Retailigence

“Club of Knowledge Hunters”

Organised Retail undergoes Reality Check

Posted by retailigence on September 14, 2008

‘Modern Retail’ was the buzz word, surrounded with excitement and euphoria only a year ago. However the inevitable consolidation and its sudden and quick arrival with an unexpected slowdown has  surprised most experts. Every one connected with retail was anxious about imminent shortage of quality manpower. Managerial talent was in short supply and salary packages were piercing stratospheric levels, reports indiaretailbiz.com. HR consultants and trainers were ecstatic about unfolding opportunities.

Like life cycle of any sunrise industry the things have changed overnight. Nobody can deny that there has been a slowdown in the expansion.  This is not to suggest that expansion of the retail chains has completely halted or there are no new players entering the sector. World’s top four retailers, namely, Wal-mart (USA), Carrefour (France), Tesco (UK), and Metro (Germany) have either entered or made arrangements to foray into India through ‘cash and carry’ route. They have also resolved the FDI hurdle that bans entry of multi-brand retailers in front-end retail by appointing Indian retailers as their franchisees.

Initial cracks appeared with Oswal’s decision in July, to shut down their 22 stores ‘innerwear’ chain called ‘Straps’  followed by recurrent news of closure of a few stores owned by prestigious retail chains. Spencer’s Retail (RPG) has closed 40 stores; Next (Videocon) has announced closure of 20 stores in the past five months. Even niche brands like Nike and Conizza have been affected. Retail chains like Big Bazaar (Future Group) and Indiabulls (erstwhile Pyramid) have also closed some of their stores. Even Reliance Retail, according to reports, has cut down the size of its first hypermarket store ‘Reliance Mart’ at Ahmedabad, bringing down the size (1.65 lakh sqft) of its first flagship store to nearly a third of the original size. Even Kishore Biyani concedes that everybody miscalculated. Big Bazaar or Reliance have not  completely halted their expansion. They are certainly opening new outlets at other locations, but at slower pace.

In fact, slower roll-out appears to nave now become the corporate mantra of most large retail chains. Bharti’s ‘Easy Day’ rolled out just seven stores in six months; four being opened on the first day. Reliance Retail has set up over 700 stores in less than two years  but the number is much lower than its original target. Only, Subhiksha, currently mired in many controversies is appearing to be opening around 60 stores every month. All major retailers have also begun to tighten up. Reliance Retail, Aditya Birla Retail, Future Group, Provogue, Spencer’s, Koutons and Vishal Retail are among the big retail players, who have initiated cost control measures. Some of the chains have even begun renegotiating original lease rent agreements. Apart from cost efficiencies and slow roll out, all big business houses have also begun revisiting their retail strategies.

In a complete reversal of its original strategy of doing every activity on its own, Reliance has now begun forming partnerships with niche global brands. In some cases it has even offered majority stake and operational control to these partners. In another strategic shift, both Spencer’s Retail and Big Bazaar have begun focusing more on high yielding fashion apparel  segment compared to low yielding food and grocery business.

While the high profile CEOs of Aditya Birla Retail and HyperCity have resigned, many at the lower levels are also being fired. Against earlier projections of creating half a million retail jobs, Reliance has axed 3,000 of the 20,000 jobs. Most companies are also rationalising pay packages in tune with what is prevailing in their other group companies.

How did it happen ?

The most important factor is  higher operating costs (rents, salaries, electricity bills, etc), fewer consumers (initial craze of visiting newer and bigger shops having waned for a variety of reasons including higher price tags for similar items, which most Indian consumers do not accept), sliding demand, competing brands getting crowded in the same geographic areas without any differentiation, poor service, inadequate staff training, and insufficient inventories. The original thesis of consumers getting benefited from efficiencies of supply chain over the period have been belied as several statutory regulations impede seamless trade between all stake holders. In fact, the dream of efficient supply chain has remained a dream.

In short, India still has many impediments to take advantage of ‘farm to fork’ strategy as the ‘farm’ end continues to remain beyond the reach of many retailers. Every thing, though, has not been lost as consumers have begun to expect a lot from their retailers as they have been exposed to good shopping ambience and experience. The current slow down, in the long run, may also turn out to be good for the sector as fly by night operators ready to make quick buck will think twice before venturing into the sector. While, investors will resist unrealistic valuations, financiers will look high sales and earning projections with suspicion.

Inevitably, there will be some casualties, leading to M&A opportunities. This may ensure survival of the fittest players with deep pockets and long term commitment to the sector.

Source:– indiaretailbiz.com

Contributed by :- Vipin Rawat

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