A reality check for organized retailers as dream turns sour

A reality check for organized retailers as dream turns sour

New Delhi: Modern retail in India is proving to be fraught with stress for new entrants who had embraced it as the next sunrise sector, drawn by the hype of an impending consumer market revolution propelled by the buying power of a vast and expanding middle class.

After complaining about high rentals, space crunch and the lack of enough skilled employees, retailers are now confronting more basic questions: What model of organized retail will work in a consumer market as diverse and complex as India’s? How long will it take store chains to turn a profit?

B.S. Nagesh, chief executive of Shoppers Stop Ltd, India’s second largest listed retailer, says modern retail is a “very long-haul" business and investors need to be “very patient".

And patience seems to be running out among many new retailers, who are slowing expansion, paring the number of outlets, cutting headcount and in some cases, considering exiting the business altogether as losses mount.

That’s a sea change from three years ago when modern retail was thought to be the next big thing after information technology and telecom in a country of more than one billion people. Consumer spending in the country will quadruple, from about Rs17 trillion in 2005 to Rs70 trillion in 2025, powered by the middle class, think tank McKinsey Global Institute said in a study last year.

Mukesh Ambani’s Reliance Industries Ltd, or RIL, the country’s biggest company by market value, outlined a $6 billion (Rs27,780 crore) investment plan when it ventured into organized retail in 2006.

Reliance Retail Ltd said initially that it planned to open up to 3,000 Reliance Fresh grocery stores by 2011 besides hundreds of speciality stores and hypermarkets. It later revised the plan, targeting to open about 2,000 stores of all formats by September 2007, according to a person who has direct knowledge of the situation.

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A year after that deadline passed, the company has managed to open only around 630 grocery stores and 70 stores of other formats, falling short of its target by more than half. According to the person, who declined to be identified because of the sensitivity of the issue, the company is making losses on most of its stores, particularly Reliance Fresh outlets, mainly because of staff costs, wastages, electricity charges and inventory losses.

That means opening any more stores will only add to losses. The company that nearly broke even last year is expected to post a loss of more than Rs1,000 crore in fiscal 2009, barring any non-recurring transaction, the same official said.

Reliance Retail had booked millions of square feet of space for warehouses and distribution centres. Only 30% of the space is being used by the company and the rest lying vacant, the person said.

However, a Reliance spokesperson said by email, “We would like to categorically state that there is no cap of any sort or in any form on the number of Reliance Retail stores."

“As per plan, we continue to roll out these stores both in terms of numbers and cities," the spokesperson added. “We are satisfied with our progress and there is surely room for excellence."

Basmati exporter REI Agro Ltd entered the retail business with more than 200 grocery stores called 6Ten but has shuttered dozens of stores in recent months, according to company officials who spoke on condition of anonymity because they are not authorized to speak to the media. A 6Ten store in Taimoor Nagar in south Delhi was overflowing with inventories of nearby stores that had been closed.

Indiabulls Retail Services Ltd, part of the group that also has a presence in financial services and real estate, started overhauling the stores it inherited after buying Ashok Piramal’s stake in Piramyd Retail Ltd in December. Indiabulls converted old Piramyd department stores into hypermarkets by cutting out lifestyle products and adding food and groceries. The move flopped, prompting the company to close several outlets and fire employees.

Indiabulls Retail has shut four of its nine Indiabulls Megastores, each with a floor space of about 50,000 sq. ft, and fired several employees, including senior executives, Mint reported on 6 September. Each megastore employs about 75-100 employees.

“Almost every new entrant has found that things are not going the way they had planned," says Jayant Kochar, managing director of retail consultancy firm Go Fish Retail Solutions.

HyperCity Retail is a case in point. The Mumbai-based retailer that operates a lone but popular hypermarket in Mumbai said last year it planned to open about 250 grocery stores by 2012. Less than a year after opening a few pilot stores in Jaipur, the company has not only shut the outlets, but also abandoned the project. “We are not going ahead (on smaller-format stores)," says Dharmendra Jain, HyperCity’s head of finance and supply chain. “The time and effort required to focus on this format is not reasonable if one looks at the return on the investment."

Similar reasons forced Ludhiana-based textile company Oswal Group to fold its chain of about two dozen lingerie stores and Mumbai-based Ashok Piramal Group to sell Piramyd Retail.

Ashok Pirmal Group’s executive vice-chairman Nandan Piramal declined to comment through a spokesperson on Piramyd’s sale while Oswal Retail managing director Adish Oswal couldn’t be reached.

“It’s a learning process for us. There is nothing abnormal in it," said Kishore Biyani, managing director of Pantaloon Retail (India) Ltd. “No new thing pans out the way one conceives it. Everybody is discovering new things about the business." The discoveries are being made the hard way.

Nagesh of Shoppers Stop says retailers should be prepared for losses in the short run as returns on investment in the business can take as long as three-five years. “You will obviously think that every retailer is struggling but the problem is that this is the reality," he said.

The country’s largest chain of discount supermarkets, Subhiksha Trading Services Ltd, opened more than 1,000 stores nationwide in the past two years but now vendors in some cities, including vegetable sellers in Surat and wholesalers of lentils in Pune, are alleging non-payment of bills.

Vendors in Delhi’s largest wholesale market for fresh vegetables and fruit, Azadpur Mandi, say the company had held up payments for two-six months in a business where bulk buyers pay within a month, Mint reported on 5 September. Until early this year, retailers had been optimistic about their prospects even as rentals went through the roof. Mall rentals in major cities rose to Rs300-600 per sq. ft per month, double the rate two year ago. Yet retailers from Chandigarh to Chennai set on expansion had no qualms in paying the rate.

Now many are having to sublease or surrender the space. JM Megamart, a family-owned department store in the Delhi suburb of Noida, carved out about 30% of its 11,000 sq. ft store in Shopprix Mall and leased it to grocery chain Sabka Bazaar on a revenue-sharing basis as it battled high rentals and low sales.

“This was done purely to reduce expenses," said JM Megamart owner Sanjay Rana. “Rentals are so high that it is not viable to work anymore."

Shoe Factory, which runs a chain of 18 footwear stores, has reduced the size of 10 out of 18 stores from 10,000 sq. ft each to about 2,000 sq. ft and rented the space to other retailers in the past few months.

Reliance is also pruning the size of its largest hypermarket, in Ahmedabad, from 165,000 sq. ft to about 100,000 sq. ft.

Bharti Enterprises Ltd has so far added only four stores to its inaugural batch of three in the Punjab city of Ludhiana in April with which it ventured into retail. “Bharti by now should have opened 100-odd stores as per their original projections," said a retail analyst who declined to be identified. “They have, however, opened less than 10 so far."

However, its president and chief operating officer, Vinod Sawhny, said, “Bharti Retail is moving ahead exactly as per plan. We like to do things right and we like to do them well."

Retailers have taken a hit from rising inflation, which has reached a 16-year high, and increased borrowing costs that have dented consumer sentiment and slowed demand, analysts say. Besides putting expansion plans on hold, retailers are also looking at other ways to cut costs.

Pantaloon Retail, the country’s largest listed retailer, is restructuring departments including human resources, information technology, and management to slim down its organizational structure.

“We see multiple signs (of a retail slowdown) and not one," says Devangshu Dutta, chief executive of retail consultancy Third Eyesight. Several retailers are reviewing the size of their organization, he said, adding: “Hiring has slowed down. People are being asked to leave."

Reliance Retail, for instance, is not making any effort to retain employees who want to quit, said a senior executive requesting anonymity. And about 30 of the company’s 50 expatriate executives, who it had hired at good salaries at the time of its launch, have returned home in the last three months as the company didn’t renew their contracts, according to Bijay Sahoo, president and chief people’s officer, Reliance Retail. The company had hired these experts from countries such as the US, and the UK to set up the business and mentor local managers.

“Unfortunately, the expectations (about the retail industry’s prospects) were built by people who did not understand the nature of the business," says Nagesh, of Shoppers Stop. “In 2005, we went public and investors noticed us and suddenly people thought this is the place where you make money by going public. I think the hype got created out of stock market investors." Both Wal-Mart Stores Inc., the world’s largest retailer, and France’s Carrefour SA took about 12 years to break even in China, said Nagesh.

“This is the nature of the business," he says. “And that is the reality."

Rajeshwari Sharma contributed to this story.

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