Selling steel like shampoo sachets: JSW plans 5,000 retail shops
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Mumbai: JSW Steel Ltd plans to open as many as 5,000 shops in the next five years to sell custom-made steel to tap demand in rural and semi-urban India, where rising incomes have boosted construction of homes and non-food spending.
“There are 600 districts in India with 7,000 talukas (administrative divisions),” Jayant Acharya, director, commercial and marketing, at JSW, said. “We are going to the taluka level. We may look to populate 3,000-5,000 of these with our retail shops.”
At the end of FY14, JSW will have 450 retail shops.
Steel makers are looking for new markets as they add capacity and as the slowing economic growth has led to a slump in construction activity in the cities and lower sales of automobiles and consumer goods. While home buyers in urban areas have largely disappeared, forcing property developers to delay or even abandon housing projects, a better-than-expected monsoon is likely to boost farm income for the second year in a row, boosting rural demand for homes and consumer goods.
Analysts say JSW’s move is timely especially as steel capacity will stand at 100 million tonnes (mt) by the year ending 31 March 2016.
“Steel was always bought, never (aggressively) sold. Now companies are trying to reach out to consumers and educate them on possible applications,” said Chirag Shah, director, research, at investment bank Barclays Capital. “Retail steel is like the one rupee shampoo sachet—it won’t increase sales in a big way immediately, but the segment offers longer term benefit.”
JSW, the third largest Indian steel maker with an installed capacity of 14.3 mt after Tata Steel Ltd and Steel Authority of India Ltd (SAIL), has taken a pioneering step towards expanding retail outlets that could entrench it in the retail segment, analysts say.
Retail steel—mainly construction products like corrugated roofs and bars and rods—form only a small part of the total consumption as roughly 25% of the big steel companies’ production goes to the retail sector, according to an analyst at information portal OreTeam.
India consumed 73.34 mt of steel in the year ended 31 March. Less than half of this was produced by the top five steel makers and the rest came from small manufacturers.
Mom and pop stores
It won’t be just steel grey when people visit the JSW shops. Bright colours and vibrant patterns will lure customers, according to JSW. In addition, the shops will have consultants to help shoppers buy products in the right size and shape.
The biggest impact on the market from JSW’s retail juggernaut will be on independent steel shops that could find their share being taken away, Barclay’s Shah said.
As far as rival steel companies are concerned, chances are they may not offer much by way of competition, said another analyst.
Tata Steel is focused on the automobile and consumer goods segment and is unlikely to aggressively expand its retail stores on the same scale as JSW, one analyst said not wishing to be named.
SAIL is focused on investing in dealers rather than retail stores and Essar Steel India Pvt. Ltd is focused on consolidating its operations in the midst of the slow economic growth, the analyst said.
Jindal Steel and Power Ltd is focused on big orders such as those from infrastructure clients, the analyst said.
Tata Steel and Jindal Steel did not reply to an email seeking details on their retail business.
A spokesperson at SAIL said its marketing efforts are complemented by around 2,900 dealers, including 700 rural dealers, spread over 611 districts to cater to small requirements of retail customers.
“SAIL dealership in its present form was started in 2005 which was expanded in 2011 to include rural dealership scheme with a view to expanding SAIL’s retail points at block, taluk and tehsil levels,” the spokesperson said.
An Essar Steel spokesperson said the company has 325 retail outlets, a network that was built over the past five years. “We are at the moment consolidating operations in these outlets,” the spokesperson said.
Barclay’s Shah said the immediate contribution of the retail stores to JSW’s profitability cannot be estimated, but these would help the steel maker get a direct feel of the market and help develop a domestic base as well as create brand visibility. “JSW is aiming to become the largest steel company in India and they need to develop new segments to market these volumes,” Shah said.
JSW’s bet is on the low per capita consumption of steel in India at 60 kg . The rural per capita consumption of steel at 15 kg is even more promising.
World steel per capita consumption stands at 217 kg and in the US it is at 306 kg, according to data from CARE Research.
“We are taking a journey to grow the steel consumption of the country and we are preparing ourselves to grow along with it,” JSW’s Acharya said.
Monsoon holds key
To be sure, the rising rural demand for steel owing to an increase in agricultural income, the government’s job guarantee programme and better connectivity to urban areas, has a limitation, said Hitesh Avachat, group head— metals and mining at CARE Research.
“The rural consumption of steel is growing at a much faster rate than the urban one, but it is on a low base,” Avachat said. “Rural demand is going to completely bank on the agricultural performance after every year’s monsoon. Also replacement of steel in countryside will be far lesser than urban areas.”
Avachat cited statistics that show the demand surge in rural areas may not be as high as anticipated. During the last decade the number of rural houses grew by 2% as against 4% in urban areas, indicating rural demand for steel for construction may not be high, he said.Also, the demand for four wheelers is not high in rural areas as village folks prefer two-wheelers, he added.
“In the last few years, urban demand has stagnated, and so steel companies are targeting the rural sector,” he said.
Demand for finished steel is expected to grow at a slow 3-3.5% in fiscal 2014, according to CARE Research. It is, however, expected to pick up from fiscal 2015 and from 2014 to 2018, it is expected to see a compounded annual growth rate of 6-6.5%, according to CARE.