Margins soar at retail companies as shoppers loosen purse strings

Margins soar at retail companies as shoppers loosen purse strings
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First Published: Wed, Oct 31 2007. 12 40 AM IST

Crowd pullers: A Big Bazaar outlet in Noida. The supermarket chain is run by the country’s largest listed retailer, Pantaloon Retail (India) Ltd.
Crowd pullers: A Big Bazaar outlet in Noida. The supermarket chain is run by the country’s largest listed retailer, Pantaloon Retail (India) Ltd.
Updated: Wed, Oct 31 2007. 12 40 AM IST
Mumbai: Retailers in India reported increased margins this quarter despite concerns that rising rentals, salaries and the cost of adding stores would dent margins for the three months ended in September, as customers opened their wallets and splurged on more expensive goods and private labels.
Crowd pullers: A Big Bazaar outlet in Noida. The supermarket chain is run by the country’s largest listed retailer, Pantaloon Retail (India) Ltd.
“People had been upgrading their cars, houses or airlines but the range of brands for clothes had remained limited for more than a decade,” said Govind Shrikhande, chief operating officer of Shoppers’ Stop Ltd.
“Over the last year, as we have seen premium brands such as Calvin Klein FCUK, Esprit and Tommy Hilfiger become available, we are seeing a shift.”
As the Indian economy continues expanding at more than 8% per year, salaries and affordability for consumers has gone up.
Investors putting money into stock markets may have also profited from new record highs being scaled by the Bombay Stock Exchange Sensitive Index. The benchmark Sensex breached the 20,000 point mark on Monday.
Pantaloon Retail (India) Ltd, India’s largest listed retailer, reported a net profit growth of 87% and while Shoppers’ Stop net profit fell to Rs42.3 lakh for the quarter ended September, compared with Rs7.39 crore, in the same quarter last year, gross margins increased by 100 basis points.
At Vishal Retail Ltd, a newly listed discount store chain, margins rose too. Operating margins for the six months ended September were 11.5%, compared with 11.1% for the year ended March. Profits rose as the company launched new private label products for water, flour, spices, appliances among other products.
“Typically private labels get us 3-5% higher margins,” said Ram Aggarwal, managing director of Vishal Retail.
“So, that has helped increase our margins. Vishal Retail typically has higher profit margins because a larger share of its products are private labels created in-house or by smaller unbranded players rather than consumer products or electronics companies. This allows them to control the process and buy at better rates.”
Retailers also said they are controlling costs better, which is helping keep up profitability. While salaries in the sector have been going up by 50-60% a year over the last few years as large, new players such as the Aditya Birla Group, Reliance Industries Ltd and Wal-Mart Stores Inc. enter the sector, retailers are also working to curtail employee costs and keeping employees from leaving.
At Pantaloon, while employee costs rose 41% for the quarter ended in September, compared with the same quarter last year, they had more than doubled for the year ended June, compared with the year before. The company is working to increase staff productivity, Kishore Biyani, Pantaloon’s managing director had said in a post-result phone interview with Mint.
“Pantaloon results are a pleasant surprise because they saved on personnel costs and selling and distribution costs,” said Hitesh Kuvelkar, associate director for research at First Global, a Mumbai-based brokerage said. “This is a big success because it comes despite their having spent on adding 27 new stores.”
At Shoppers’ Stop, employee costs were up 56% for the quarter ended September, compared with the same quarter last year. The cost of renting premises also went up 57.16% for the quarter, compared with the same quarter last year. Results were dented by rising rentals, service tax payments and increased power costs in Maharashtra, Shoppers’ Stop’s Shrikhande said. In the face of mounting expenses, the company had renegotiated with suppliers to get products at better prices and worked to introduce more premium brands, he added.
“It is clear that tighter cost control and better supply management are helping retailers,” said Deven Choksey, managing director of KR Choksey Shares & Securities Pvt. Ltd, also a Mumbai-based brokerage. “As the number of stores increases, it is clear that they are getting economies of scale. They can negotiate with suppliers better now. So maybe, the suppliers are bearing the brunt more than the retailers.”
The traditional July and August stock clearance sales may also have helped retailers tide through a typically lean quarter. And with the hardest part behind them, retailers say they are now looking forward to the festival season. “The first half of the year is always weaker and as we step in to the second half of the year, we are confident of better performance,” said Vishal’s Aggarwal.
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First Published: Wed, Oct 31 2007. 12 40 AM IST