Mumbai: Its share price has risen by 450% from a 52-week low. Its cash memo size has increased 10%. It’s easy to believe they haven’t heard of a downturn at Shopper’s Stop Ltd. But India’s first lifestyle retail chain has had to virtually reinvent itself to survive the financial crisis and emerge as one of the biggest gainers on the stock exchange this year.
The firm undertook a rigorous 18-month exercise to reposition itself from a premium to a so-called bridge-to-luxury (B2L) retailer—a move which involved giving a different look and feel to its outlets, and getting a slew of new brands on board. Alongside, it engaged in large-scale cost cuts, negotiated rental cuts of up to 30%, closed unprofitable formats and its top 150 executives voluntarily proposed a salary slash of 15%.
Growth plans: Shopper’s Stop president and CEO Govind Shrikhande. Ashesh Shah / Mint
Bold as they were, the moves paid off and allowed the firm to be the fastest off the block in improving profitability.
The restructuring started in April 2008—just before the start of the global financial sector meltdown—with the decision to convert eight of the chain’s 28 outlets nationwide from premium to B2L stores. With the help of brand consultant Ray+Keshavan, Shopper’s Stop adopted a new logo and facade. It got in at least 30 new high-value brands, including Mothercare, Tommy Hilfiger, Esprit, Chanel, Dior, Estée Lauder, Boss and Armani.
“The average cash memo size increased by 10% from Rs1,900 even as footfalls fell and profitability declined during the financial meltdown,” Govind Shrikhande, customer care associate, president and chief executive of Shopper’s Stop, said in an interview.
The B2L stores contributed close to 40% of the total revenue, Rs1,300 crore, in 2008-09. For the eight stores, the average bill was up 15% during the first half of this fiscal, against the year-ago period.
On Wednesday, Shopper’s Stop shares closed at Rs367.30, a 2.6% gain from its previous close, as the Bombay Stock Exchange’s bellwether Sensex rose 0.21% to 16,912.77. On 11 December, the share hit an intraday 52-week high of Rs416. In the last three months, the stock has hit a new 52-week high seven times.
Among the shares of retail chains, Shopper’s Stop outperformed the industry leader. While the shares of Pantaloon Retail (India) Ltd gained 252.80% from its 52-week low to Rs357.70, Shopper’s Stop shares gained 451.45% to Rs389.05 from its 52-week low of Rs70.55.
According to another senior executive, who didn’t want to be named, both value and B2L goods provide Shopper’s Stop with the same margin of 33%. “But while value brands have a faster rotation (higher sales) cycle, B2L has higher cash margins. With fixed costs remaining the same at 20%, and average cash memo size increasing, it would be fair to say that over a period of 12 months, there would be an expected increase in earning profit margins,” he said.
The cost cuts have also played a big role in the success story. And they are going to continue. In a few days, its retail outlets in Mumbai will switch loyalties from Reliance Infrastructure Ltd to Tata Power Co. Ltd to derive the benefits of lower power tariffs, said a senior executive. The savings will add to profits, as 30-35% of the costs are incurred by the retailer on electricity.
The turnaround has also been acknowledged by independent observers. “We expect Shopper’s Stop Ltd’s earnings growth to gain further momentum in the quarters ahead, thanks to continuing cost-containment measures and improvement in same store sales,” Pragati Khadse of IIFL Research wrote in a 9 December report titled Growth Ahoy. Same store sales compare sales of stores that have been open for at least a year.
Anticipating customer behaviour—particularly that of Gujaratis and government employees—has been crucial to the turnaround. Gujaratis form the firm’s largest consumer base in western India, where the bulk of Shopper’s Stop sales take place. Pune and Mumbai together contribute close to 40% of overall sales. Similarly, government employees are the largest community of buyers in the north.
A survey showed spending by Gujarati consumers was on a par with other customers between June and September 2008. But it fell below the average spending after the financial slump, with a differential growth rate of at least 8%. However, with the Sixth Pay Commission recommendations kicking in around this period, the expenditure of government employees grew 8-9% faster than others.
The survey, conducted between July 2008 and June 2009, covered the spending patterns of the in-house First Citizen Loyalty programme, which has at least 1.45 million registered customers and adds nearly 300,000 every year. The loyalty programme contributes close to 74% of the retail chain’s overall revenue.
“With B2L, we are focusing on just 7% or one lakh First Citizen members, as we classified them as the target audience. This 7% accounts for 91% of the B2L and luxury sales,” said Vinay Bhatia, customer care associate and vice-president (marketing and loyalty) at Shopper’s Stop.
Shrikhande said the firm intends to use the data on community spending patterns more effectively in the coming year to increase its consumer base in every region.
According to a recent report by HDFC Securities, the retail sector’s performance has been a mixed bag over the past three years. While revenues of listed entities such as Aditya Birla Retail Ltd, Reliance Retail Ltd, Spencer’s Retail Ltd and Vishal Retail Ltd showed a 46% compound annual growth rate, the sector remained unprofitable with losses hitting a combined Rs1,200 crore at end-March.
Retailers are once again stepping up on expansion plans. Recently, Pantaloon raised Rs500 crore via a qualified institutional placement (QIP). Shopper’s Stop is expected to raise Rs250 crore (Rs120 crore via a QIP and Rs120 crore through promoters’ warrants). Tata Sons Ltd-backed Trent Ltd, which has Westside and Star Bazaar retail formats, also announced expansion plans.
But raising money could be a concern for retailers, say experts. “Even with toned down growth plans, we believe funding costs will weigh on profitability, given that very few players are free cash flow positive,” said Abhishek Ranganathan, an analyst with HDFC Securities, in the report. “Working capital accounts for an average 50% of balance sheet size and inventory management plays a key role in determining profitability for retail majors. Moreover, given the role of debt in funding expansion, interest costs (2-7% of revenues) also assume importance.”
Another sector expert, who didn’t want to be named, said the model of departmental stores favoured by Indian customers until now is on its way out. Hypermarkets, which work at the lower end of the pyramid and commoditize for mass markets, and speciality stores such as Croma and Titan Eye+, which offer a lot of variety, are the models gaining ground, he said.
“Departmental stores such as Shopper’s Stop will see their margins squeezed due to higher rentals. Customers will also go away as it has no brand appeal. This has already happened in advanced markets, and will happen here as well,” he added.
But such fears are not holding back Shopper’s Stop. “We are looking at bringing in new consumers as we open more outlets, target communities and also increase the cash memo size,” said B.S. Nagesh, customer care associate and vice-chairman of Shopper’s Stop.
On the cards is the opening of 14-15 new stores in the next two years, to add to the 28 stores the firm has built in 19 years. But the retail chain also operates 52 Crossword stores and has a 19% stake in HyperCity stores—both of which are also geared for expansion.
The firm is eyeing a QIP and a Rs120 crore cash flow this year from internal accruals. It has room for diluting its equity as the promoters hold 68.5%. “We will raise Rs250 crore from various instruments like QIP, promoter share dilution and internal accruals for our growth and expansion,” Nagesh said.
B2L is here to stay. Premium goods earlier contributed 80% to the firm’s overall revenue, while value goods contributed 20%. But after the restructuring, their contribution has declined by 10% each, while B2L now contributes 20%. “We expect B2L to grow to 25% of overall revenue by FY10, and 30% by FY11,” said Shrikhande.