow at least 7%+ per annum for next decade.
2. Organized retail is around 6% of total retail which gives a huge opportunity to players to expand.
3. India has one of the youngest populations of world and huge growing middle class with increasing income.
4. Malls are the best place to take a huge share of consumer wallet by providing great shopping experience.
5. Shoppers Stop is one of top 3 retailers in India with strong presence in most big cities and it’s a strong brand as well.
6. 5-10 years from now (2012 to 2020) Shoppers Stop is going to be earning much more than today and hence you can buy its share as management has already shown that it can grow and scale company competitively.
The problem with the above simple argument-conclusion is that what is told above by Ben Graham that it’s too well known, popular, simple, and “logical” that the price of it almost always incorporates years of good future growth with no margin of safety for investors.
As Howard Marks would say “Everybody knows it’s a great investment, so you should buy it” inevitably implies that the price has been bid up really high to an extent that you will earn only meager returns from it. To quote him “Warren Buffett constantly stresses “margin of safety.” In other words, you shouldn’t pay prices so high that they presuppose (and are reliant on) things going right. Instead, prices should be so low that you can profit – or at least avoid loss – even if things go wrong.”
The above 6 point argument is reliant upon too many good things to happen continuously so that a 40 P/E investment in Shoppers Stop could give you higher return than holding a NIFTY at a P/E of 14-18.
Before reading this analysis please keep in mind the following table and always think in terms of where do Indians(and not YOU) actually spend money on whenever you read anything remotely related to great opportunity?
Here is how Indians MPCE is (household monthly per capita expenditure) for 2009-10
Indian Household Monthly Per Capita Expenditure (2009-10)

Items % Expenditure by Indian Household for 2009-10

Items % Expenditure by Indian Household   for 2009-10
cereals 13.56%
gram 0.17%
cereal substitutes 0.07%
pulses & Products 3.39%
milk & products 8.35%
edible oil 3.36%
egg, fish & meat 3.25%
vegetables 5.60%
fruits & nuts 1.76%
sugar 2.12%
salt 2.12%
beverages 5.82%
Food Total 49.55%
pan, tobacco, intoxi 1.89%
fuel & light 9.03%
clothing & bedding 4.84%
footwear 0.97%
misc. goods & services 28.33%
durable goods 5.40%
non-food total 50.45%
total 100.00%

Share of Modern and Traditional Retail

Basic Analysis of Retail Buying and Limits of its Growth

A lot of my analysis will try to compare India with US/UK where retail is almost completely organized and almost everybody in India keeps on giving examples of how Walmart or Tesco or Sainsbury are the way Pantaloons, Shoppers Stop will shape up. I know it’s not a apple to apple comparison but I am doing it so that it clarifies how completely different the perception begins to appear when you stop extrapolating performance of Shoppers Stop with a developed countries’ retail chain.

How do people buy what Shoppers Stop sells? Let’s start with 1st step.
People living in Homes
This is the most important part of Organized Retail often ignored almost completely which limits the amount of growth any organized player can hope to achieve in India .
Average Size of a House in USA, UK, India & Per Square Feet per person comparison
For retail in India to flourish there has to be a comparison made between type and size of houses in India, US and UK because that is where people will store what they buy.

There is almost no comparison for the per square feet space in house per person between US, UK and India at all.

This is a huge factor in determining the success of organized retail/Shoppers Stop because for India 50% expenditure occurs on food and if Indians can’t store 1 week or 2 week worth of food items in their house they will buy very less amount of it if they go to Retail outlets.

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

People in US/UK load up a week or two of food 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) is double compared to US(2.59) /UK(2.21)

No matter how much supply chain is improved by Shoppers Stop for food there just isn’t enough space in Indian homes to stock up 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 because there just isn’t enough space to store it in homes .

This directly implies that lot of food and almost all of grocery will be bought only when needed from the nearby (within 1-2 kms) kirana shops and NOT from 10 km- one hour drive to malls.

The top spending youngest of the crowds do not live in their own homes
A lof the recent 10lakhs per year of really high disposable income people in IT and BPO just out of college(and with 1-3 years job experience) live in PG(paying guest though it’s not what people normally thinks so) , a concept which would be unthinkable for US . Here you have 1 Almirah/wardrobe per person and 1 fridge to be shared by 4-6 people. Mind you these are the most likely customers you can expect to visit malls, shop and splurge. Even if they don’t live in PG 3-5 of them share 1-2 BHK home with 1 refrigerator and 1 wardrobe per person(some times a suitcase does the job) . And go ask a bachelor girl living in a PG how she dreams of two big shoe racks where she can put her 45th pair of shoes but just cant because the Flat or PG is not big enough .
Unfortunately they have a huge limit on what they are going to buy particularly clothes because you have just 1 Almirah. Indians do not like to throw their clothes away or sell them back. Have you ever taken a 1-2 year cloth and thrown or exchanged?
And of course all these young bachelors eat tiffin or use services of baai (maids) and do NOT go to Organized Retail to shop for Grocery or food at all. Even if they have to they will just go and buy from Kirana . And these are the most precious targets of Organized Retail .How many bachelors under 27 line up at Hypercity on Saturday weekend to buy a week of grocery, cereals,milk,juice, etc??
And if they want to buy booze there is always the nearby kirana booze shop with grills in front like a jail selling the most premium liquor wrapped up in newspaper and put in black/brown non-transparent polythene and takes less than 3 min in total to buy and by 4/5 min it would be gulped down . Compare that to at least a 25 min line at billing counter at Hypercity (the drive/travel to that being the biggest pain) on Saturday evening to buy booze. By that time other guy will actually have been done with his beer.
So you have a peculiar double whammy that Organized Retail which wants to target the young people with cash to spend sells low margin (loss making may be) food items which the bachelors don’t buy at all . And boy India is a really young country and average age is like below 30 . And the bachelors with money in pocket do not have enough place to store clothes, shoes , etc .
Hence again this is a very important factor which most people completely ignore because people writing the reports are most probably rich enough to not live in PG or are married.

Size of Fridge India
I could not get any official document on average/median size of fridge/refrigerators in India but I am sure it will be like 75-80% households have ONE Refrigerator at 165-180 Litres.
But if you see the average size of Refrigerator in US is approximately 500 Litres which is like 2.5 times that of India. On top of that size of household in US is 2.6 vs almost 5 for India. And I have not even considered the population equation of almost 90%+ households having Refrigerators in US vs less than 7 crore people in India having Refrigerator even in next decade . I am just talking about even if Indians have Refrigerators still Shoppers Stop will not be as successful as thought out to be in food sales which are 50% of total retail spend .

Per Person Fridge/Refrigerator Volume in litres
US 192
India 38

With this kind of per person volume available for Indians the dream of selling high priced(high margin) frozen contents , meat/fish , milk products or booze or whatever item that requires fridge just goes out of the window.

Money with the People
I will not go into much detail with this as there are way too many obvious data points which show Indians are going to be earning much more in the near future than last decade.
Ignore the nearby Local/Mom-n-Pop/Kirana Shops in favor of Shoppers Stop

Advantage of Kirana/Mom-n-Pop Stores over Organized Retail/Shoppers Stop:

In US and other developed countries almost every store which is selling anything needs to have AC , electricity for 12 hours at least , comply with regulations like fire safety , labour laws , taxes (you cannot evade as easily ) , maintain overheads like receipts ,CCTVs, credit card machines etc and of course pay a minimum wage rate of around $10 per hour (boy that’s like Rs. 80000 per month in India) even . Hence the small US kirana store is actually a very high cost operation vis-à-vis a Walmarts.
The Kiranas have following advantages over the Organized Retailers and Shoppers Stop:

  •  Most Kiranas and Vegetable Sellers Don’t pay taxes and never will because either their income is less than minimum taxable income 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 with almost 200 million households but less than 40 million pay taxes.)Don’t tell me if income tax officials will go after kiranas .
  • 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. Even if a lot shift to canned food the refrigerators are not large enough to hold even 1 week of supply for family of 5.
  • There is such a huge market for out of home small snacks ( aloo paratha, pani puri, vada pav, idli , dosa , rajma chawal , sandwich, etc) and majority of them exist right on the road . They will keep doing business even for next 100 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 or for even 1 hour (if they do not have fridge).
  • Most do not need to pay rent (opportunity cost is really nothing as they could not have just rented out a 10-10 feet room and got gobbles of money)
  • No need for receipt machines or printers.
  • No CCTVs.
  • No labour laws to adhere to.
  • No Credit/Debit Card Machines hence save on 1-3% of what VISA and MasterCard get from Shoppers Stop.
  • No need to adhere to various laws like fire safety, multiplicity of taxes and compliance, accounting, etc .
  • No Need to hire MBAs, consultants, pay some directors lakhs of rupees for doing nothing and sitting in meeting, etc .
  • No need to buy even a single computer or pay for internet.
  • Easy home delivery.
  • Proximity to customers.
  •  High margin liquor business is almost completely dominated by kirana due to above benefits of quick service and availability.
  • 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. (E.g.- 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 depending on what he sells OR just sit at his stall one day and you will see it right in front of you when policeman will come and take money) This directly implies Kirana/Vegetable sellers will always (even in next 100 years) will be close to where people live and hence beat the Organized retailers on lot of above points of ease , convenience and cost of operation.

Basic Disadvantage/Advantage of Any retail remains same for Organized or Kiranas
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 efficiency boils 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%?? (India is the second highest producer of fruits and vegetables in the world, but only has cold-storage capacity for 10 per cent of the total production).

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 , Reliance Retail, etc . If it hasn’t been beneficial for last 10 years since Shopper’s Stop and Pantaloons started their exponential growth(and taking globs of money from investors and ever willing banks) 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. Capital is not limitation but it’s the return on capital which is the limitation for corporates which makes sure no one will open cold storage . Does anybody seriously think that Reliance or Bharti Airtel or Pantaloons have no money to invest in cold storage or big warehouses and they need generosity of Walmart or Tesco to give money to them so that they can open cold storage chain?

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. 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(But planning commission surely solves lots of problems of power on paper!!) .

Roads– The pathetic condition of Indian roads means the big Volvos and Trucks of Wal-Mart which zip around on great roads of US cannot do the same in India- you have to use small tempos which go at 20-30 kmph in Indian traffic. And of course Shopper’s Stop/Wal-Mart cannot build roads, bridges, train tracks and flyovers.

Even if I assume that magically the above 3 points somehow are taken care and improved then it will be beneficial in almost same degree to the Kirana as is to Shoppers Stop. The truck which carries goods(fresh or preserved from Cold Storage built by government) for Shoppers Stop on great roads/flyovers will not say –Well you are Kirana I will not come to you but I will go to the Shoppers Stop which is just behind you. Either the truck will have goods for e.g. HUL beauty products or freeze dried fresh fruits for both Shoppers Stop and Kiranas or 10 kiranas will have 1 truck to bring them the goods.

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 –though this doesn’t directly guarantee success but at least you have some brilliant young minds working on solving problems). Even then, ITC which is arguably the best agri sourcer in India decided to exit fresh food retail business .When ITC leaves a business completely where it already has real know how it should ring a bell to competitors waiting to come in that biz.
People travel to Retail Shop/Shoppers Stop or Buy Online
After deciding they have to buy something from Shoppers Stop the big question arises: You have to either travel to the mall/Hypercity or buy online and get products delivered at your home.
Keep in mind monthly per capita expenditure for Indian household implies almost 55+% to food and around than 5%-8% for apparels.

Going to Mall
Here are the problems faced by almost everybody when deciding to go to a Mall
• Except Mumbai NO City in India has auto which ply honestly with meter. Auto Rickshaws will
o Not be found near to your house
o Plainly refuse to go
o Charge something like Rs. 40 for every 2-5 kms when actual should be less than 20.
o If it’s raining you might as well pray to God to get an auto.
o Even if you get an auto a family of 5 (avg family size is 4.7) cannot sit in 1 auto and     bring stuff from Shoppers Stop.
o Most importantly- this pathetic Situation of Autowallahs will continue indefinitely in future though someone reading this can sit in your chauffeur driven car and be optimistic that situation will improve in future.
• I do not know anybody who takes Meru Cabs, call taxis for going to buy grocery/food to a Mall because the cost will be just too expensive compared to saving you may get.
• Public transport using buses, shared auto is nothing short of pathetic and every single Indian would like to avoid it given an option and public transport just cannot be improved, EVER to an extent people start using it for buying grocery from Shoppers Stop.
• Traffic situation cannot even be described in words in top 10 cities in Indian (Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai,NCR, Pune, Chandigarh and Kochi) cities which have 85% of organized retail space . Even next 10-20 years the traffic is NOT going to improve at ALL .In fact traffic is going to worsen and I can bet my life on it unless Apple can do something to change the way we travel – Magically!!! .
• People can and do use bikes to go to organized retail to buy stuff but then they can never buy enough groceries which they can comfortably with their family and safely load on a bike and come back home .
o Also almost whole India has harsh summer (temp north of 35 degrees) and harsh       winter (temperature close to 5-13 degrees and for Indians it is harsh) and of course rains . All these directly dissuade people from travelling on bike to go to a Organized retail outlet for at least 4-5 months in a year when they would rather just walk to closest Kirana store even if it means less choice of goods and less discounts.
If you have a car then you have to drive through the pathetic traffic, park in congested parking spot, pay exorbitant parking fees and then buy stuff. If anyone wants to base his growth of Shoppers Stop on increased car sales in India please read below.

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 and Electronics only and completely ignore the consumer’s wallet ).

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 (compound interest example and infact I have ignored the population growth completely) about growth needed by car industry in India to reach the car ownership level of UK (I believe India will NEVER have a car penetration level of USA):


CAGR in Cars
























SIAM has forecasted an 3%-5 % growth rate in automobiles in India this year. 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.(I cannot imagine the road condition during that time) By the way Indian population will also be growing on base of 1.2 billion by >1% per annum .

With 30% (+/- 5% depending on whom you talk to ) of Indians living below $1 in abject poverty and another 20% just living above poverty line I am optimistic but will not want to invest in Shoppers Stop basing my assumption on this remarkably rosy prediction of future .
Buying Online
Instead of going to store Shoppers Stop people can buy stuff online and get them delivered to their homes. It’s a great concept and it’s remarkably successful in US with Amazon being the leader and customers the winner.
But Here is a problem with online buying in India w.r.t. Shoppers Stop:
• 60% sales of Shoppers Stop are Apparels and people like to try and then buy and this behavior is not going to change no matter what you do.
• Furniture , Shoes , Handbags , Watches , etc almost all things which Shoppers Stop sells(counted under non-apparels) are items which people buy only when they see it , feel it , try it if possible and then buy it . It’s not going to change.
• Only stuff which Shoppers Stop can sell successfully in large quantity is Books , CD/DVD and Electronics.


If anybody really believes that there exists a viable business proposition for CD/DVD sales in India then he ought to think again.
SOPA/PIPA notwithstanding Indians do not buy CD/DVD for music or movies in a quantity which would cover the cost of having high rent Crossword financially a rewarding experience. Music is going to be pirated no matter what anyone on the planet does. It’s too simple, easy and free to download songs from internet.
Movie DVDs just are not going to sell enough but pirated/shared via Bit Torrent or DVD rental companies(BigFlix and Seventymm are good and have good collections) will be preferable over buying a DVD outright. I mean does anyone really think that a reasonable number of Indians will walk up and buy a Rs. 300 priced DVD of films from Crossword instead of just downloading or renting it out from BigFlix or Seventymm or better yet walk on street and buy a pirated one at Rs. 30-50? (Best of luck for people who think DVD piracy will stop someday –this does not mean I condone it) Just as a sidenote – Apple is now shipping its Macbook Air without DVD drive and of course as of now a lot of people will say its stupid and you have got to give but wait for next 2-4 years and check out how many laptops are going to come with DVD drives .
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, teddies, home furnishing items, accessories, knickknacks – the only thing which retailers seem to be selling and making some money(or closed completely).

Books Retailing Online and Shoppers Stop Failure
What to say about Book retailing online.
See the comment on management sometime in mid- 2008 (AR – 2008)
“The Company is also actively progressing towards setting up an e-commerce portal to be able to offer
Its products for sale through the internet. “
Finally they did launch.
“Your company launched its online shopping site in July 2008. Currently the site also offers books from Crossword in addition to Shopper’s Stop merchandise and has a country wide delivery foot print.” Note the word also as if it isn’t really a side business rather than THE business .

See comments of Westside on Landmark (AR 07-08 July 2008) :

“It is the “small-box” book retailing formats that get most impacted by the challenge posed by internet offerings. The “larger box” book retailers, offering a substantial number of titles in a store for browsing at leisure and the proposition of a coupled coffee shop in many cases, tend to be far less impacted by the online retailing of books. The play out in developed markets like the United States is consistent with the above view.”

Are you kidding me ? With Amazon starting 10 years earlier(1997-98) and brick and mortar retailers completely decimated even till July 2008 the management still thought in 2008 that having some coffee shops in Landmark and more books to browse will actually make sure they are not affected by online retailing of books . I mean they (Westside and Landmark and Shoppers Stop) had all the money in the world , access to capital markets which was awash with liquidity(till 2008 at least) and they could have made sure that they can build a real e-commerce behemoth the way Flipkart with 2 guys below 28 years were doing from one room almost at that point of time in 2008 .

I mean Landmark/Westside is somehow related to Tatas and they have a company called TCS which even in 2008 would have had at least 1 lakh employees. Similarly the whole of BPO and IT boom with young guys and girls remain on internet for 8+ hours a day. And even then managements just could not think that may be these guys will buy lot of books at click of mouse but still they may want to pay by cash on delivery and would want a great NOW service where no excuses can be made for late delivery. So lets go aggressively online and target these customers. Its just so simple and apparent to me .

The management just could not think that online retailing of books can be made viable, profitable and initiative which can be loved by customers. They just thought that may be if they could get another big 20000+ sq feet of swanky (read prohibitively expensive) real estate at a prime location they would be able to sell a lot of books. Or better yet get people in for lure of books and sell them some gift items (read high margin).

There has been plethora of crap online retailers in India through last decade like Rediff , Indiatimes , etc which seem to have been in existence for 10 years minimum . But only one as of now has really stood up and that is Flipkart.

Here is a company started in late 2008 with literally no money by two guys from their home below age 29 and have now a valuation almost twice that of Shoppers Stop (market values change and indeed I feel online retailing a bubble but that’s a different story) but just thinking about it makes me wonder what was Shoppers Stop thinking. .

I think there are just 3 things to be really successful in Online retailing of books in India
• Promise to sell what you have (don’t say after user orders that it’s gone out of stock or it will be late).
• Indians do not like to pay online with slow internet, crappy user interface, no trust and hence retailers should offer cash on delivery.
• Deliver the product on time to customer’s address and then take money so have a courier system which you can really depend on and not something like a crap local courier (whose name itself rhymes with some politician and makes you forget how cash on delivery can be trusted with those courier guys).

That’s it!

And Shoppers Stop or Landmark or Pantaloons or Reliance Retail just could not do anything about improving online book retailing at all. Flipkart blew right past Shoppers Stop when the whole market was there for the taking. Shoppers Stop and others had tons of managers, money, senior leadership, access to capital markets , consultants and maybe even some investment bankers but just could not deliver a great customer experience when they had to sell books online .

Now people go to Shoppers Stop(Crossword) or Landmark browse books , come back home , order on Flipkart and get the books to their home by saving at least 25% than buying in the shop .

Even today a search for one of my Favorite Books Chanakya’s Chant(prices are almost same at around 135)
• Crossword – Delivery days is 3-5 business days
• Flipkart – 2-3 business days
• Rediff – First page it shows price 197 and 7 business days delivery and then when you click its unavailable. Great!!
• Landmark – 3 business days with Cash on Delivery (Good unfortunately price of same book in mall is Rs. 195.Anybody who comes to know about this will never buy from Landmark mall)

For cash on Delivery Shoppers Stop charges Rs. 30 extra irrespective of how much you bought but Flipkart for orders over Rs 200 shipping is free.

This just is unacceptable and it goes show that even after investing more than Rs. 30 crore in physical format of Crossword in 2005 Shoppers Stop can not match neither the delivery dates nor the delivery price of a start up.

Funny things will happen in future just as Amazon is doing for customers in US where people go to Best Buy , Walmart or any physical retailer , scan/enter barcodes and check prices directly from Amazon , buy online and get it delivered to home . (With Amazon already in India Shoppers Stop Crossword is really at Cross Road !!) .

Experience the product or read the book a bit at Crossword and order from Flipkart is going to be the future sooner than later.

I can easily see in next 2-5 years Shoppers Stop closing/selling off Crossword (don’t know how or why anyone would buy it unless they want to change what they sell there).

Same closing of Landmark is also going to be sooner than later. If someone thinks that these brick and mortar book retailers can adapt and may be offer coffee to customers and beat online book retailing and become competitive look at this in US:
Borders Group Inc second-largest U.S. bookstore chain with 339 stores and more than 10000 employees filed for bankruptcy last year.

Amazon started to gain ground in early 2000-01 and the Borders Group would have obviously seen it right in front of their eyes the growth of Amazon but they just could not do anything about it even when they had 10 whole years to do something about it.

This is exactly what is going to happen in India as well.

With Flipkart and scores of other online retailers(and the Big Daddy Amazon already in) ready to bleed themselves while selling books by directly putting them in the homes of customers Crossword/Landmark book stores is bound to go down and close sooner than later .

Now of course Crossword itself can and indeed is doing what Flipkart/online retailers are doing i.e. online shopping and selling of books . But still the fact remains that it’s a terrible business where you have book stores and e-retail of same books at same time and of course you cannot price same at bookstore and online because then you would not cover up the atrocious rent you pay for a Crossword/Landmark book store.

Don’t you think why Amazon has ZERO physical presence has a logic to it?

Electronics Sales Online

As of now I didn’t find Shoppers Stop selling electronic items online. Here is a snippet from their con call :

Shopper’s stop 2011 May Concall on electronics business “The unfortunate thing that obviously is that we get good top line sales from it just that why cannot as we earn a lot of margin on it. So you are right to say that it is an area that we are not necessarily looking to grow. And as I say that it will reduce as a percentage of sales going forward.”
I am not sure they can ever start and pursue a plan whereby they can sell enough quantity of electronics goods online.

Anybody who wants to know how to sell electronics online look no further than 3 year old Flipkart vs a 20+ year old Shoppers Stop.

Every guy who is buying from Flipkart etc is a sale lost for Landmark and Crossword.
These things happen all the time in business where an upstart just blows past a heavyweight completely and they just cannot do anything. Ask Sears Roebuck ( how Sam Walton of Walmart started and beat the hell out Sears right in front of their eyes and Sears just could not do anything .

It seems Shoppers Stop management spends most of the time in doing what they know best to do – Real Estate. Spend time negotiating, getting clearances, talking to mall developers, talking/lobbying with government and politicians for some land dealings and all things somehow related to Real Estate.

For online mega push – They just do not get it. (As Steve Jobs said — Tablets Are Not PCs and Our Competitors Just Don’t Get It)Ask iPad’s competitors now that iPad 3 has already launched and you don’t even have 1st tablet from Microsoft after almost 2 years of 1st iPad introduction.The company microsoft which put a product PC which did not exist in almost a billion homes just does not get tablet .

Here is a small sales break up of Landmark which should be almost same as Crossword (have not seen break up of Crossword in official documents but I guess it cannot be more different . Infact just remove crossword/landmark from each shop and put a person there and I bet they cannot distinguish whether it’s a Landmark or it’s a crossword).
Details on landmark mix of sales breakup:
Gifts, Toys & Stationery – 27%
Gaming & Technology – 12%
Music- 5%
Books – 27%
Home & Others – 18%

Music , Books and Gaming & Tech are losing proposition and will soon be closed(in their words it will be ‘restructured’).
People Choose the Stuff/Goods they Buy

I have not seen any analysis by anybody which shows what Indians spend on and what Shoppers Stop/organized retailers actually sell . The common rhetoric which I see is Retail Trade in India is almost close to $400 billion (varying amounts so I have just taken a round figure) and organized retailers have around 6-7% market share . Hence there is a huge untapped market which the organized retailers will storm in and make lots of money.
But when average Indian opens its wallet and takes out 100 rupees he spends Rs. 50+ on food and rest Rs. 50 on non-food . So when anyone says that organized retail can jump from 6% to say 20% of retail spending in India there has to be logical sense to it . You cannot capture consumer’s wallet share by just selling them apparels and beauty products only.
Let’s see how Indians spend to understand how drastically limited organized retailers’ real market is. And to what extent there is mismatch with respect to what Indians spend on and what they (organized retailers) actually sell.
Food Expenditure comprises 50% of total spending by Indians
Westside(Trent) puts Food and Grocery expenditure at 60% though I will take 50% but the fact is organized retailers have 1% penetration in the largest category of expenditure by Indians.

Food Items Indian Household Expenditure Break-up in %
Cereals & Pulses 22.09%
Milk & products 10.88%
Vegetables 7.30%
Oil, Egg, Fish ,Meat 8.60%
Fruits & Nuts 2.29%
Sugar & Salt 5.52%
Beverages 7.58%
Foods Total 64.26%

There is a small adjustment to % amounts which Indians spend on food and non-food is done to make it appropriate. The PCFE is collected by NSSO but includes items which is not targeted by Organized Retail viz
• Education
• Transport and communication
• Others
• Fuel & light
• Housing (rent and mortgage)

Hence I had to remove the above items which accounted for almost 24% of the total Personal Consumption Final Expenditure. Hence the actual % of PCFE had to be increased by proportionate values (100/76 * Value) i.e. by around 30% .
So a 16.95% for Cereal and Pulses in original PCFE becomes 22% in my analysis.

Let’s put this fact into perspective in a bit more detailed manner for optimists.
Cereals and Pulses- 22% of total Expenditure
Rice , wheat , barley , corn , etc are the staple diet of India along with various pulses like Tur , Chana , and Masoor . Realistically speaking no matter what Shoppers Stop does it cannot really sell more cereals/pulses to same top 10 cities of India (which have 85% of organized retailers presence) and hope to capture even a meaningful bucket of this huge 16% expenditure profitably enough because local Kirana wala will beat them hands down . On top of that selling these Cereals and Pulses requires NO electricity at all and people do not really want a great ambience to buy Tur Daal or rice. 100 years later also they will not require power but each organized retailers’ shop which is trying to sell these items needs complete power supply. Based on this cost only Kirana will always beat organized retailers.
Of course there can be some brand loyalty created by companies in even pulses (of course in Atta/Flour and Rice we already have quiet a lot of brands in market ) . But then those companies like ITC (Ashirvad) , Kohinoor (Rice) they themselves are working on a razor thin margin(and boy just go into Rice section of Hypercity and there will be more brands there of rice than there are even the number of private insurance companies in India) that till time it reaches the Shoppers Stop it can only use these commodity items to lure customers in the mall and hope them to sell something on which there is enough margins for Shoppers Stop .
There can never be a non-linear growth in this item.EVER. You cannot scale and get good enough margins by selling this absolute commodity and make a decent return on capital EVER.
Does anyone really think organized retailers will open enough shop criss crossing whole of India and sell Rice and Wheat at a cheaper price than your local kirana store?
My Prediction for Cereals and Pulses for organized retailers in Next 2 Decades- Out of 22% of total household expenditure on Cereals and Pulses retailers they may crawl to 3.8% . So 18.2% of consumer’s wallet which goes towards buying cereals/pulses will not be tapped by organized retailers/ Shoppers Stop even till 2030.

Milk and Products – 10.88 % of total Expenditure
Over 85% of milk industry is unorganized which means the local doodh wala is the guy who gives milk everyday to people which they boil and consume on same day or at max one day later. Has anybody bought pouched milk in US/UK which needs to be boiled before consuming?
No one seriously thinks that organize retailers can do what Mr. Kurien has done for Amul over last decades. Its astonishing supply chain efficiency at most places where even electricity is not available for many hours on end is unbelievable.
Consider this — More than 13 million milk producers pour their milk in 1,28,799 dairy cooperative societies across the country. Almost 12 million litres of their milk is processed in 176 District Co-operative Unions and marketed by 22 State Marketing Federations, ensuring a better life for millions.
If someone really wants to tear his head apart in trying to make money in milk and milk products market then he is welcome to come and compete with Amul , the grand Daddy of Milk in India .
Following is and will be a reality for at least 2 decades to come:
• More than 95% of Indians will keep on preferring to buy pouched/fresh milk delivered to them every morning which they will boil and consume same day.
• Only the richest of rich actually go and buy the Nestle/Amul Tetra Pack(Pre boiled ready to consume) milk which are priced at twice the pouched milk . On top of that you cannot buy more than 5 to 10 litres of them because you don’t have that big house to keep them.
• Even the tetra pack sellers sell at a razor thin margin which will continue to be true in foreseeable future because they are competing with the Amul/Mother Dairy/Mahananda pouched milk which are just mind bogglingly cheap and at a margin almost unsustainable by any private player forever.
• No matter how much butter/cheese (so called high margin/value product) an organized retailer decides to sell it will never be material to them at all.
Bottom line is when Amul has to operate on a margin at around 4%-5% or even less good luck to Shoppers Stop/ organized retailers.
My prediction for Milk and Products for organized retailers for next 2 decades – They will not capture more than 1.3% of the market. So Shoppers Stop/ organized retailers will not be able to tap more than 9.58% of consumer’s wallet which goes towards buying Milk and Products.

Vegetables – 7.3%
Please read what benefits Kirana has over organized retailers here . On top of all these factors how will you beat the vegetable vendor who comes on a cycle or a push cart right at your doorstep where you can choose and buy and that too on credit? ( I bet even MBA’s from IIMs hired by organized retailers cannot answer this ) .
Vegetable selling is again a very low margin business as all organized retailers know and have explained in their con call and Annual Reports. Infact they are again kept so that people come there and maybe get attracted by that teddy and Vase kept at entrance and buy that (as some one said Loss Leaders. Only problem is the whole food unbranded business seems like loss leaders).

Of course you cannot deliver Vegetables by internet because the quality issue will crop up always even in next 100 years unless teleportation becomes reality.
My prediction for Vegetable for organized retailers for next 2 decades – organized retailers/ Shoppers Stop may capture 0.7% of vegetable market. So they will lose 6.5% of consumer’s wallet.

Sugar and Salt – 5.52%
I don’t even want to explain that no magic can be done by retailers/ Shoppers Stop EVER while retailing sugar and salt which are another razor thin margin business. It’s a thankless business and you cannot make enough money at all unless you are Tata Salt or HUL (Annapurna) and both have really small margin on selling salt. Of course you cannot force the high income earning people from top 5-10 cities of India to consume more salt, or sell a Lou Vuitton salt to rich people ,can you?
Sugar might be sweet but you cannot charge a premium because it’s completely brand proof. I cannot imagine a situation where any company comes up with a great sugar in a way that people start to rush to organized retailers to buy them (which the organized retailers are able to sell at a good enough margins) EVER. And then if someone tries this it will turn sour for him. And you cannot force rich people to consume more sugar and infact it would be completely opposite where most rich people have to avoid sugar(and of course India is the diabetes capital of world).If someone is betting on selling sugar free you must acknowledge that all kirana walas have that as well.
My prediction for Sugar and Salt for organized retailers for next 2 decades- Negligible market will be captured by organized retailers. So Shoppers Stop/ organized retailers will lose 5.34% of consumer’s wallet.

Beverages – 7.5%
I am not sure what this category was assumed to consist because there is separate category for pan/tobacco/intoxicants where I assume liquor comes in. Milk is other category which is separate. So this should consist of fruit juice and cold drinks, tea and coffee.
First Indians do prefer fresh fruit juice though a lot of them are shifting to package fruit juice industry which I feel is eating up the local roadside fruit juice seller and he is in pressure .
It is I believe a good enough margin business whereby organized retailers can and do make significant money.
Regarding cold drinks it’s a two company market in whole world. And both of them can bargain really hard with organized retailers and they have tremendous distribution network in whole country .Organized retailers just cannot force consumers to drink some premium coke/Pepsi priced at a high margin item. Coke and Pepsi are kings and Organized Retailers dare not negotiate with them. It was a nice try that Pantaloons is selling some Tasty Treat Cola in their Food Bazaar but the result is known by everybody of what happens if someone competes with Coke/Pepsi on this planet at least .
Tea and coffee just cannot be privately branded and sold by any of Shoppers Stop/ organized retailers because if they could they should really start a business and compete with Nestle/Bru(HUL) or Tata tea,etc . Does this competition sound exciting or threatening? But yes these can have high margins and organized retailers can sell some to real connoisseurs and make meager amount of money.
My prediction for Beverages for organized retailers for next 2 decades: Because of margin and brands I believe this is where organized retailers will capture more market than any other section of food . My guess 2.6% of consumer’s wallet which is spent on beverages can be captured by 2030. They lose 4.98% .
Egg, fish & meat and edible oil – 8.6%

Eggs – The cheapest way on the planet to sell eggs is via kirana stores or on the road in a push cart. Period. People who buy eggs cannot be expected to load up on eggs and buy something like 2-3 dozen at once for a week of consumption from organized retailers because they do not have enough safe places in home to store it .

How can organized retailers/ Shoppers Stop ever sell eggs without packing it in at least 6/12 packets ? And if they have to pack it and sell how can they ever sell eggs at a cost cheaper than roadside vendor who sells eggs without packing? Can you ever have a branded egg for which you can charge a premium (you know the way Shoppers Stop says high margin items)? A lot of people actually consume eggs right there on the road either as omelets, boiled or sandwich – will these customers buy eggs from organized retailers?
If the answer to above questions is no everybody should stop thinking that Shoppers Stop/ organized retailers will always be an even a miniscule component of egg market .Forever!

Fish – Here is an item which in our area is sold on the road which is the case in whole of India. The area where it is sold is called Fish Market where the complete infrastruture needs are –
• One man/woman with one big basket of fish (with some ice thrown in some cases) (don’t ask what sophisticated supply chain put the fish in that big basket)
• A place to sit (with umbrella doing the job of prevention from weather gods , sometimes not even that)
• Customers
And that’s it . Don’t assume that these Fish Market do not sell high value fishes (pomfret/Salmon) . You just have to go to correct fish market to buy the fish you want. How can the Shoppers Stop/ organized retailers ever compete with this kind of market?
Of course they can have big cold storages and brilliant looking fridges and sell fish with nice clean dressed people. But it’s highly expensive and you to have a really big area/enclosed to make sure the vegetarians do not get offended by the smell of non veg items on sale.Hence they cannot sell fish in all stores unless stores are really big enough to be segregated .
Meat– Same argument as Fish only difference is it is generally sold in a small shop (if you can call those shanties as shops ) where the only expense apart from almost zero rent is a big knife ,a butcher and a bit of water. Indians prefer fresh meat than canned/frozen (read expensive) which they will continue in near future I really feel it’s a lost game trying to sell Meat by Shoppers Stop/ organized retailers.
Edible Oil consists of 3.36% of consumer’s wallet and there is huge limit on how much high margin oil can you possibly sell to the richest people in India. It’s not like apparels that somehow you can sell more even if the person does not need it by giving discounts or by some kind of branding.
Private branding does exist but the already existing brands are just too strong competition (ask anybody how strong Ruchi Soya, Adani Wilmar, Sunflower,Saffola, etc are ) in this field and really speaking I cannot see that organized retailers can ever have such a strong edible oil brand that people will walk into Shoppers Stop and instead of buying Fortune, Sunflower , etc will buy a Hypercity edible oil brand . Again it’s a razor thin margin business. God help you if someone thinks they will sell some high margin olive oil and make money.

My prediction for Fish, Meat, and Eggs for organized retailers for next 2 decades – 0.78% of consumers wallet is optimistic enough . So Shoppers Stop/ organized retailers will lose 7.82% of wallet.

Fruits and Nuts – 2.29 % .
Fruits – Read about Vegetables and apply directly same logic for fruits. Nuts I guess too small to even consider it .
My prediction for Fruits and Nuts for organized retailers for next 2 decades –
I think 0.05% to 0.08% is what it will look like. So Shoppers Stop/ organized retailers will lose 2.23% of consumers wallet.
Summary of Food Market Capturing Possibility
Food Items Indian Household Expenditure Break-up in % % Which CANNOT be captured even till 2025-2030 % Which can be captured till 2025-2030

Food Items Indian Household Expenditure Break-up in % % Which CANNOT be captured even till 2025-2030 % Which can be captured  till 2025-2030
Cereals & Pulses 22.09% 18.24% 3.84%
Milk & products 10.88% 9.58% 1.30%
Vegetables 7.30% 6.51% 0.79%
Oil, Egg, Fish ,Meat 8.60% 7.82% 0.78%
Fruits & Nuts 2.29% 2.23% 0.06%
Sugar & Salt 5.52% 5.34% 0.18%
Beverages 7.58% 4.98% 2.61%
Foods Total 64.26% 54.70% 9.56%

Shoppers Stop low Food Sales as a % of Total Revenues
2011 Oct Concall
“Mark Ashman: If you look at Q2, food was 61% of our sales against 59% last year . “
So overall revenue up to 192 Crores

In 1 Quarter total sales of food was = 60% of 192 Crores = 115 Crores
So for Yearly multiply by 4 = 115*4 = 460 Crores of sales of food .
Total Shopper’s stop sales = 2500 Crores
Food sales = 18% of total sales

Now food constitutes 60+% of spend of Indian households.

For Shopper’s Stop the apparel constitutes 60% of sales while NON-apparel 40%. The above calculation approximates the food component of sales . I do not have break up of how much of that sales is from Branded food products(Nestle, Coke , Britannia ,ITC etc implying tough margins and low negotiation power – Does someone really think Shoppers Stop can negotiate with Britannia or a Nestle ?) and non-branded(like vegetables, fruits , non-branded rice , dal , etc with low single digit to negative margins)

Currently Organized Retailers have around 1% of Food Market. By next decade or two they would be close to 10% of total retail spends. Of course this can be achieved by huge capital expenditure with a maximum pre-tax return of 6-9% only. Again this is a pitiful return whichever way you look at it. Investors in Westside, Shoppers Stop , Pantaloons must remember this when they are getting into investing in these retail companies .

This reminds me of Charlie Munger’s saying: “If the business earns 6% o¬n capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% o¬n capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.” – Charlie Munger at USC Business School in 1994

Non-Food Expenses

Durable goods- 7.03%
Now this seems an easy target for retailers with the Cromas and Ezones and even Hypercity displaying great variety of products which people can experience and hence they seem to have huge upper hand w.r.t. any small shop. But have a look at the comments by the retailers:
Question in 2011 May Concall Shoppers Stop – “In your HyperCITY what are the trends you are seeing, are you also kind of cutting down on the focus on the electronics part of the business, because it is too competitive, the margins are too low, what is your thought process on that?

Mark Ashman :It is a tough category that is for certain. I think we touched on it before it is about 15% of our sales mix at the moment. And we want to grow the home area and we want to grow the apparel area and the categories that I think will see the relative flow would be in the CDIT space. So it is an area that we continually review. We had down size the space we are giving it in that category in our new stores. The unfortunate thing that obviously is that we get good top line sales from it just that why cannot as we earn a lot of margin on it. So you are right to say that it is an area that we are not necessarily looking to grow. And as I say that it will reduce as a percentage of sales going forward.

Pantaloons Feb 2011 Concall
We are looking at monetizing to some extent by dropping down eZone and converting that into more of a digital commerce business rather than a physical store business
On Electronics Category Mr. Biyani’s Thoughts.
“This category is totally dependent on brands and three brands account for 55-60% of the business and so the bargaining power is still with the brands.
I don’t believe we or any other retailer in this category in India has a formula wherein we can increase the margins nor is there any visibility of this. The cost of retailing also doesn’t help as we are in malls and in prime spaces and the product margins are also low. In India, in the electronics business, we have to hold display and store inventory.

Nowhere else in the world does the retailer have to hold display inventory. In addition, the entire supply chain on electronics requires us to have to have warehouses for every store because of the taxation, so the amount of stock which one holds, the amount of business one does and the margins one gets, definitely calls for a relook at the model.
We have seen worldwide that electronics retailers don’t make as much as margins, but they all have gone in for building up scale, lot of their own brands as well as gone into digital commerce as a platform and that’s what we want to follow rather than opening up lot of stores and be dependent on various brands to give us margins.
So the sizing of the store which currently averages around 14,000-15,000 square feet, will be cut down to around 2,000 square feet.”
2000 square feet? Seriously? That’s the size of 3 BHK flat in our locality .
Here is  latest kicker from 2012 on eZone :
“With an aim to focus only on 5 cities, eZone has shut down 11 stores in cities while opening 5 new stores.”
Yes somehow the 5 cities only will help to capture the so called amazing retail opportunity of India as if the rest of Indians in hundreds of other cities just do not buy TV , Fridge , AC , cooler , oven, etc .
I wonder what were they thinking when they launched into this electronics category because following facts were true in 2005-06 as they are today:
• 3-4 brands (mostly Koreans and Japanese) account for 60% + of biz so they have great bargaining powers.
• Organized retailers had Low margin and they don’t know and cannot increase margin .
• Cost of retail space has always been high at prime locations. If you want cheap location come to Jharkhand/Manipur/Andaman Nicobar.
• You have to hold huge inventory.
• Tax laws were same in 2004-05 as they are today that you have to have warehouse for every store.
• It was not like worldwide retailers like Best Buy/Radio Shack/Walmart were making tones of money while selling electronics.
• You always knew you had to depend on brands(electronics) to give you margins .
• Did organized retailers think that you could beat the Samsungs, LGs and Sony’s of world by selling Koryo/Croma or some cheap Chinese make by just putting it in your showroom?

So there you go – the facts have been bared for all retailers who plan to come into the durable goods retailing and it is that you just cannot make money at a margin which justifies the investment and expenses it incurs.
Another crucial thing which they are missing while targeting the top 5-10 cities only is following:
• Durables like Fridge , Washing Machine , AC, Oven , all work for at least 5-10 years and hence consumers don’t buy them every 4 years but rather after 8-10 years .
• Only TV is what some consumers may want to upgrade but that too once you leave your CRT and buy a LCD/LED of say 26 or 32 inch , that’s it ,you are done for next 5 years minimum .

Here is some fact which makes my point clear. The organized retail has just thrown in the towel/tapped out on almost 60% of durable goods market which exists and which they will never capture.
People living in small towns and villages account for 59% of Consumer Durables such as refrigerators and Washing Machine sales. (Source NCAER)
Hence actually the saturation will and probably has occurred quickly in top 5-10 cities and the actual growth lies beyond these cities where the Organized Retailers are just not going. So much to say for capturing consumer’s wallet in whole of India. Just look at the way sales have exploded for durables for top 5 companies of India and how many of Japanese electronics giants are increasing their focus on India but they are just not captured by organized retailers at all.
Mobile phones
They have NEVER been any good enough for any organized retailer to sell because the roadside shops have none of the limitations and high cost structure of organized retailers(like they don’t and will not pay taxes no matter what the govt does , don’t need to hire anyone , can sell Chinese brands , etc ). Just look at any Organized retailer’s mobile phone collection and you would use the word pathetic as a mild one. For Mumbai walk in Alfa at Ville Parle or go to Borivali (Indraprastha) or for Delhi go to Nehru Place and you would know what I am speaking about. I am sure each big and small city in India has that kind of shop.
Courtesy of Flipkart people are now buying mobile phones through online as well.
Indians have bought at least 45 crore plus handsets in last 10 years .(Current telecom report says it has 64 Crores of connections sold of which many may be inactive or be a dual sim hence I am taking 45 Crores as a rough estimate) . How much of the mindboggling number of 45 crore has come from organized retail?
My prediction for Durable Goods for organized retailers for next 2 decades-
With 2 of biggest organized retailers throwing in the towel already and more to follow for sure I guess out of 7.03% of total spend they can capture around 1% of market . So they will lose around to 6% of consumer wallet.

Clothing & bedding and Footwear– 7.56%
Apparels, Apparels, Apparels!!! This name cheers retailers like nothing else. Shoppers Stop gets 60% of its sales from Apparels. And it seems that even in next 20 years the percentage may only go down till 50% max. And the decrease will come not because they started selling more of what Indians spend on proportionately (i.e. food) but because they sell more of beauty or some other rich person product like gift item/teddy bears/home decorative, etc.
I am sure Shoppers Stop / Organized Retailers will keep on saying things to obscure the fact that Indian organized retailing is equal to Clothes and Beauty Products retailing and nothing else.
But yes I am positive on the apparels and footwear business of Organized Retailers and Shoppers Stop as they can and do sell premium items with good margin to rich people . But the biggest reason this cannot be scaled without too much capital is people buy these things after they try and no internet is going to change that in next 2 decades.
My prediction for apparels and footwear organized retailers for next 2 decades –
They can probably capture up to 1.8% out of almost 7.56% available. So they will lose almost 5.7% share of consumer wallet.

2.46% of Expenditure on Tobacco Products can never be tapped by Shoppers Stop
Indians spend almost 2.46% of their income on Pan/Tobacco/Gutkha/Ciggarette etc .Its next to impossible that the roadside Pan/Tobacco wala can ever be displaced or his sales reduced by even meager amount because Shoppers Stop/Walmart has opened a swanky new mall. Organized retailers should just forget about this huge 2.46% of retail spends on tobacco by Indians forever which are a huge source of sales and most importantly margin for foreign retailers around the world.
Even if somehow they start to sell cigarettes in enough quantity how will they ever sell 1 cigarette(the way Indians buy cigarettes is not by packs unlike in whole developed world but piece wise like one or two)?
Miscellaneous Goods & Services – 28.33%

Now this huge value in % terms is not explained in the data by the government in PCFE but I have following approximate break up for this based on the new consumer price inflation values which have been released.

Inflation CPI Weights (%)
Education 3.35
Medical care 5.69
Recreation and amusement 1.43
Transport and communication 7.57
Personal care and  effects 2.92
Household requisites 4.3
Others 1.06

Inflation CPI Weights (%)
Now education obviously should not be covered for Shoppers Stop though in developed countries almost all of text books for students are actually sold by Organized retailers.
Medical care (sales of drugs which is almost exclusively by Organized retailers like Walgreen and Pharmacy section of Walmart etc) is almost wholly dominated in west by Organized Retailers while it’s absolutely zero for Organized Retailers and Shoppers Stop. And even in next 100 years they will not sell medicines in Malls profitably as the nearby mom-n-pop medical stores will always be lower cost structure for selling medicines.And does anyone think that the thousands of Medical Representatives will actually go inside Shoppers Stop and try to sell drugs ??
Recreation and Amusement is also almost negligible component of Shoppers Stop’s revenue and will continue to do so.
Transport and communication should not be counted.
Personal care and effects – 3.8%
Now this excites retailers like nothing else , not even apparels because here they are can cater to the most basic need of people who have their Malthusian needs already fulfilled i.e. looking good . You can have all the amazingly premium products to be sold through this Organized Retailers channel. Here I even think they have pricing and bargaining power as opposed to almost any other category.
I will say almost 30-40% of market can be captured because the top rich people will pay for quality (read high priced) beauty and personal care products. Volume wise they cannot but value wise they will.
My prediction for personal care organized retailers for next 2 decades –
They will capture about 2.63% of the market but still they will lose 1.17% of consumer’s wallet because they cannot be present all over India.

Household requisites – 5.6%
This is a category they are pushing a lot with almost all Organized Retailers having some kind of home sections as they feel they can sell high priced furniture and home items in top 10 cities in India . They do have a good chance here to make a bit of mark because furniture is something which can be priced high and current local furniture walahs are pretty lousy when it comes to service/shopping experience.
But again it’s a very low return business and huge capital expenditure/working capital is going to be tied up since you have to have a big display at prime locations in India (read prohibitively expensive) on to lure customers and make them buy. And once you buy you do not buy furniture for next 10 years minimum.
One thing you just cannot do what a lot of companies do in developed countries is to open a large store outside the city and hope that buyer will come there to buy(and you save on rent). Unfortunately it’s just not going to happen.
My prediction for Household requisites for organized retailers for next 2 decades –
But still I think they can capture almost 20% of the household requisites in coming decade. This would mean they can get around 0.91% of overall customers wallet but still they are going to lose almost 4.6% of consumer’s wallet.
Summary of above predictions:
I believe that in next 2 decades organized retail will grow to capture almost 20% of Indian’s expenditure on retail from the current measly 5-6%. This is completely different from what most have predicted because lot of so called brilliant consultants/advisors predicted a 17% organized retail market share by 2012-2015 which can occur only on ppts and excel sheets.
Just as a side note and exercise for you: — try to analyse the limit of organized retail considering fact that if 30-40% of population is under poverty line (again govt will put less and NGOs will put number high) so they must be excluded from organized retail calculation of target market. But all of them eat something for sure else(and that’s not clothes which they eat) else they would die and organized retailers just don’t sell enough amount of food at all . Think!!!
Organized Retail Industry Market Penetration level in 2025-2030

Overall Summary (Food + Non-Food) Market Penetration in 2025-2030

Overall Summary
Indian Household Expenditure Break-up in % % Which CANNOT be captured even till 2025-2030 % Which can be captured  till 2025-2030
Foods Total 64% 55% 10%
Non Food Total 36% 29% 6%
Total 100% 84% 16%

Overall Summary Food Items Market Penetration in 2025-2030

Food Items Indian Household Expenditure Break-up in % % Which CANNOT be captured even till 2025-2030 % Which can be captured  till 2025-2030
Cereals & Pulses 22.09% 18.24% 3.84%
Milk & products 10.88% 9.58% 1.30%
Vegetables 7.30% 6.51% 0.79%
Oil, Egg, Fish ,Meat 8.60% 7.82% 0.78%
Fruits & Nuts 2.29% 2.23% 0.06%
Sugar & Salt 5.52% 5.34% 0.18%
Beverages 7.58% 4.98% 2.61%
Foods Total 64.26% 54.70% 9.56%

Overall Summary Non-Food Items Market Penetration in 2025-2030

Non Food Items Indian Household Expenditure Break-up in % % Which CANNOT be captured even till 2025-2030 % Which can be captured  till 2025-2030
Pan,Tobacco, Intoxicants 2.46% 2.46% 0.00%
Clothing & Bedding 6.30% 4.56% 1.74%
Footwear 1.26% 1.17% 0.09%
Durable goods 7.03% 6.00% 1.03%
Medical care(CPI) 7.41% 7.41% 0.00%
Recreation (CPI) 1.86% 1.86% 0.00%
Personal care (CPI) 3.80% 1.17% 2.63%
Household Items (CPI) 5.60% 4.69% 0.91%
Non Food Total 35.74% 29.33% 6.41%

Shoppers Stop and Walmart Sales Mix Contrast
Shoppers Stop sales are 60% apparels and 40% non apparels(and around 18% is food) but look at Wal Mart Sales mix.
Wal Mart sales Mix – 2011
Grocery 54%
Entertainment 12%
Hardlines 11%
Health 11%
Apparel 7%
Home 5%
Total 100%

People Buy the Stuff with Cash/Credit/Debit Cards
Anybody betting on great credit card penetration in India in coming decade needs to see following chart and read the analysis below on finding out the limit on credit cards spread in India in next 4 decades to come:

Source:USA –
India: Business Standard

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% in foreseeable future, middle class growing and hence number of credit cards will grow very fast and so on so that Big Organized retail will grow exponentially. Think again.

Limit to Credit Card Penetration in India
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 1-2 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/Reliance Retail 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 purchases.

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 Kiranas don’t get bankrupt(ala US banks).Of course they do not have to pay 1-2% to Visa/Mastercard as well .

Walmarts , Tescos, Bharti Retail , Westside , Star Bazaar 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 math (again my favorite compounding calculation which some how our brain just doesn’t get it):

Basic Calculations for India to achieve Credit Card Penetration rate equal to that of US or UK

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

Ok so debit cards are growing rapidly in India but they are equal to cash and they do not and will not be used for impulse purchases in huge amount. Once you binge and see your bank account deplete at the same time with a timely sms reminder every time you binge that you have now only X amount in your account instead of after 52 days you will understand that proliferation of debit card does not help to that extent the retailers what they assume it to be . Even if debit card was not there people were buying stuff with cash. And one cannot base your business plan and hope for profit on people being able to spend easily with Debit card rather it should be based on good quality product/service at a reasonable price.

People take goods purchased back to their Homes
Read about the “amazing transport infrastructure !!“ .
Read about size of home and why it’s very important because if you have small home with more people living then you cannot buy a lot of food for 1-2 weeks and store.
Read about the size of fridge/refrigerator and why it is a very important factor for buying food.
The Curse of Expansion- Low Return, Zero Free Cash Flow
Really good description why it’s a bad or very low return business.

2011 Concall
“So both the working capital and CapEx; if CapEx goes first before the cash flow starts and typically the problem that we have seen recently is three things we have seen in new malls. You go and fit out and after the fit out, you have to wait for 2 to 3 months. So CapEx is sitting idle. Number two is you take the people and still you are not able to open for 45-60 days, your manpower and operating costs also go there and number three the ramp up of most of the new stores has been on the slower footing than what we saw till about 12 months back. So all three levels the cash generation is now taking 4 to 6 months more than what we expected earlier. So that is where the interest cost and the debt is going up slightly than what we expected earlier .

What happens is if you stop expanding, I can deliver it tomorrow, but the question is you cannot stop expansion because there is a future growth that you have to plan. So at a steady state of growth, I think we have said that the 24 months down the line we should be able to hit an 8 plus EBITDA at total level.”

Read the above statement carefully and grasp it because they have just admitted how bad the business is in terms of cash flow and return on capital.
Expand the above thinking for every retailer present in India because everyone has to keep on expanding. If they don’t then they cannot make excuses (like expansion, inventory sitting idle) for low return business.
Ask a simple question – Since they will keep expanding for next 10 years at least when will the steady state of growth ever reach when there will be free cash flow available to shareholders i.e. after all capex?

2011 Concall
“thirdly it is much more efficient for us to expand more than one store in a particular city rather than PAN-India . “

That is what retail is all about in India. Just keep selling in 8 top cities in India and still hope that somehow you will capture 20% of total retail pie in coming decade. Its such a capital intensive business that it can never earn double digits post tax return (PAT) on invested capital in real life (though it certainly can on spreadsheets).

Charlie Munger on why Heavy Investments in Efficiency in Capital Intensive Business Don’t Reward Company
If anyone is banking on great supply chain efficiency,scale, IT ERP , blah blah to reduce costs for shoppers stop they need to read following comments by Charlie Munger on improving efficiency by more machines/investments .
In all cases, the people who sell the machinery—and, by and large, even the internal bureaucrats urging you to buy the equipment—show you projections with the amount you’ll save at current prices with the new technology. However, they don’t do the second step of the analysis which is to determine how much is going stay home and how much is just going to flow through to the customer. I’ve never seen a single projection incorporating that second step in my life. And I see them all the time. Rather, they always read: “This capital outlay will save you so much money that it will pay for itself in three years.”So you keep buying things that will pay for themselves in three years. And after 20 years of doing it, somehow you’ve earned a return of only about 4% per annum. That’s the textile business.
And it isn’t that the machines weren’t better. It’s just that the savings didn’t go to you. The cost reductions came through all right. But the benefit of the cost reductions didn’t go to the guy who bought the equipment. It’s such a simple idea. It’s so basic. And yet it’s so often forgotten.
That’s such an obvious concept—that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.

Read the above again and keep that in mind when someone brags about scale , IT , efficiency , new technology etc for a capital intensive business particularly for retailers .
Shoppers Stop/Organized Retailers on Inflation – Funny Read
It’s generally accepted (and it’s almost truth) that if inflation is pretty high (>10% whichever way you measure for last year) consumers are going to spend less and postpone their purchases. But the Organized Retailers initially behaved like Ostriches as if burying themselves in sand will save them. Here are some fun comments made on inflation which they have had to swallow:

Pantaloons comments on Inflation-“it will increase trading density”.
Pantaloons Feb 2011 con call
Mr. Biyani – “But ultimately it is the customer who has to accept to pay higher prices.So inflation is something which will increase our trading density and our realization per square foot in the long-term. The consumers will have to adjust and the whole country will recalibrate itself to pay higher prices, “
Yes customers will surely recalibrate to pay higher price and make sure your realization per square foot increases. In analysis you don’t even assume that may be there is a remote possibility that customers will buy less and you will be left with high priced inventory and then in the end you have to bring your price down by 30%-50% , advance and increase the sale period and PRAY .

Pantaloons Feb 2012 after seeing the results

Mr. Biyani – “The festive season this year was particularly disappointing resulting in lower same store sales growth. The same store sales growth for the quarter in lifestyle retail stood at 5.27%, for the value retail at 3.18%and -3.18% in home retail business. Owing to the weak sentiments, customers across formats seem to have postponed their purchase decisions. “

It was not weak sentiments because do customers buy clothes and personal care products depending on Sensex values or whether Greece defaults or what is Debt/GDP of USA?

No they see what price they have to pay for what they are getting. If it does not match customers do not recalibrate. It’s the retailers who have to recalibrate and boy they did as below.

Pantaloons 2012 – “Keeping this view, the company prepared itself early for the promotions season in January”.
(Organized Retailers had to bring in upto 50% sales almost 1-2 month earlier and mark down goods by even higher amounts)

But they were right on one account inflation did increase the trading density as Pantaloons almost doubled their sales from Rs. 5339 Crores to Rs. 11012 Crores .
Alas !!! Their profits for half year ending 31/12/2011 vs 31/12/2010 halved from Rs. 189 cr to 90 cr.
Shoppers Stop comments on Inflation-“Magins and Inflation has no relationship on us”
2011 con call
“Govind Shrikhande :Inflation and margins frankly have no relationship with us.” (I am Loving it !!!!)
July 2011 Concall
Govind “As far the customer readjusting to the price point I would say by Q3 they would have got adjusted to this prices and apparel and non-apparel we are still not seeing any concern there so that will continue and Q3 is again a big number in terms of non-apparel as well so I see it customer getting used to it by the end of Q2 and Q3.”

What exactly is meant by adjusted? That people will start buying same quantity at higher prices?

I thought this was the standard thing taught even to B-School guys in 1st year MBA that if inflation is high your sales may become high but bottom-line will take a hit(if you are a guy who cannot increase price and still sell) , big hit if your 60% sales are apparels and apparel inflation was almost 18+% .

Shoppers Stop Feb 2012 Concall .
“But fundamentally everyone has to focus on one fact that consumers shop because they want and they don’t shop because of discount.”
Do you believe that ? Do you ? Really ?? Why do they shop most when there is discount and less when there is no discount?
“Now whatever various things that you see and hear on every day, it is working on the sentimentality. Our expectation is that the consumer sentiments will improve dramatically in the second half of next year number one. Number two, yes they will also be aided by the prices. So apparel prices, our expectation is they should either be flat or drop between 5 to 8% in the coming year.”

Do people really postpone shirt buying because Greece is going to Default or Debt to GDP of USA has grown above 100% or may be Italy’s Bond yields have risen or Nifty has gone from 5800 to 4800 ? What exactly do you mean by sentimentality which you easily blame for bad performance?

After increase of 18% in apparels (whereby a 1000 rupee shirt became almost 1200 ) do you think that a flat or maybe a 5% (or a Rs. 60 drop in shirt price will make shopper’s jump of joy and buy a lot ? Then why has everybody started sale early and lot deeper? They should have just reduced all prices by 5% and bingo all problems should have been solved.

But here they face reality:
For 9 months ended 31st Dec 2012 vs last year 9 months sales increased by almost 50% but profits halved from Rs. 35 cr to 18 cr..
“Customer entry overall was up by 6%, but as I mentioned earlier that there is a drop in like-to like level at 11%. This is clearly signaling the consumer’s idea of postponing certain purchases especially clothing and which is the category that can be postponed and that is the reflection that you see in the customer entry.”
“as I mentioned earlier, the apparel has taken a hit because of the apparel price increases”

“overall our belief is that Q4 will be better than Q3 — “
How on earth can that be ?
Shoppers Stop remarkable turning around of how Q4 will be better than Q3
Early in 2011 con call Shoppers Stop insists that Q3 is always the best season in all quarters(and its common sense as well).
Govind Shrikhande :“Abhishek in Q3 our retail business is always the biggest quarter because it combines Puja, Dusshera, Diwali, Christmas and the New Year, so you just cannot compare Q3 with any of the quarter. If you take Q3 across over a year you will always find Q3 as the biggest. Q3 actually represents the best of the sentiments and so not really comparable, if you ask me.

Amnish Agarawal: No but I am looking at say like-to-like volume growth of 15%.

Govind Shrikhande: When the season of buying is on, you will have the occasion to buy which is Diwali, Christmas, New Year so it is not a comparable to Q4 which always is dominated especially if you look at March with exams fever all around.”

Q3 has and always been the best quarter for every retailer. Period.

But in Feb 2012 Concall when the reality set in they said
“Our current expectation is in Q1, we should see softening of apparel prices, may be flat to -5% depending on the category and that should help volumes in apparel to come back and overall our belief is that Q4 will be better than Q3,…”

How or why should Q4 be better than Q3 ?? When you earlier said that there is always something like exam fever in Q4 . Have exams been postponed or the Festivals of Q3 just did not come ?
I have an answer – since they have pre-poned the yearend sales and marked down the prices they will sell more(don’t ask about margins).

Also from April to May IPL is again going to be there . So once again they will say IPL did contribute a bit for low performance.

Some Fun commentary from Annual Reports

2006-07 Annual Report

Misleading view on Depreciation
Company projects as if increasing depreciation is really nothing and even gives figures of Net Profit excluding the additional depreciation. Read below what happened next year .
“ It may be noted here, that in keeping with your Company’s prudent and conservative accounting standards , the useful life of certain classes of assets have been re-estimated , resulting in the depreciation charge for the year being higher by Rs.101 million. Had it not been for this additional charge, the Net Profit would have been Rs. 363 million, effectively a growth of 34%.”
Here are comments by Warren Buffet on companies showing as if depreciation is not an expense.
“Trumpeting EBITDA (earnings before interest, taxes, depreciation and amortization) is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?

Berkshire -2000 annual report — References to EBITDA make us shudder does management think the tooth fairy pays for capital expenditures? “

Projections in Annual Report
FICCI report said — The organised retail sector is likely to increase its share from the current 4% to over 20% by 2010, as the overall retail sector grows from $328 billion to $430 billion .

(I mean does anybody even care to know a bit of basic maths and logic ? Because a growth from 4% to 20% when the base itself is growing would mean a CAGR of at least 100% per annum for 6 years. )

Here are comments by Buffett when he finds high growth projections in annual report of any company

“Finally, be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don’t advance smoothly (except, of course, in the offering books of investment bankers). Charlie and I not only don’t know today what our businesses will earn next year – we don’t even know what they will earn next quarter.”

SS- “In its constant attempt to deliver “Nothing but the Best” to its customers your Company needs to renovate its older stores. These renovations have a substantial impact on cash flows. Renovated stores also go through a gestation cycle before they ramp up to original performance levels. “

There will always be some kind of renovations going to happen for next ‘N’ number of years and is there any analyst who is taking that in considerations.

Market price of shares in 2006 .
(The price rose even more from 600 to 777 rupees while earnings were same. This means instead of “just” paying 74 times earnings people were ready to pay almost 100 times its earnings. Now that’s exciting stuff. A 100 P/E for a capital intensive business)
2007-08 Annual Report

“Depreciation increased from 25.6 cr to 39.3 cr an increase of almost 55% . “

If someone thought that it was a one off thing in 2006-07 they would have been terribly mistaken. The management had said because it was prudent accounting that depreciation had increased which as if seemed it one was off and not really a charge.

The management actually said in 2006-07 as if had it not been like their choice of putting higher non-cash depreciation the profit growth last year i.e. 2006-07 would have been around 34% as if they are very prudent.
But the reality sets in quickly enough within one year.

Here is some “modest growth projections”

“In the backdrop of low penetration, favourable demographics, steady economic growth, easy availability of credit, and large scale real estate developments, the modern retail sector is poised to grow robustly at a 42% CAGR over FY07-11, to reach a size of USD 70 bn; its share in total retail is likely to improve from 4.1% currently to 15% by FY11.”

2012 it is now and organized retail is actually around 6% only. 15% would probably be reached in 15 years .

“The top eight cities like Mumbai, Chennai, Delhi, Kolkata, Pune, Ahmedabad, Hyderabad, and Bengaluru account for a large part of the modern retail in the country and are expected to contribute almost 85-90% to the total modern retail, going forward. “

Indeed that is true and that is the exact reason that a 20% organized retail penetration will be realized only after 15 years from now.

“In the next 4-5 years, the country will have over 1,000 hypermarkets and 3,000 supermarkets”
Really ?? The most optimistic projection I have ever seen in my life .

“This explains why savings and investments constituted only 4% of the Indian consumer’s wallet in 2003, down from 14% in 1999. “

Not sure about this metric. I thought Indians saved around 35%. (
It seems a classic case of misleading where by some metric of some report Shoppers Stop says Indians save only 4% of what they get in their wallet. Frankly I am waiting for that day when Indians spend 96% of their salaries and save 4% , its almost laughable.

“The world average hovers around 9%. From a mere 3.2 mn in 2000, the number of credit cards has grown to 22.6 mn in 2007.”

Of course the credit cards grew fast but have a look at what happened. Number of Credit Card Holders in India in last 5 years –

“Real estate costs for the Indian modern retailers are 8-20% of sales compared with 3-4% for retailers in other countries. “

Directly implies that profitability will NEVER be like other countries. Does anyone think it’s going to improve or conversely prime real estate prices are going to go down?? The reason for absurdly high real estate is simple – there are very less number of high earning people in India and they are so much concentrated in top 10 cities that even in next 20 years the affordable real estate is not going to be possible. And of course politicians and black money people will ensure that price of real estate does not go down. (If anybody has bought a house who is reading this will know about black money in real estate transactions)
“If the expansion in the past has been fast-paced, the future has much more in store. Players have set out plans to invest close to USD 25 bn over the next four years. “

Common sense must be used when values like this are bandied around $25 billion. I mean $25 billion? Am I crazy ?

“The store run by Hypercity has shown very impressive performance in the year gone by .

This was in 07-08 and HyperCITY is still around 2 years away from PAT ie PAT will be positive for Hypercity by around 2014-15 according to management.

Annual Report 2008-09

“Also, modern retail, which accounts for almost 5 percent of the market, is expected to grow at a CAGR of 40 percent from US$ 20 billion in 2007 to US$ 107 billion by 2013 .”

Even after slowdown had started they predict 40% CAGR .

“A report by Images Retail estimates the number of operational malls to grow more than two-fold, to cross 412, with 205 million square feet by 2010, and a further 715 malls to be added by 2015, with major retail developments even in tier-II and tier-III cities in India..”

Here is a fact
“Shopping Malls in India to Grow By an Unbelievable 50%, from 190 Now to 280 in 2011: CBRE “ Will there be another 400 malls in next 3 years to reach 700+ malls ?? (Hint : use common sense )

Now at the end of 2009 India had 52 mn sq ft of mall space. ( — Knight Frank)

So for Images Retail prediction to come true so that 205 million sq ft to be ready by 2010 India had to build 3 times retail malls than it had built in its entire history .

Here is a bit of reality check — Only 6 mn sq ft of retail mall space added in India in H1 2011 (

Trick Question – If in 6 months India adds 6 mn sq ft how many years will it take to reach around 150 mn sq ft . ? (There you have the answer . – approximately 12 years )

“A lot of experts opine that the speed at which modern retail in India was expected to grow was overestimated”
(Finally some sense prevails)

“According to the Investment Commission of India, the overall retail market is expected to grow from US$ 262 billion to about US$ 1065 billion by 2016, with modern retail at US$ 165 billion (approximately 15.5 percent of total retail sales). “

There they go again saying modern retail will be 15% of total sales by 2016 . I say it will be that by 2026 .

(What people don’t realize while projecting is that even though whole retail sales will indeed grow still organized retail will NOT grow that much because organized retail is almost equal to Apparel and fashion retail in India concentrated in top 8-10 cities only . Indians will keep on spending on food which constitutes almost 55% of retail and it will keep on increasing but organized retail companies just cannot hope to get a big pie of this as margins are so razor thin that it’s almost impossible to sell profitably enough.)

“According to new market research report by RNCOS titled, “Booming Retail Sector in India”, modern retail market in India is expected to reach US$ 50 billion by 2011 “

Its 2012 now is it $50 billion?I mean total sales by software and BPO industry which sells in dollars is around $50-$60 billion .

“Modern retailing of mobile handset and accessories is expected to reach close to US$ 990 million by 2010.” (Did anyone buy mobile phone from Shoppers Stop?Where do you buy your mobile phones from?  )

Annual Report 2009-10

“A study has pointed out that organised retail penetration, which was expected to touch 16% by 2012 from the current 5 %, is likely to reach only around 10.4%”.
Finally some sense but still toooo optimistic as reality has borne out .

“As per study by Business Monitor International Ltd., Modern retail sales will reach US$99.09 bn by 2014, 13.1% of the total retail sales in the country.”
They Shoppers Stop just keeps picking up predictions by some agency which no one ever cares to check their previous projections against reality and put that in Annual Report . When will they ever NOT put a projection based on some study by some consultants/MBAs . ? I am waiting …………….!!!!!
“Inventory holding period is higher at 105 days during the current fiscal against 92 days last year due to opening of four new stores during the year.”

Since they have decided that they will open around 5-8 stores every year for next 10 years so this situation will be true every year in near future and they will have an excuse for high inventory holding period .
Annual Report 2010-11

Shoppers Stop had predicted of 39 stores by 2007-08 but they reached that target in 2010-11 only . Late by just 4 years.
“Modern retail true potential to be $260 billion by 2020 at around 21% of retail “. (huh enough !!!)

But here is some truth and reality and precursor to future on high rentals:
“Rentals continue to be highest expense for retailers and are 4 to 5 times than that of their western counterparts .”

Because India is not US or UK since it has grown in less than 10-15 cities only with people of high disposable income concentrated there. The rest are crap.

Nagesh May 11 Concall
On margins in cosmetics
“ Similarly on the other hand if you look at our non-apparel growth, non-apparel is currently is the highest tax category in India with import duties ranging between 45 to 55%. In cosmetics it is about 100%. We believe in the next three years’ time these duties will fall to normalize level so a 55% can fall to 25%, 100% can fall to 50%. That actually gives us tremendous opportunity for us in terms of margin game.”
But the prices and taxes will go down for every single retailer. Don’t you think the other guys can cut you on price? What makes people think that imported cosmetics will not become cheaper at Westside/Pantaloons/Lifestyle compared to SS ?Or why will people keep paying high price for cosmetics which a lot of times nowadays is also available at medical and big kirana stores increasingly . ?
In May 2012 Concall on High Interest Charges

“We are also seeing an increase in finance charges with the new store openings the fill and the working capital is taking the interest higher and that is how the PAT is down from 27.9 Crores last year to 19.2 Crores, down by 31% and as a percentage from 5.4 to 3.4.”

This is always going to be the case as your business is such that if you don’t invest capital you can’t grow proportionately because the return on capital is very small . There is no hope in future that finance charges are going to go down unless the new store openings are stopped or somehow Shopper’s Stop becomes Amazon(I won’t bet on 2nd option).

“but if you look at historically over the last 4-year, 5-year period our average selling price has gone up only between 3-5%. This year has been an aberration because of the apparel price increases.”

Again there is huge problem in this statement that average selling price has gone up only by 3-5% which on a 1000 rupee shirt would come to 30-50 rupees.
Does anyone believe that a shirt which was bought in 2007 of any reputed brand which cost 1000 in 2007 is costing around 1030 in 2012 ?

Also saying this year was aberration would mean the following conclusion –
A good branded shirt which is costing around Rs. 1600 this year will start to cost say around 1500 or something in next couple of years ?? Are you depending on softening of apparel prices to make money for yourself? Are you seriously saying there will be deflation in apparel prices ?A deflation kind of situation or a huge real income growth of India?

“For Hypercity One is I would say the revenue structure share would still be coming big from metros. I would say my guess currently is between 75 to 78% would come from the big metros.”

This directly implies that Organized retail will never catch up aggressively in smaller cities.

Howard Marks of Oaktree who is one of my role models has said :
The bottom line is that what “everyone knows” isn’t at all helpful in investing. What everyone knows is bound to already be reflected in the price, meaning a buyer is paying for whatever it is that everyone thinks they know.

Mark Twain:
It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
The problem which no one seems to even identify with all these feel good retail projections is that it is inherently a low return business. I did not see a single document anywhere which even remotely questioned the projections of 12-15% market capture by organized retail by 2012-2015. Not a single doc mentions that it’s a low return on capital business. Not one document which questions how good companies have been in allocating the capital and managing it efficiently.
Nobody even questioned what should be compounded growth rate required by organized retail to jump from 5% in 2008 to almost 15% in 2012-15 and consequently the approximate amount of retail space and money to be pumped in this business.
No one questions the simple fact that if Indian retail spend is almost 55% on food and organized retail sells 55% of clothes (rest mostly being fashion accessories , beauty products and miniscule food ) then how can you hope to capture a bigger pie (since apparels spend by Indians is just about 9%) .
If for last decade when there was phenomenal growth in retail and still the Return on Invested Capital (PAT/Funds) is miniscule to range around 6-8% for every listed retailer then how come we can expect a rosy picture. Isn’t a 8% ROIC pathetic when even inflation is close to 6-7% over last decade? Why should there be any meaningful increase in the returns in future?
And if not then how can I as an investor hope to earn or beat NIFTY/SENSEX by investing in Pantaloons , Shoppers Stop , Trent since I cannot earn more than what the business earns on invested capital over a reasonably long time frame and that too starting from a P/E of 35+?
Any investor must question assumptions/projections, use simple mathematical examples and above all think logically to decide to buy any stock.
20 years from 2012 when I will read the same blog entry I hope my prediction about organized retail being close to 15-20% of retail sales come true. If it exceeds I am happy but I won’t bet my hard earned money on a business which earns single digit returns on invested capital and is available at 35+ P/E ratio with almost no margin of safety.
Amit Kumar
March 2012
P.S. The best format and hope for these Organized Retailers should be to NOT open shops in mall but get into opening kirana stores across India at minimum price and fuss . Then only you can make enough sales and money.

Published by amitkumarblog

Will update later !!!!!!

23 thoughts on “Shoppers Stop Analysis – Investors in for a Low Return over long term– Guaranteed !!

    Aditya Birla Retail closes 50 organized retail stores across India and cuts jobs.
    Pantaloons closing lot of ezone stores across India - Biyani on ezone’s future – So some of the sizing of the store which currently averages around 14,000-15,000 square feet, will be cut down to around 2,000 square feet.”

    Well here is what great organized retail future looks like which will capture 20% of consumer’s wallet by 2016 🙂 .People who are looking at a bright future to Indian organized retail .. GOOD LUCK .

  2. Really nice analysis connecting the dots of autos, IIM recruitments, e-commerce challenges, examples of Borders etc and Howard Marks(also my favourite). A pleasure to read such well argued and unconventional thinking.

  3. I beg to differ because:

    To much of data complicate thing..this article is more of self advertisement of the author who have read few article…published one of them in b school along with his batch mates and happened to be searched by other MBA students looking for short cut rather than…..any thing more….this article goes round and round giving data which I find useless……size of fridge to growth of organized retail…shopper stop….too much assumptions….come on man have a life….its more of a article of frustrated man….who is challenging the intellect of the best minds in business why because he has read few books of warren buffe value investing…..I felt asleep reading this article…India is growing in tier 2 and tier 3 cities where organized retail is just…opening it shops…..

    P.S please be precise and to the point rather than confusing yourself with too much of data…and believe what you see…go to a shopper stop shop in weekends…to believe me…tell me how many cloths you buy these days from unorganized shops and from where did you brought your T.V….??


  4. Finally I got a comment opposing my views . I love it .
    Here is the first thing I am pasting directly from my blog :
    “Below I will mention my analysis for the low returns which people are going to get if they invest in Shopper’s Stop at current valuations (P/E >35) . My analysis is NOT about the revenues/profits/number of stores/great shopping experience/low prices for customers of Shopper’s Stop but it’s about the returns to be expected by investors if he invests in Shopper’s Stop starting Jan-Feb 2012 valuation.

    Don’t be dazzled by clothes for gods sake and use your common sense and look at the numbers .
    Because you would surely been dazzled by Kingfisher Airlines . I mean even I would have used my common sense and thought Hey Kingfisher is great but sadly what is so clear to common sense is NOT the reality . The emperor is Naked .
    It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain
    humans use a variety of heuristics – mental shortcuts, essentially – to make judgments and you must avoid them while investing else other guys will eat you up baked , fried or raw .

    I will answer you point by point but lets just start with COLD FACTS .
    Here are 5-6 Facts of Organized Retail and “tremendous growth” which has happened quite recently .
    Fact 1: Your Comment– India is growing in tier 2 and tier 3 cities where organized retail is just…opening it shops…..
    Aditya Birla Retail closed 50 organized retail stores across India , exited completely from Mumbai and cut lots of jobs .
    Oh they closed 50 stores , hmmmm lemme think did they ?? After all Birlas could have used “common sense” and instead should have been opening 50 new stores to expand into wonderful opportunity of retail isn’t it ? And holy cow did they just exit completely from Mumbai which has maximum rich people concentrated within small area out of whole India ?? hmmm . Pls don’t say Birlas , THE Birlas don’t have money or don’t have bankers lined up to give them money .
    Mr. Biyani on his Ezone business
    “With an aim to focus only on 5 cities, eZone has shut down 11 stores in cities while opening 5 new stores.”
    In 2011 Here is SS comments on expansion plans of Hypercity:
    “For Hypercity one is I would say the revenue structure share would still be coming big from metros. I would say my guess currently is between 75 to 78% would come from the big metros.”

    Fact 2
    The poster child of India’s organized retail Pantaloons sells the retail chain to Aditya Birla.
    I thought retail chain is a CORE business of Pantaloon and they are the guys who started it . Why are they selling if organized retail has such a good potential in India man?? Think. They could use their “common sense” and make BIG money in organized retail no?? Why sell??
    If you answer that it was to reduce debt guess what just sell the whole business and you will be debt free. Wonderful no??
    You can ask why is Birla buying it ?? Guess what PalmOS was bought by HP , Air Deccan was bought by Kingfisher , and I can go on and on but we can talk 4 years from now how much money AB made .Remember there is something called as a lose-lose deal and most M&A deals are just that .

    Fact 3 : Your Comment– from where did you bought your T.V — aiiya did and past tense dont go together –it should have been -did you buy your TV
    Pantaloons closing most of Ezone stores across India.
    Kishore Biyani on Electronics sales
    “I don’t believe we or any other retailer in this category in India has a formula wherein we can increase the margins nor is there any visibility of this. The cost of retailing also doesn’t help as we are in malls and in prime spaces and the product margins are also low. In India, in the electronics business, we have to hold display and store inventory.
    Nowhere else in the world does the retailer have to hold display inventory. In addition, the entire supply chain on electronics requires us to have to have warehouses for every store because of the taxation, so the amount of stock which one holds, the amount of business one does and the margins one gets, definitely calls for a relook at the model.
    We have seen worldwide that electronics retailers don’t make as much as margins, but they all have gone in for building up scale, lot of their own brands as well as gone into digital commerce as a platform and that’s what we want to follow rather than opening up lot of stores and be dependent on various brands to give us margins.
    So the sizing of the store which currently averages around 14,000-15,000 square feet, will be cut down to around 2,000 square feet.”

    2000 square feet? Seriously? That’s the size of 3 BHK flat in our locality .

    Here is latest from 2012 on eZone :
    “With an aim to focus only on 5 cities, eZone has shut down 11 stores in cities while opening 5 new stores.”
    Tier 2 and Tier 3 cities hahahahha .
    Here is SS on electronics retail
    Shopper’s stop 2011 May Concall on electronics business “The unfortunate thing that obviously is that we get good top line sales from it just that why cannot as we earn a lot of margin on it. So you are right to say that it is an area that we are not necessarily looking to grow. And as I say that it will reduce as a percentage of sales going forward.”
    SS in may 2012 concall
    Govind Shrikhande of SS: Which are brown good, basically mixers, stoves all that. We don’t sell refrigerators television which are very low margin products.

    Rahul –There you have it coming straight from the best brain in business of where I Bought my TV from and where I would buy it from and importantly who is going to be making money even if I do buy from Croma??(I am sure you have heard of some “small” electronics companies like Samsung , Sony ,  )
    Common sense says people keep buying TVs from organized retailer but point is not that . Point is who is going to make money? Retailer or Samsung? Think instead of just using common sense because Howard Marks has put it:
    “In the investing world, everything that’s intuitively obvious is questionable and everything that’s important is counter-intuitive.”

    Fact 4 : Your Comment “go to a shopper stop shop in weekends…to believe me…tell me how many cloths you buy these days from unorganized shops “

    Its absolutely correct. I have stopped buying from unorganized shops and SS is crowded on weekends and helluva crowded during sale time. Here is the problem which I put in 1st para of my blog:
    • Indians on an average spend close to 60% of their expenditure on FOOD.
    • Organized Retail have just 1% or even less share of FOOD sales in India.
    • Indians spend around 10%-11% only on clothes, beauty products and footwear.
    • Almost 80%-90% of sales of Shoppers Stop or Pantaloons or Trent (Westside) are clothes , beauty , accessories and footwear products and less than 10%-15% comes from food sales and that too comes from great brands of food (Nestle-Maggi , Cold Drinks , Biscuits ,Milk products ,etc which are razor thin margin business)or commodities(rice,sugar,etc)and vegetables which are again almost zero margin products.

    Pardon me for using data but you must read it again and again and then use YOUR COMMON SENSE.
    What percentage of your salary do you spend on clothes?? (Mind you – believe me you are the top 1% population of India as are the people who go to shopper stop to buy clothes. Don’t be surprised YOU ARE.)
    And what percentage is spent on food by lower middle class and poor people (defined as per day Rs.28 by our govt and come to about 30 crore + of people . Yea 30 crore people live below Rs. 28 per day and that should not be a news to you)
    Yes that’s correct out of Rs.100 as income almost 60% goes towards food for most people of India spend on and just 5% on clothes.
    You still don’t believe it isn’t it ? Pls search somewhere else go here:

    Click to access Press%20Release%20KI-HCE-66th_8july11.pdf

    This is the report by govt of India HOUSEHOLD CONSUMER EXPENDITURE IN INDIA, for last 20 years and clothing spend is less than 5% of expenditure by a household???
    So my dear Rahul you get dazzled and impressed by clothes and beauty products being sold by SS on weekend and think that it is the future. Unfortunately you used your common sense and not use the second level thinking which is what Daniel Kahneman in his amazing book . (I have read more books than just some value investing books lolz)
    Just for fun here is a small simple problem , try and answer n see why you make a mistake : These are the kind of mistakes you must avoid if you are in investing field else you will be butchered by Buffets and Soros of the world.

    You tell me how can SS or Pantaloon target just 5% of expenditure of Indian consumer (on clothes) and hope to capture a large part of consumer wallet? Even if by some magic they captured all clothing expense still it would be just 5% of expenditure isn’t it?

    —size of fridge to growth of organized retail
    Well what can I say here more than just ask you to please try to connect the dots and if possible do some grocery shopping yourself rather than always eating prepared meals  .
    Here is Walmart on how much sales it gets from Grocery:

    Click to access Morgan%20Stanley%20Simon%20%20Transcript.pdf

    Its 55% – i.e. 55% of sales of Walmart comes from GROCERY and consumables even though US Citizens Spend less than 6% of their expenditure on food (
    But Walmart’s sales of apparels is just 7% ( and US consumers spend around 4% of their income on apparels (check 2nd page)
    OK here is a short summary of above as you have mentioned I use too much of wasteful DATA and to Simplify read and a trick question for you – Do you see something unusual that Organized Retail should actually be called Organized Apparel Retail which only targets 5% of total spend of Indians ?? If not then I cannot help you.

    % Spend on Food by Indian Citizens 60%
    %Sales From Food by ShoppersStop 16%

    %Spend on Clothes by Indian Citizens 5%
    %Sales From Clothes by ShoppersStop 60%

    % Spend on Food by US Citizens 6%
    %Sales From Food by WalMart 55%

    %Spend on Clothes by US Citizens 4%
    %Sales From Clothes by WalMart 7%

    As you can see Indian retailers are just jumping up and down in the clothes section which is meager component of sales but WalMart on the other hand has almost same amount of sales of clothes as the US citizens spend on clothes but it has much more sales on food than US citizens spend on Food . Exactly opposite is here in India . You must be able to imagine the limits which this % puts on growth of retail in India.

    So here is how you connect dots of Fridge size with organized Retail growth potential and why WalMart is so big in US and SS can never become as big as WalMart even proportionately –
    • Why is Walmart so big in US and gets 55% of revenue from Food and Grocery sales ? Because US people can buy food stuffs and store it in their fridge which incidentally is triple the size of fridges used in India .
    o You must understand that people drive to WalMart in cars pack up for 2 weeks of grocery , bring it back and put in fridge . They can do that because of only 1 reason . Size of Fridge .
    o Second reason is that Most developed countries citizens prefer to eat canned food and even canned chapatti and paratha is sold there. Indians on the other hand do NOT prefer canned food but prefer FRESH Food . If you prefer canned food and want to extrapolate to all Indians then I prefer eating lizards and cockroaches.

    • Why is it that Hypercity/SS can never be a place where people will load up on grocery of more than 1 week? Its because you do not have place in fridge to keep the 2 week supply for a average family size of more than 4 (yes India’s avg family size is more than 4) .The only reason you may not appreciate this fact is because you have never tried to buy grocery yourself from Organized Retailer and store for 2 weeks . On a weekend instead of getting dazzled by clothes go to Hypercity and just ask anybody who is buying grocery and they will say at most they are buying for 1 week. And Indians love fresh food where climate (summer and rains) ruins most fresh grocery purchases within 3-4 days if not put in fridge as opposed to many places in most developed countries which have low temperatures for most months in year.

    Fact 5 from where did you brought your T.V err Books from ???
    If you haven’t yet made a purchase from Flipkart or numerous other online retailers then you are probably living in a stone age. Flipkart has almost killed Landmark , and Crossword and wait it will be sooner when both will be sold off .
    Or both will sell more of Clothes (your fav) or teddy bears or some key chains only .

    So you will come back and say well they also have online store . Oh yeah and that is why Your Brilliant Business men(aka the Biyanis n Rahejas) were and are Beaten handsomely by couple of guys from a room in Bangalore who built flipkart which is valued more than shoppers stop today??

    Here is some example for you to ponder:
    Borders Group Inc second-largest U.S. bookstore chain with 339 stores and more than 10000 employees filed for bankruptcy last year.

    Amazon started to gain ground in early 2000-01 and the Borders Group would have obviously seen it right in front of their eyes the growth of Amazon but they just could not do anything about it even when they had 10 whole years to do something about it.

    This is exactly what is going to happen in India as well and wait till Flipkart gains ground in TV selling as well .Other day my friend actually bought TV from Flipkart . Howz dat !!!

    With Flipkart and scores of other online retailers(and the Big Daddy Amazon already in) ready to bleed themselves while selling books by directly putting them in the homes of customers Crossword/Landmark book stores is bound to go down and close sooner than later .

    Fact 6
    2010 – Hypercity will become profitable in FY-2012
    2012 May – Hypercity will become profitable in 30-36 months
    LOLZ ……. haahahahaha… Common Sense!!!!!!

    Mark Ashman of SS: I think on apparel we were closed of the year 7.6 almost of 8% and our aim is to get this through 10% and then on to 12%. That is where we are pushing that area hard. In terms of the other areas that was not a dramatic change. So food was in the quarter 62% in last year was 62%. Home was 10.5% against 10% last year and CDIT fell by 0.5% against last years in Sports Choice they should broadly flat. So really in that last quarter not a big movement and this numbers have broadly the same for the full year picture.

    (After all if they push hard Indians might start EATING clothes  )
    Mark Ashman of Hypercity: So we would expect to see CDIT coming down and we would see food probably being at just below 60% mark and let the other numbers kind of balance out from that. The big movement should come from the apparel, some movement in home, CDIT(electronics and TVs lolz ) should fall back and food should settle at around 59% it is where we would like to see it coming out

    “…..I felt asleep reading this article “

    Brilliant because here is my favorite comment “Most investment decisions which are great are met with yawns “.

    Fact 7:

    After its IPO the returns got by investors by holding SS till June 6th 2011 would have been this with:
    • A 100 rupee invested in Shopper’s Stop for last 7 years would have grown to about 162.
    • A 100 rupee invested in NIFTY for last 7 years would have grown to about 231.
    • So NIFTY has beaten Shopper’s Stop handsomely over 7 long years.
    • Or someone really conservative would have easily beaten returns of Shoppers Stop by putting money in FD with ZERO downside risk.
    Maybe you think market is wrong so here is some other fact of so low return these businesses make on equity employed.

    Average for 10 years
    ROA(return on assets) 5%
    ROE(Pre-Tax) Return on Equity 11%

    Why should investors give money to SS for a 11% return with such huge downside risks when they can get 9.5% pre tax on RISK Free Fixed Deposit ? Business wise SS has made a Grand Total of of Rs. 172 crores of Net profit till date since IPO 7 years ago with an average of around Rs. 19 crore a year . That’s a pathetic result anyway look at particularly considering that they employed on average Rs. 440 crores a year . So 19/440 = 4.3% .

    Do you want to start a business where you invest 100 rupees and the profits which you get is a measly 4-5% ? If yes then best of luck else –you should ideally run away from this kind of business or the only reason you would run this is because you want to dazzle your customers with CLOTHES on a WEEKEND and make pathetic returns from your investment. Go through this to learn why the most important thing in a business is the return on invested capital and if its low then you better not buy the stock. Pls read completely.

    Again read my first para where I say I am not debating on how great shopping experience does SS has or other retailers have created. I am debating that they cannot be a high return from stocks for Investors as proven by history and as would be proven in the future because lots of people make same mistake as you did . Just be enamored by the glitz of SS but not thinking deep and hard because almost 99% people will think just like you without looking at data.
    My suggestion to you would be –Keep shopping at SS(hopefully during sale) and DON’T invest in SS but buy a Mutual fund instead and you will be happy for next 5-10 years.

    1. Mr Amit now am quite sure you have done your MBA from…a tier 2 or 3 mba colleges in India…even tier 1 some of them are useless….they teach u to data mine lots of article without using your common sense….FYI we are group of venture capitalist….did after working for IB for 3 years…..investing in India…and our investments are in green…so I know what I said…perhaps….it was beyond you….people who make money in business as in GOOD b school should know if i invest $5 will I get 6….that what business is…..will suggest you to to an MBA first…from a good B school….btw what you do?

      1. Hahahah ahahah I Just cannot stop laughing .. Seriously man ….. you are just too much man …….!!!!!!!!!!!!!!!
        —So when faced with facts and strong logic that you are WRONG the first sentence you type in reply is “Mr Amit now am quite sure you have done your MBA from…a tier 2 or 3 mba colleges in India” ….
        Seriously dude do you even think before typing these kinda stupid inane words ??
        Cannot you use your common sense and brain to oppose me point by point on why my views are wrong ?

        I mean its unbelievable that your thought process seems just like a politician where when faced with cold real life facts you start personal jabs and insinuations which have absolutely no reason to be when two adults are supposedly debating something as logical as “Should investors invest in SS at current valuation “.

        And using data to support my logic is taught in tier 2 and tier 3 B-Schools ??
        What were you taught in your B-School that when a contrary thought comes up with correct facts and solid logic then you should defend your view by saying —“Man you did your MBA from tier 2/3 B-School ,where they teach you to use data , Hence I my view is right . “

        Unbelivable .
        I was really expecting that for each of the facts I mentioned you would come against each of them point by point and blow my arguments away . Lo Behold – you come up with the most stupidest sentence any MBA or degree holder can ever say – “You come from tier 2/3 B-School “

        Its just pathetic man . Grow up !! Be a Man and get out from the crap shit Student mentality life that my B-School has a higher rank than yours –hence you are stupid and I am brilliant ..PLZZ it will help you in your real life !!!This life is not what degree you paste on your sleeve but how much brain you can use to support your view or oppose someone else’s views by logic , data and opinions .

        Crying like a politician will not help .
        I pity the guys who hired you in IB because of your MBA tag . If your fantastic view on Shoppers Stop were opposed in that IB there also the debates went about like this or what ?? “You are from low B-School . Don’t talk . You are wrong. Go to SS on weekend and see clothes they are selling “ hahhahahah

        And by the who is this “WE” . I thought we(i.e. me and you ) were having this discussion but you just blabbered — “FYI we are group of venture capitalist..Investing in India “
        I mean suddenly you say you are a VC. (God help the people who are handing you the money) .

        You say your investments are in Green. What I am supposed to do about that ?? Is that an achievement you want to show or did you actually make money by investing in companies like SS ??
        If you have the guts show me your complete investment results till date for last 4-5 years and then tell if its green—Have you beaten a FD return pre tax for last 3 years ??? Boss My FD is Green by the way!!!!!!

        Lets just say you are MBA from Harvard , Kellogs , INSEAD , LSE or Wharton or IIM or ISB .
        I give a RAT’S ASS for your degree or for that matter anybody who did MBA from any MBA college including those listed above and boasts that he has MBA degree from bla bla hence he is intelligent than you even though he is speaking horse shit.

        I guess the Lehman , MS,GS, JPM and all other crap financial companies had MBA’s from top colleges and all of them FCKD up with all their degrees,, I repeat all were bankrupt in 2008 . So plz don’t keep shouting over the top about your MBA degree.

        Please use your MBA degree and look around and use COMMON SENSE. MBA Just DOES NOT MATTER .
        For more info just pick up the top 10 Billionaire’s list and point to me who the heck there is MBA . You pathetic thinking guy the pc or mac on which you typed is made either by Gates’ or Jobs’ company both were college drop outs . I guess you would not talk to Bill Gates coz man he did not even complete his engg forget MBA . haaaaaaa ..

        If you have the guts , brain , logic and thinking capability you will answer me by disproving my facts point by point and prove via logical arguments that –
        “Shoppers Stop or for that matter Pantaloons , Trent etc are a good buy as of today (7th June 2012) for next 5-10 years because retail in India is going to grow . And this investment will beat Nifty over the investment period.”
        If you cannot give logical arguments against this and start going in a hyperbole it will show what MBA degree really means for people like you.

  5. Here what happens when a looser like you…from a pathetic college…failure in life…wana be consultant types start blogging…copy pasting facts…events happen in history….try to predicting the that what you called efficient market hypothesis…is that what you learned….where is your fundamental nugghead……FYI we don’t invest in airline especially in India…were jet fuel and airport taxes are sort of liability….and airline loose after having 80% loadfactor…why…because they have high debt..and their Interest ratio….is going out of the window….these ppl have more assets as off balance sheet items and don’t capitalize them…..showing as interest expense rather than debt cost…and there bankruptcy cost increases….simple corporate finance…in high volatile industry never use debt….but they use all over the world…second…especially in India…where there are infrastructure woes……………..airline industry will suffer…kingfisher is just one among many….so predicting it….no big deal…….this is called common sense….not borrowed sense for people like you who move with heard seeing few article…now its clear…your intellect capability and finance knowledge not let me show you…where your facts go wrong…..your first assumption is status co….51% FDI heard that…..yes yes…cann’t happen in India…trillion dollar market untapped because of inefficiency in value chain…..yes…big giants cannot enter as in toto but what happens if they outsource there knowledge….like build some thing like ITC chaupal……heard that….go google son….what happened if there is policy changes…..understand one thing in life whether in physic or in life things move more unstable state to stable state…there is always a change….if you think past will repeat itself then you are good to be doing what are you doing….in working hours writing blog as your manager thinks this best you can do…..its an assumption but I think more or less a correct assumption since working person cannot write such big fairy tales during weekdays…or your jobless…either jobless or useless….anyways…its says a lot about your intellect and future career growth!!……

    1. Rahul Nice to see lots of logical facts so I will point out all the positive facts as well which you mentioned(for a change you talked like an adult with logic and facts) –
      Rahul – “Here what happens when a looser like you…from a pathetic college…failure in life…wana be consultant types start blogging…copy pasting facts”
      Amit – If you are a man you will stop personal attacks else you know what you are !!!!!!!
      Again I knew you would start like this with a personal attack rather than a logical argument to disprove my assertions . Again man … again you are shouting about my pathetic college.
      What it is with you? Grow up yaar and leave this bull shit of college ranks . Shit ..!!!!!!
      I am a failure in life as declared by the great IVY league passout Rahul ??? How on earth you decide that boss ??? hahahha hahahhaha
      Oh man Copy pasting facts? Me copy pasting facts ?? hoohohoho
      In your IVY league college do you generate your own fact or what??? hahahhahah
      I thought facts can only be copied pasted isn’t it? Do you generate facts by saying like “well I am from SO SO college so let me Generate some FACTS “
      What a joke Rahul . You should read again what you typed man and use your common sense dear. You have got absolutely ability to discuss what I typed point by point and oppose each of them .
      You start by saying I am a looser and failure …….whoooooooooooooooooof hehehheheha hahahhahaha
      Amazing man seriously god…help you …. And it shows the kind of level of thinking you have got!

      “wana be consultant types “ hahahhaha hahha
      Here is an excerpt from my blog copied and pasted without editing :
      “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 retail experts/consultants and analyst of brokerage houses from India where all graphs go one way – up. I hope I am proven wrong in coming decade or two.”

      Had I wanted to be consultant types I would have said “Hallelujah here is a trillion Dollar easy money present . Come take it . Put money in SS n Future Group. “
      Have you ever seen a consultant PPT where graphs are going down , with general tone and predictions being negative??
      Have you ever seen a consultant saying do not go into this business as it is a low return low profitability business. ?
      Have you ever seen a consultant warning people that hey maybe there is a bubble in this sector and investors should expect very low return here??

      If not then how on earth you think I want to be consultant types you XYZ. If I wanted to be consultant I would already have been that and made ppts of castles in the air rather putting reality in face of people.

      Rahul “events happen in history….try to predicting the that what you called efficient market hypothesis”
      You have really wrote perfectly here on airline industry in India.

      “FYI we don’t invest in airline especially in India…were jet fuel and airport taxes are sort of liability….and airline loose after having 80% loadfactor…why…because they have high debt..and their Interest ratio….is going out of the window….these ppl have more assets as off balance sheet items and don’t capitalize them…..showing as interest expense rather than debt cost…and there bankruptcy cost increases….simple corporate finance…in high volatile industry never use debt….but they use all over the world…second…especially in India…where there are infrastructure woes……………..airline industry will suffer…kingfisher is just one among many….so predicting it….no big deal.”

      Rahul –“where your facts go wrong…..your first assumption is status co….51% FDI heard that…..yes yes…cann’t happen in India…trillion dollar market untapped because of inefficiency in value chain”
      “what happened if there is policy changes”

      Amit—Yes I am may be wrong on this assumption that there may be status quo for a long time . I have heard of 51% FDI . Well if you really want to base your investments decisions on whether Mamta Bannerjee , Left Parties and the Kings of UP(Yadavs where reliance retail was forced to shut ) will happily agree to a 51% FDI then BEST of LUCK .

      Just Fyi Mamta just now blocked the Pension bill. Go figure when will she allow our great PM to have 51% FDI in retail. Here is my small advice –“Do not base your investment decisions and put your hard earned money on the line assuming that maybe some day politicians will act and allow FDI in Retail. “ (unless of course you are more concerned about fees for manazing size of assets rather than returns more particularly return compared to average returns by market participants)

      Just to refresh you some history for the last 8 years the hullaboo of FDI in retail has been sloshing around so that investors like you buy the story and pay ridiculous P/E like 60+ for these Organized Retail guys.(You have absolutely no clue of how politicians are going to oppose it tooth and nail and neither do I ).

      Seriously you MUST NOT invest based on what great thing the govt can do so that magically SS or Pantaloons become 5000cr mkt cap companies. The first rule of investment is to be conservative and I do not think conservatism means that you HOPE for FDI in retail to pay crazy P/E for a pathetic return on capital business.

      2004- Tribune almost said that FDI in retail is a done deal —- yawwwwwwwn

      2005 — Rediff lists down amazing benefits of FDI in retail (which read by people like you paid P/E of 83 for Shoppers Stop and almost same for Pantaloons.P.S.

      Oh yea and …2005 PAT of SS was 19cr . Last FY ending March 2012 again PAT was 19 cr . OOOPS !!!!!!!!!!!!!!! So much so for the amazing clothes on display in SS .
      Here is 2005 The Hindu article which would puts such sure possibility of Retail FDI that its almost believable to me as well.
      Here is another TOI article —

      See Rahul I absolutely believe FDI in retail is good and should happen and when it happens in the best possible way India will be benefitted immensely along with all organized retail players.
      But that does not mean I will put money at these crazy valuations hoping that FDI will happen. You must be able to see the futility of being positive here.

      Rahul – “like build some thing like ITC chaupal……heard that….go google son….”
      Amit – Absolutely agree that ITC is the best company which comes closest to perfecting the supply chain dynamaics particular to India because India is nothing like any other country in the world . Kudos and Hats off to ITC man seriously the E-Choupal is the best thing to happen to Indian farmers who can cut middle man and sell their products to ITC whereby ITC will make Atta etc and sell to customers with its brand and quality stamped in.

      But you know what e-choupal has been in existence for almost a decade and no-one else has been able to replicate this task till date although these retailers (SS , Future) have been trying in vain to do that again for almost 8 years . Also e-choupal is not what brings veggies and perishable to market it brings only the cereals to the market .

      Just for your info because I am sure you do not know about it ITC has closed its e-choupal Fresh Business(2010).
      “The agri business division of ITC is exiting the fresh food retail business and focusing on procurement for its own group companies.
      The company, which aims to connect farmers to markets, started its own Choupal Fresh Retail stores and had taken on managing the fresh produce section and supply chain for several organized retail chains in 2007.
      The company had earlier tied up with the Future group to manage its fresh produce supply chain at Food Bazaars, jointly deciding the pricing of produce retailed, the range to be offered in each store and the promotions to be run. The arrangements were modeled on the basis of a revenue and profit share between the retailer and ITC.

      At that time, ITC had forecast supplies to such retail chains rising over a period of time to almost half of the sales clocked by its wholesale fresh produce business. Though fresh produce is not a high profitability category, it helps improve overall customer profitability due to increasing the frequency of customer purchases.

      An ambitious plan to set up 140 Choupal Fresh stores across 54 cities has also been canned by ITC. ITC will now focus on procurement for its own internal consumption as determined by its food brands including Ashirvaad Atta and Sunfeast biscuits.”

      Now my father (as you had mentioned I should google son) the great, the best of the best whose cigarette business throws off cash so fast that ITC can gobble up 1 Shoppers Stop every year and still have money for 1 more Shoppers Stop (look at PAT for ITC). Infact ITC paid dividend distribution tax of around 370 crores on average for last 6 years- least being 198 crores .
      This is more than complete PAT made by your lovely Shoppers Stop for last 8 years since its IPO (total PAT is a meagre 172 crores for SS cumulative for last 8 years since its IPO).

      These are the guys the ITC who do it . Keep making money year after year with fantastic management and a return on equity of 40% or more with ZERO Debt and set up a e-choupal business from scratch. Kudos to ITC . For ITC the kind of PAT profits made by Shoppers Stop(20-40 crores) in year are Chump change and you know what 15-20 crores might even be missed by ITC and they will not even bother a second .
      Now That ITC has left a business and you are trying to tell me these lowly bank funded Biyanis who sell their core retail business in one downturn will do what the mighty ITC could not ??.

      ITC is what is a wealth creating company Shoppers Stop , Pantaloons etc is what is called as wealth destructing companies. If you dont believe me ask the guys who stuck with ITC , SS and Pantaloons and tell them whom do you want to CURSE if given a chance . N you will know the answer .

      My dear Rahul this ITC has left a business. The king of agri business supply chain has left a business. The 3rd largest company based on market cap has left a business. The company who does not know what to do with the boat loads of cash coming from cigarettes business has put down the towel in fresh food business. The company ITC which recruits the cream from top B-Schools and sends to remote corners of India and of course pays handsomely has left a business.

      Does that strike you as something? Do you think ITC is stupid or does not have money or drive or management ? Or do you think some company can just walk in India >Use Ctrl+C and Ctrl+V and bingo you have the exact supply chain of ITC ??
      Or do you think these Biyanis and Rahejas can prosper and beat what ITC has left?? If yes …keep dreaming after all being positive is not taxable.

      These organized retail guys went up coz of cheap liquidity and loan and investors like you who paid crazy money on empty hollow promises of something like policy change or wonderful retail opportunity without for once using common sense of how much return on capital can they possibly make. One downturn and Biyani is selling left right and centre . Guys who are the real Men among boys are Infosys,HDFC , TCS , Colgates , ITCs , HULs , Nestles . One downturn and they don’t start selling or panicking and asking for bailout or FDI or some shit.

      Rahul – “understand one thing in life whether in physic or in life things move more unstable state to stable state…there is always a change….if you think past will repeat itself then you are good to be doing what are you doing….”

      Amit – I absolutely agree and the sentences you put are the best ones to have at back of your mind in order to be positive in life and face it head on rather than just lament about past . Hell in past India was under British . lol ..
      But here are some quotes which I always keep in mind which may help you a bit:
      History does not repeat itself, but it often rhymes.
      Those who cannot remember the past are condemned to repeat it.
      And my favorite – This time its different.

      See Rahul I cannot emphasize more to you that Organized retail is a low return low profitability business.Because of this it should be given a very low P/E multiple something which is deserved by businesses which make high single digit returns like 10-13 P/E .

      Unfortunately in the market so many stories keep on circulating about the wonderful rozy pictures precisely to take money from investors into pockets of promoters who promise moon.

      Last 8 years has proven that you cannot even hope to beat FD returns forget about beating NIFTY if you pay 35-40+ P/E for these organized retail companies . It’s a fact.
      Do ever use return on capital or equity as a valuation parameter?? Have you ever seen a industry where for a decade guys had low 10% ROC and suddenly it shot up to 20%?

      Here Charlie Mungers Wisdom from excellent article :
      “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”

      If you say that do not look at history and ignore these fundamental principles of business then I cannot help you sir.
      If you still have not grasped the above simple argument or give me a logical argument that indeed these companies can actually raise the return on capital employed values to say 20% or 30% then please think and use common sense and say that boss “It is not wise to put money in these stocks at current valuation “ .

      Rahul – “in working hours writing blog as your manager thinks this best you can do…..its an assumption but I think more or less a correct assumption since working person cannot write such big fairy tales during weekdays…or your jobless…either jobless or useless….anyways…its says a lot about your intellect and future career growth!!……

      Now here we go a personal comment on me and my manager .
      –write such big fairy tales

      Amit – “Did you just say fairy tales?? hahah ahhahahha I am laughing on the floor man seriously .

      I had put 6 FACTS in last reply. You tell them fairy tales???? hoooooaahahahha a
      Let me tell you fairy tales – great clothes in SS on weekend, TV , FDI in retail coming soon(Mamta notwithstanding ) –Hence invest in SS , My college better than yours hence I am better , You a loser and failure in life without knowing anything about me because u did MBA from tier 2 or 3 where they teach to look at data .

      And You said BIG Fairy tales – hmmm
      So typing 2-3 page of facts how much time does it require Rahul???
      Are you the busiest person in India or Are you in charge of designing the Next iPhone(Johnathan Ive might become jobless) or is your typing speed is like 10 words per minute??
      If answer to any of the above question is NO then there you have the answer to “BIG” fairy tales.
      And yes I am sure 10 years from now when I look back and when I am proven absolutely right about these crap stocks you will agree. And yea I am proud of the work I am doing and if only you had the intellect to judge me on logic and facts you would have a completely different opinion on my future.

      Just FYI why I hate these guys look at what Reliance said yesterday:
      2012- June -Reliance Retail aims to clock Rs 50,000 crore revenue in 3-4 years . Haluaa hai kya yaar . I mean seriously.
      I mean here is another prediction related to Reliance Retail in 2006 (
      “A recent report by CLSA Asia-Pacific Markets, the brokerage, predicted that Reliance Retail could achieve sales of $20bn (£10.5bn) – or 5 per cent of India’s overall retail market – and profits of $1bn within six or seven years(that would have meant by now it should have had profits of $1 bn but unfortunately not even sales are that much). “
      This is what consultants do and guys like you believe in this hyperbole. People like you will fall again for this kind of thing.
      Again anybody can have sales of 50k crore if you give them 1 lakh crore to invest . What should matter is having a high return on the capital employed. If it is not doing that you as an investor is going to get pathetic returns corresponding to the return got by the underlying business.
      Have got another suggestion for you do visit site . There your mind will open to what real thought and finance is and what is meant by independent thinking .

  6. Mr. Kumar!!! Since your blabbering a lot….let see what your point of view are…as I did not find that important…but since you have wrong notion that people graduating from Stanford, Colombia…are equals to graduates from colleges like you…I hope you are a graduate!! Here is your fairy tale…point to point wise…as it should have been presented and where it lack…
    • Facts: – Deductive intelligence knowledge base versus data base…simple definition would have been from Artificial intelligence where data base is car is outside and it raining..database will have no answer as there is no third sentence the car will get wet were as knowledge base or intelligence will match the dots rather looking for third sentence or past to deduce a logic. Get that!! no…then leave it just understand facts are not created or destroyed….its deduced by you according to your knowledge base what I saw in your article was influence of some past success or failed stories and people …dats base..Knowledge base was missing….
    • I don’t know which movie or book you have seen about consultants…..but there no free lunch in business do you think top executives of top notch organizations are dumb head like u?
    • Now FDI retail :- There are two main factors of contention
    o Industry (Retail)
    o Policies
    • Like business industry has a life cycle…Retail as industry is going through turbulence it happens for most of industry before it matures – lot of buying selling consolidation will happen and is happening, it is part of process nugghead!! Not that retail as industry is collapsing; you should know what you are doing at end of the day.
    • Policies: Hmmm I share you one secret if you wana make money then you should have an idea of what market will be 10 years from now rather than past and present….and policies are made by politician…so assumption that your mamta’s and yadav will be in power in 5 years and will take same stance seeing 1 trillion dollar market doesn’t makes sense. In business there is Risk but seeing the return from 1 trillion and growing market sounds exiting!!/
    • Last point when did I had personal comment on your manager if you have confusion let me be clear all my words are were directed on you!!…you deserved that……

  7. @Amit Kumar – Its never easy to ride on a contrarion view.. Its only when the storm hits people go back and search for you and apologize.

    You are hitting them below the belt.. ought to make them groan 😉 .. Enjoy !!

  8. Hey Rahul….I don’t who are you…but my regards….some of them think am impersonating as you kindly ….:)…. BTW nice comments… Respect!!

  9. Mr Banerjee I don’t know who are you??……what happened Amit…..loss of word??

    1. Hi Rahul I am not really at loss of words but its futile to argue too much on this issue I think and it will be better to let facts speak for themselves .

      My whole purpose of blog on Shoppers stop was and is (copied directly from blog):
      “Below I will mention my analysis for the low returns which people are going to get if they invest in Shopper’s Stop at current valuations (P/E >35) . My analysis is NOT about the revenues/profits/number of stores/great shopping experience/low prices for customers of Shopper’s Stop but it’s about the returns to be expected by investors if he invests in Shopper’s Stop starting Jan-Feb 2012 valuation. “

      I will now post yearly on this comment on the price and returns of investing in the Retail stocks VS NIFTY VS GOLD vs FD .
      So here goes the 1st yearly post (all prices as of 11th june 2012 ):
      NIFTY : 5054

      Shoppers Stop(your fav) : 300

      Pantaloons : 163

      Trent : 898

      Aditya Birla Nuvo Ltd :765 (you may say it’s a wrong choice and I agree because it has diverse interest in fin , Insurance , MF , IT-BPO ,25% stake in Idea , etc but I have put this as well in group because
      • It has substantial revenue from Retail (clothes brands like LP,Van Heusen, Peter Eng ,Allen solely etc
      • And it bought what Mr. Biyani Sold .

      Reliance : 721
      The big daddy seems to be betting the farm on retail and aims to make revenues of Rs. 50,000 crores in next 3-4 years and hence its here . (

      Gold : 29798 (MCX 4th Aug expiry )

      FD rates for 5 years . 9.25-9.5% across many banks
      FD rates for 10 years are around 8.5-8.75% again across many banks

      Lets keep this score card all values PRE-TAX to have less complications else someday someone will say they would invest from Cayman Islands or British Virgin Island or Mauritius or god knows where from .

      Also let me just put my equity favorites as well –
      Colgate – 1140
      HDFC – 656
      Hero Honda – 1978
      And one I hate

      Dish TV – 58 (some “good future” of Dish TV is explored here which again you may not appreciate
      – (

      See you 365 days from now for next 5 years.

  10. Hi Amit,

    You have a view point on SS and Mr Sharma is not able to counter that, so he is beating around bush, maybe to satisfy his urge for superiority.

    We would look at the comments of Mr Sharma, Where there are no facts, figures only claims to substantiate his claims.

    But he has agreed in his post that
    a) Retail Market in India is in downturn : If there is a downturn in sector, How will stocks perform ?
    b) Retail Market is moving towards maturity : I am sure if Sector reaches maturity stage, You wouldn’t be able to garner above market returns and hence stock price will trade at a lesser valuation or P/E leading to lesser returns.

    Nobody says that the business of retail will collapse, but we cannot expect above normal returns nor these sector will churn out multi – bagger for investors.

    Mr Sharma should appreciate such negative comments, at least he will be able to buy stakes in such companies at cheaper valuations.

    I want to ask Mr Sharma a question out of curiosity ? I guess from your post, I am able to infer that you belong to Ivy League but why ” Ex ” YOU LEFT THAT LEAGUE OR REMOVED ?and If you have left that why are you flashing that ? normally students who have completed their courses are not ex , but alumni.


    Jigam Gandhi

  11. Mr Gandhi!!…… wow…. you look for one get many…. I don’t have time for you… sorry… Amit… again your showing me data base from past.. not inference or knowledge base…. what has happended if it repeats… then making money in market would be easy.. how much you have earned from the market??? whats your alpha… please do share… SS is just an example to show your flawed thinking…

  12. Were is our investment banker dese days…..lookin for some better investments….:P……or confused… ever….

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