It’s just a normal market correction, is how Pinakiranjan Mishra, partner at consulting firm Ernst and Young, or E&Y, interprets the slowdown. The organized retail sector, which had witnessed year-on-year growth of 35% in 2007, is likely to end 2008 with a lower growth rate of 25-30% at a time when retailers are closing unviable stores, pruning staff and reworking business models. Mishra stresses that the industry will benefit in the long run as retailers learn from their mistakes. A member of the retail committee at the Federation of Indian Chambers of Commerce and Industry, he authored E&Y’s report Winning With Intelligent Supply Chain, released earlier this year, which talks about the challenges inherent in a supply chain so critical for the retail sector’s success.
In an interview, Mishra spoke about the reasons for the current downturn and the outlook for the country’s organized retail business. Edited excerpts:
Modern retail was growing at about 35% year-on-year but this year looks quite bleak. What are your views?
While parts of organized retail might be impacted to an extent, there are several segments, such as food and grocery and consumer durables, that have a potential to do well. Moreover, retailers in the value segment across product categories are likely to do well. The FMCG (fast moving consumer goods) industry has done very well and organized retail will also benefit from this growth.
Also, the impact of the current slowdown will be only in the short term. We are seeing a shift from unorganized to organized in consumer durables. If you look at the consumer durable sector, the (revenue) growth has been 3-5% in the first two quarters (of 2008-09). Organized retailing in consumer durables has grown by 25%. This shows a clear shift in the market.
What kind of growth are modern retailers likely to see this year?
There will be some impact in organized retail, as mentioned earlier. As of now, we don’t know where the market is headed. If things continue as they are now, growth could be close to 25-30%.
What are the reasons for a lot of stores closing, companies revising growth plans and firing employees?
It’s just a normal market correction. In a growth phase, companies tend to focus on getting top-line and in a tight market, the focus shifts to cost management and efficiency improvement. Retailers are now looking at how to optimize their resources and are re-evaluating store formats. Closing unprofitable stores or renegotiating rentals are (the) tactics being employed.
It’s a short-term blip and things will improve in the near future. However, the industry will incorporate learnings from today in their future strategies and this will help retailers in the long run. Most retailers will use this opportunity to review their business models and build their cost structure that works in the long run. This will mean more focus on store sizes, their locations, their profitability, among others.
So you think the retailers went overboard at the planning stage?
Retail is a new industry and if you talk to some retail companies, they (will) agree that they didn’t have the right model and hence had to experiment. It’s true that issues such as (the) size of the stores, business models, formats, customer profile, among others, were being debated and refined. This experience gives them time to reflect and make those changes.
So what are the lessons learnt?
One lesson learnt clearly is that retail is a low-margin business and companies need to constantly focus on cost management for long-term success. Secondly, the retail mode, and that could include the size of stores, positioning, pricing, among others, has to be finalized before any large-scale investment. Thirdly, a key learning is that the Indian consumer is extremely value-conscious even for premium products. So the retail offering, even if it is a premium offering, has to be built around value to be successful.
Did some retailers misjudge the market and wrongly grab whatever real estate was available to them?
I don’t think it’s a misjudgment; it’s probably more an issue of lack of experience. Don’t forget that retail is a new business and like any new business, there is no precedent to follow. I am sure retailers will be more careful in this regard in the future.
What is the future outlook for the industry?
With the right business model and product offering, modern retail can be a huge success story. Food and grocery, for example, has a huge potential if retailers get the format and pricing right. So, maintaining a 30-35% growth is not really difficult if retailers continue doing the right thing, build the right business model.