BackSteel makers reap benefits of retail sales
Retail sales growth for top three steel makers in FY15 raced ahead of sales to auto makers, large construction firms
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Mumbai: For India’s steel makers that started directly selling to customers three years ago through dedicated retail stores, it’s finally time to collect the dividends.
As customers turn increasingly brand-conscious in an economy starved of industrial demand, retail sales growth for India’s top three steel makers in the fiscal year that ended in March raced ahead of sales to auto makers and large construction firms.
Retail sales volume at JSW Steel Ltd grew 8% in 2014-15 against the company’s overall volume growth of 2%. For Tata Steel Ltd, the branded products, retail and solutions volumes grew 10%, against 3% overall sales volume growth in India. In the same period, retail volume at state-owned Steel Authority of India Ltd (SAIL) grew 2%, against a 3% fall in overall steel volume.
Essar Hypermart operates through a mixed model of franchises and company-owned stores, Tata Steel sells through the franchise model which includes some exclusive branded showrooms and SAIL operates through dealerships. JSW Steel stores are fully franchisee-owned.
To be sure, retail sales volume are still lower than bulk sales. In 2014-15, retail contributed 16% to JSW Steel’s overall sales volume and 5-6% to SAIL, while branded products, retail and solutions contributed 36% to Tata Steel’s total sales volume.
JSW Steel is bullish on the retail segment, said Jayant Acharya, the company’s director, commercial and marketing. “Demand in the smaller markets in the country, driven by demand from construction in these areas, is doing better than that for larger cities... In addition, demand for branded steel is seeing improvement as more customers are now looking for quality. These factors have contributed to retail sales," Acharya said.
SAIL added 213 dealers to its retail network in 2014-15, a 9% increase over the previous fiscal year. “In view of our capacity expansion and the opportunities available in the retail sector, we are focussing more aggressively on expanding the volumes in retail," a SAIL spokesperson said.
In the last three years, the company has spent close to ₹ 35,700 crore on capacity expansion to reach a saleable steel capacity of 20.2 million tonnes in the current fiscal year, from 12.8 million tonnes in the last fiscal year.
An email sent to Tata Steel on 10 June was not answered.
JSW Steel has approached retail markets with a more segmented approach. It has three categories of retail stores—JSW Explore for metros and urban cities, JSW Shoppe for urban and semi-urban markets and JSW Shoppe Connect for semi-urban and rural markets. “We are working on the last-mile reach. Focus would be on adding more stores on the Connect side," JSW Steel’s Acharya said. The company, which currently runs 480 stores, plans to add 200 more stores in the current fiscal year.
“If the total steel demand in the country grows at 6% this year, retail is likely to grow at 8%. Most of this growth would be driven by construction and demand from small and medium enterprises," Acharya said.
Retail stores are normally located closer to warehouses, from where goods are directly transported to the customer—who is either an individual or a small company or a small manufacturer.
“The smaller ‘mom and pop’ shops, specifically in rural areas, are shutting down. The bigger companies, in turn, are eating into this space as smaller shops have not been able to compete with them on the cost side," said Chirag Shah, director of equity research and head analyst of building materials, metals and mining at Barclays Capital Plc. Shah expects this retail growth trend to continue.
In May 2014, Essar Steel merged its steel processing centre and distribution unit with its steel retail chain Hypermart. Hypermart has also started selling non-Essar steel products, which contributed to 30% to the steel retail chain’s total revenue in the last fiscal year.
According to Ravi Singh, chief executive officer of Essar Hypermart, the 2014-15 revenue of ₹ 3,500 crore is not comparable to 2013-2014, due to the merger. However, Singh believes total revenue for Hypermart will double in the current fiscal year.
“Medium and small enterprises are filling in for the lack of demand from large industries. That is where we see the demand coming from," Singh said. Essar Hypermart contributes 20% to Essar Steel’s total revenue.
Online channels are also being tapped. SAIL last year tied up with India’s largest online vendor Flipkart to sell kitchen sets. Steel products were sourced from SAIL’s Salem steel plant in Tamil Nadu, which is renowned for kitchenware.
“The response from buyers on Flipkart has been so encouraging that plans are afoot to expand this list of products to at least 40 items (currently 12 items) in the next few months," the SAIL spokesperson said.
Industry experts were baffled when the steel companies initiated their retail push, since they traditionally focussed on the bigger buyers. Three years later, the retail success has vindicated the companies’ strategic focus.
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