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Retailers forced to adopt proper store formats, improve efficiency

Retailers forced to adopt proper store formats, improve efficiency
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First Published: Fri, Apr 17 2009. 10 51 PM IST

Slow growth: A Big Bazaar retail outlet in Noida. The retail sector is expected to grow at a rate of 15-20% for the next two-three years. Harikrishna Katragadda / Mint
Slow growth: A Big Bazaar retail outlet in Noida. The retail sector is expected to grow at a rate of 15-20% for the next two-three years. Harikrishna Katragadda / Mint
Updated: Fri, Apr 17 2009. 10 51 PM IST
Mumbai: An economic slowdown is prompting India’s retailers to sharpen their focus, while foreign firms are pausing after scrambling to enter a market named the most attractive retail destination three years running.
As economic growth picked up to at least 9% in recent years, a swelling middle class attracted big Indian companies such as Reliance Industries Ltd, Tata group, Aditya Birla Group and Bharti Enterprises to the retail sector.
Global retailers Wal-Mart Stores Inc., Tesco Plc. and Germany’s Metro AG also felt the pull.
But the attraction has dimmed as economic growth has slowed to below 7% and spending has tightened.
Slow growth: A Big Bazaar retail outlet in Noida. The retail sector is expected to grow at a rate of 15-20% for the next two-three years. Harikrishna Katragadda / Mint
Retailers are closing stores, curbing spending and repositioning themselves to ride out the tough times. But the shake-out should leave the sector in a stronger position to take advantage of any rebound in growth, analysts say. Brokerage Edelweiss Securities expects the upheaval to last 12-18 months.
“Players (retailers) who can continue to attract consumers with attractive discounts and maintain efficiencies in the system will emerge winners,” Edelweiss analyst Priya Ayyar said in a report.
“We expect value retailers like Pantaloon Retail to fare better.”
A.T. Kearney, which ranked India the most attractive retail destination from 2006 to 2008 in its annual Global Retail Development Index, last year valued the Indian retail market at $511 billion (around Rs25 trillion). It sees this rising to $833 billion by 2013.
The setback for retailers in India is seen as a necessary one after companies opened outlets at a furious pace in unviable locations at exorbitant rents, charting out ambitious expansion plans relying on debt.
“They will now look at how to run a fundamentally sound business with a proper store format, proper location and headquarters support,” said Anand Raghuraman, partner and director at Boston Consulting Group (BCG).
Retailers are starting to put their houses in order.
India’s largest listed retailer, Pantaloon Retail India Ltd, faced with falling sales in various products and high inventory costs, is reworking its strategy.
It is focusing on cost and supply chain efficiencies, high-margin private labels, better credit terms and prices from vendors and re-negotiating lease rental agreements, Fitch Ratings said.
Pantaloon sales, which dipped in February from the previous month, saw an uptrend in March due to aggressive discounts and promotions. Its shares have risen some 60% from a record low hit on 9 March.
Cash-strapped Vishal Retail Ltd is closing stores and has no plans to open more next year, but will expand through the franchisee route, says Manmohan Agarwal, chief executive, corporate affairs.
India’s retail sector has been growing at 30-40% annually over the past decade, according to KPMG. It is now expected to grow at a more sedate 15-20% for the next two-three years, but the India retail story is still intact.
Analysts say the economic slowdown is likely to lead to more focus on value-retailing in clothing and food in coming months and a shift away from lifestyle retailing, a strategy that should benefit local retailers.
Though a thin margin business, the food and beverages sector is seen doing well, BCG’s Raghuraman said.
Overseas retailers are still keen on India but prefer to wait for a year or more.
“The demographics...are there, there is still opportunity,” said Anshuman Magazine, chairman and managing director, CB Richard Ellis South Asia Pvt. Ltd.
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First Published: Fri, Apr 17 2009. 10 51 PM IST