Shopper’s Stop is among India’s oldest department stores dating back to more than a decade and a half, and while, at the time it introduced the concept, a department store was a novelty even in top metros such as Mumbai and New Delhi, that’s no longer the case. Shopper’s Stop now operates in an increasingly competitive marketplace crowded, not just with local retailers, but also overseas brands that are hoping to lend expertise to local players and grab a share of the wallet from India’s increasingly spending- and credit-friendly population. In an exclusive interview with Mint, B.S. Nagesh, managing director of Shopper’s Stop Ltd, talks about where retail is headed and the challenges ahead for the company and the industry. Edited excerpts:
It looks like Shopper’s Stop is moving towards becoming more premium — towards higher-margin products. Is that happening?
At Shopper’s Stop, one of the things we have been very focused on for 16 years is that we have not tinkered with the brand and we have remained in what is called the department store category. But what we realized, since we track a very large
number of consumers, is that customers are growing at a faster pace than us. So, it is important that we keep pace with customers. So we have been upgrading the store and the offering keeping the customer base in mind. We are also upgrading the presentation and comfort.
Constantly evolving: Shopper’s Stop managing director B.S. Nagesh says “It is important that we keep pace with customers. So we have been upgrading the store and the offering keeping the customer base in mind.”
One of our biggest successes has been at our Rajouri Garden store in Delhi because we have doubled the size of the store to 140,000 sq. ft from 65,000 sq. ft average. We were expecting to hit (certain) numbers (targets) one year down the line but we are hitting numbers in five-six months. So, we know that consumers are accepting the change of positioning we have done.
Are you surprised that consumers have no problems accepting your higher-end positioning and new premium stores?
It is not a surprise but a reinforcement of our belief and understanding of the consumer. The tough part for us is to keep the balance between the bridge to luxury and luxury; we tilt towards upgrading the customer without alienating the customer. We will continue to experiment.
Are you talking to some new high-end brands looking to retail in India? What can consumers look forward to in your stores?
Honestly, the entry of brands is taking years. So, if you ask me is there a brand that has decided to come to India and is talking to us, I would say ‘no’. On the other side, some of the brands that have already entered, such as Gas, Body Shop, Guess, are talking to us and negotiating to take space is our stores.
Why is it taking so long to sew up such deals?
If you look at the brands, there is a tremendous difference between what they hear outside and what they see here. When they talk to people they hear 300 million customers, 50 million households. But when you come, you see that you can open only two stores. It is shattering for them. Although, everyone knows that in the long term this is a fantastic country and there will be huge volumes, in the short term there is nothing and that is disappointing. Secondly, even if there is a consumer there is no quality... I mean there are no quality malls. Of the 500 malls that are being talked of not more than 50 have actually come up. Of these, three of four are malls and the balance are (really) shopping centres.
When they do come in, what are some of the challenges these companies face?
The two brands that we have dealt with, what we predicted as our property cost in the numbers versus what we actually got, is almost 50% more. If we expected it to be X, it turned out to be X plus 50% or 60% and we couldn’t control it.
Secondly, it is the uncertainty of the property till the last minute. The delays in the property deliverable are unbelievable. You tend to import merchandise three months in advance. So if Mothercare bought in (stocks) in the north for a winter opening then you open in March or April, you can’t even take (the goods) to Mumbai or Bangalore and sell (them there). These are challenges that most developers don’t understand here and people like us suffer. Currently, uncertainties of the business are too many and will remain till 2010- 2011. All the malls, whether they are under construction or planned, will be ready by then. To me, you can call 2010-11 the revolution taking off or you could call it the bloodbath...
Competition has really hotted up since you opened your first store in the early 1990s. Some of the new retailers have deep pockets; how do you plan to compete with them?
The US is the world’s biggest retail market, $3 trillion (worth) and Wal-Mart is the world’s biggest player. But in the last 40 years it has been able to get just 10% of the market. In retail, the winner never takes it all. The reason is that a customer never buys because he gets a product from a retailer. He buys because he has a relationship with the retailer. So what does a retailer need? First, he needs an ability to create and build a brand. The next is resources for your plan. You only need so much money to execute your plan. For instance, for us to reach from our current 1.6 million sq. ft to 3 million sq. ft to 6 million sq. ft, we need only Rs1,500 crore to Rs1,700 crore. We will go to our existing shareholders for (a) rights (issue to raise) up to Rs500 crore and borrow Rs500 crore and still we will be less than a 1:1 debt equity (ratio).
The reason retailers buy properties is that they don’t see rentals softening soon. How do you balance this situation?
If you have a lease model then you can make the most of that opportunity. When you are in a “bought” model then that...opportunity does not work. Whether you have bought or leased there is a cash out period—whether you have paid to the borrower or to build the asset. So, I think 2010-11 (presents) a huge opportunity. There will be a drop in prices and stronger brands will be invited to come at a lower rate.
There are two kinds of brand tie-ups we have. One is the brands that we sell within our shop and that we are continuously looking at; second, we take the master franchise and run the stand-alone ourselves like (we have for) MAC and Mothercare. We are not really pursuing that in an aggressive fashion at all because the small stores are not really working out in the current scenario. We are not in the business to create chains for the purpose of creating (them); for saying we have 150 stores and so much turnover. We are very clear that if you can’t make money within 24-36 months... then we don’t get into that property at all.
What is the perception you get from foreign retailers about the lack of a clear retail policy here?
They are very confused. When you are silent, the confusion is much more. When you are proactive there is no issue, but when you are reactive there is a problem. On retail, the government has been reactive. If somebody starts burning things then you react. Why is the policy like this? The Bharatiya Janata Party (the dominant party in the National Democratic Alliance government that ran India between 1999 and 2004) said that when they win they will allow foreign direct investment but that did not happen; the Congress (the dominant party in the ruling United Progressive Alliance government) said they would support it, it’s been four years and nothing has happened.
To us, it is very clear. The government does not want to allow FDI where it impacts small retailers, and smaller retailers are very clearly food and grocery retailers. You could have a very clear policy saying we will not allow FDI in small food and grocery retail. That takes away 90% pain of small retailers. Then comes the big box, which is the hypermarkets. There whether you allow it or you don’t allow it, the cash-and-carry segment is always open. So, I would not call it back-door, but a front-door entry that is available for large formats. Anyhow, the larger formats take five years, specially for large players to start making money for them. So, I would say proactively they need to understand what they are doing and support that this is a very good booster for the economy.
Secondly, when you say 51% in single brand retail how does it make a difference. I mean what is the single brand retailer you want to get. Marks and Spencer or Ikea? If they are the 51% partner, what will the 49% partner do?
You were talking about upgrading customers. One segment that has become big in recent years is luxury. Will you look at entering that space?
It is not a big area; it is a talked about area. It is extremely difficult to get into luxury unless you have luxury retail environments. Luxury in India has started out on a platform where I’ll be surprised if anybody ever makes money. Some of these retailers have signed properties at similar prices in Delhi and Manhattan or London, and we should see how much do they earn in those stores compared with the ones here. There is no way you can make money because the sales you get there are many times the sales you get here. Rentals are higher here. For us we were keen to look at luxury, not that we were not. The more we can do luxury the more you learn about upgrading customers. But we finally did not do it.
So, how are bridge-to-luxury customers different from luxury and how are Indian luxury customers different from their Western counterparts?
They are very different. Shopper’s Stop customers are always aspiring and want to see themselves shopping with others of the same mindset. The luxury customer is the reverse. The luxury customer is one who believes he has arrived in life; they want to differentiate (themselves) from people who are around them, even if it is the same shopping. Luxury in India is snobbish right now.
Why is it that what is commonly a high street brand abroad is luxury/premium here? What impact does that have in the market?
Absolutely, this is where the maths and economics not-working comes in. Since most brands have come with franchisees who do not have a long term equity with the brand, they have to make money in the five-seven years time. So, what they end up doing is they position the brand as cost price (plus) build up to sustain the brand. That is not the way you build brands. That’s where the positioning goes for a toss.
Several developers want a presence in retail. They feel that they can leverage their real estate presence to acquire a front-end retail presence. Can this work?
This opportunity is not unique to India. This opportunity was unique around the world and if you look at the best developers they don’t do this. It just doesn’t work. The mentality required for retailing is very different. Even today, we only make money by selling the Rs500 shirt and Rs100 mug one at a time. In real estate, when was the last time the big players sold a Rs20 lakh flat? To make a crore it takes my whole chain the whole day. This mentality is very different. At my level, I get at least two to three customer service phone calls every day, which I attend personally. It is nice because of may be the stock market valuation, it is nice because you think it is the right way to do it. It is not fair for me to brush it off, but it won’t be as easy for everybody. For some of them it may work if you have a very clear arms length between your real estate and retail operations. There are some successful examples but you have to think like a retailer and be a mall developer.
What do you see happening on the real estate front? Any softening?
I definitely expect a correction and softening. Because supply will increase... How many retailers will bleed for how long and say I am trying it and trying it? One day they will say sorry I cannot do it anymore. There will be a very little correction this year or next year. But I see a major correction in 2010-11 by the time all the malls come. We will run almost 50 stores by then. I would say about 20% downward correction could happen.