New Delhi: Modern retail in India is proving to be fraught with stress for new entrants who had embraced it as the next sunrise sector, drawn by the hype of an impending consumer market revolution propelled by the buying power of a vast and expanding middle class.
After complaining about high rentals, space crunch and the lack of enough skilled employees, retailers are now confronting more basic questions: What model of organized retail will work in a consumer market as diverse and complex as India’s? How long will it take store chains to turn a profit?
B.S. Nagesh, chief executive of Shoppers Stop Ltd, India’s second largest listed retailer, says modern retail is a “very long-haul” business and investors need to be “very patient”.
And patience seems to be running out among many new retailers, who are slowing expansion, paring the number of outlets, cutting headcount and in some cases, considering exiting the business altogether as losses mount.
That’s a sea change from three years ago when modern retail was thought to be the next big thing after information technology and telecom in a country of more than one billion people. Consumer spending in the country will quadruple, from about Rs17 trillion in 2005 to Rs70 trillion in 2025, powered by the middle class, think tank McKinsey Global Institute said in a study last year.
Mukesh Ambani’s Reliance Industries Ltd, or RIL, the country’s biggest company by market value, outlined a $6 billion (Rs27,780 crore) investment plan when it ventured into organized retail in 2006.
Reliance Retail Ltd said initially that it planned to open up to 3,000 Reliance Fresh grocery stores by 2011 besides hundreds of speciality stores and hypermarkets. It later revised the plan, targeting to open about 2,000 stores of all formats by September 2007, according to a person who has direct knowledge of the situation.
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A year after that deadline passed, the company has managed to open only around 630 grocery stores and 70 stores of other formats, falling short of its target by more than half. According to the person, who declined to be identified because of the sensitivity of the issue, the company is making losses on most of its stores, particularly Reliance Fresh outlets, mainly because of staff costs, wastages, electricity charges and inventory losses.
That means opening any more stores will only add to losses. The company that nearly broke even last year is expected to post a loss of more than Rs1,000 crore in fiscal 2009, barring any non-recurring transaction, the same official said.
Reliance Retail had booked millions of square feet of space for warehouses and distribution centres. Only 30% of the space is being used by the company and the rest lying vacant, the person said.