Mumbai: As consumers return to stores, retailers are again eyeing growth plans in the wake of a reviving economy, except this time they are focusing firmly on profitability at the store and regional levels.
The new strategy is a marked divergence from the rampant space addition that retail chains undertook in the 2-3 years preceding a global economic slowdown that began in calendar 2008 and culminated in the collapse of Lehman Brothers Holdings Inc., and brought the global financial system to a near-standstill.
“The cautiousness that followed during the financial meltdown as modern retail returned its focus to fundamentals and focus on profitability at store level remains now opposed to just expanding footprints or adding space to increase evaluation,” Anand Raghuraman, partner and managing director at The Boston Consulting Group, told Mint. “The land grab phase is over.”
Following the financial meltdown, “the total area added to modern retail in tier I cities fell from 6.8 million sq.ft. in calendar year 2008 to 3.6 million in the last 12 months,” says Bappaditya Basu, vice-president and head (retail and leisure advisory, west India), Jones Lang La Salle Meghraj. Tier I cities include the top 10 wealthiest cities in the country.
Growth outlook: The Rs90,000 crore Indian modern retail sector has once again been seeing 20% growth levels in the last six months, double that of the growth rate seen since the meltdown began. Ramesh Pathania/Mint
However, a strong festive season and a relatively positive economic outlook have seen revenue growth on the rise again.
“The Rs90,000 crore Indian modern retail industry is once again seeing growth at 20% in the last six months,” says Kumar Rajgopalan, chief executive officer, Retailers Association of India, an industry group. “This is double that of 10% growth seen post the financial meltdown and is estimated to be 25% for financial years 2010 and 2011.”
However, space addition is also creeping back.
“In the coming six months we expect modern retail to add nearly 80% of the total space added in the last 12 months, or 2.3 million to 3 million sq.ft., in the top 10 cities depending upon the permission and clearances given by the government of India,” says Basu.
Besides, the difference in approach to expand can also be seen in outlook towards funding and rentals. “The rentals being agreed to and leases signed are only where it is economically viable,” says Pankaj Jaju, senior vice-president, Enam Securities Pvt. Ltd. “People are also looking at funding more conservatively versus expansion by debt that we saw in the past.”
The focus on profitability can be seen across the sector. For instance, of the four listed retail companies—Pantaloons Retail India Ltd, Shopper’s Stop Ltd, Trent Ltd (Westside) and Vishal Retail Ltd—the first three saw their operating margins and net profits improve year-on-year for the quarter ended September 2009 against the corresponding period in the previous fiscal year.
Vishal Retail, which in the past year closed about a dozen stores and renegotiated rentals, is still weighed down by debt and large inventories.
“We have spent the last 12 months reassessing our costs. All major costs are down, rentals are down by 25-30%. Even manning, utility and logistics costs are economized now,” says Damodar Mall, chief executive officer of incubation and innovation at the Future group, the parent company of Pantaloons Retail.
“Profitability is our first concern now as versus adding footprints in the past,” says Thomas Varghese, chief executive officer, Aditya Birla Retail Ltd, that operates the More chain of stores. “As we expand across the country, we will look at clustered profitability and maximizing of our assets and overheads.”
Aditya Birla Retail closed at least 119 More stores in the past year, bringing its total down to 654 supermarkets, but is now looking to add a few more. Varghese said the firm would end the year with 700 stores, including adding hypermarkets, and would look to expand its regional dominance from southern India to other parts of the country.
Govind Shrikhande, president and chief executive officer of Shopper’s Stop , a leading player in Mumbai and the National Capital Region of New Delhi and its suburbs, also backs the local dominance approach.
“We will now look for becoming dominant players in our present markets like Pune, where we have two stores we will add one more and in Bangalore we will add two more to take the tally up to seven,” he said. “And once we have populated our present markets we will move to new towns, tier-II towns like Jaipur, Amritsar, Ahmedabad, Aurangabad, Coimbatore and Vijayawada.”
Similarly, other who have already established regional success are looking to cross borders. Univercell Telecommunications India Pvt. Ltd’s a mobile retail chain with 300 stores across South India, is now looking at enter the western and eastern Indian markets, managing director D. Satish Babu told Mint, adding that regional retailers will need to localise even at the point of sale as they expand into national markets.