IndiaRetailBiz

Around this time last year, ‘Modern’ Retail was buzzing with lot of excitement and euphoria surrounding the sector was highly visible. Even strident political opposition from political activists and unorganised sector was factored in by business leaders in the sector.

Every one connected with retail was anxious about imminent shortage of quality manpower. Managerial talent was in short supply and salary packages were piercing stratospheric levels. HR consultants and trainers were ecstatic about unfolding opportunities.

Like life cycle of any sunrise industry, consolidation is inevitable, however, what has surprised the most experts is its timing. It has happened much earlier than expected.

This is not to suggest that expansion of the retail chains has completely halted or there are no new players entering the sector. In fact, the world’s top four retailers, namely, Walmart (USA), Carrefour (France), Tesco (UK), and Metro (Germany) have all either entered or have made arrangements to foray into India through ‘cash and carry’ route.

They have also resolved the FDI hurdle that bans entry of multi-brand retailers in front-end retail by appointing Indian retailers as their franchisees.

Call it rightsizing, downsizing, rationalizing, restructuring, consolidation, or by any other name, the fact that the sector is already facing the specter of a slowdown can not be denied.

Initial signs of what was in store came from the announcement of Oswal’s decision this July, to shutdown their 22 stores ‘innerwear’ chain called ‘Straps.’

This was followed by recurrent news of closure of few stores owned by prestigious retail chains.

While, Spencer’s Retail (RPG) has closed 40 stores, Next (Videocon) has announced closure of 20 stores in the past five months. Even niche brands like Nike and Conizza have not been spared.

Large retail chains like Big Bazaar (Future Group) and Indiabulls (erstwhile Pyramid) have also closed some of their stores. Even Reliance Retail, according to reports, has cut down the size of its first hypermarket store ‘Reliance Mart’ at Ahmedabad. It has shut one of the three floors and is believed to be in the process of closing down another. This, in effect, will bring down the size (1.65 lakh sqft) of its first showpiece store to nearly one-third of the original.

Even Kishore Biyani has conceded, “I was an eternal optimist; now I have become a realist. Everybody has miscalculated.”

This is not to suggest that Big Bazaar or Reliance have completely halted their expansion. They are certainly opening new outlets at other locations, albeit at slower pace.

In fact, slower roll-out appears to nave now become the corporate mantra of most large retail chains.

This can be seen from the fact that Bharti’s ‘Easy Day’ in the past six months has rolled out just seven stores, four of which were opened on the first day. After initial aggressive roll-out, Reliance Retail, though, has set up over 700 stores in less than two years (not a mean achievement by any yardstick), the number is much lower than its original target. All of their speciality and large format chains, except Reliance ‘Fresh’ are still struggling to cross either the single digit or are in low two digit numbers.

Only, Subhiksha, which is currently mired in many controversies, is appearing to be opening around 60 stores every month.

Importantly, all major retailers have also begun to tighten their purse strings. Reliance Retail, Aditya Birla Retail, Future Group, Provogue, Spencer’s, Koutons and Vishal Retail are among the big retail players, who have initiated cost control measures.

Some of the chains have even begun renegotiating original lease rent agreements.

Apart from cost efficiencies and slow roll out, all big business houses have also begun revisiting their retail strategies.

In a complete reversal of its original strategy of doing every activity on its own, Reliance has now begun stitching partnerships with niche global brands. Reliance in some cases has even offered majority stake and operational control to these partners. Apart from products, Reliance has even tied up for services like supply chain and  infrastructure development.

In another strategic shift, both Spencer’s Retail and Big Bazaar have begun focusing more on high yielding fashion apparel  segment compared to low yielding food and grocery business.

On human resources front, while the high profile CEOs of of Aditya Birla Retail and HyperCity have resigned their jobs, many jobs at the lower levels are also being axed. Against earlier projections of creating half a million retail jobs, Reliance has axed 3,000 of the 20,000 jobs. Most companies are also rationalising pay packages in tune with what is prevailing in their other group companies.

Has ‘modern’ retail then hit the wall?

Well there are many views as there are experts. The most important among others include higher operating costs (rents, salaries, energy bills, etc), fewer consumers (initial craze of visiting newer and bigger shops having waned for a variety of reasons including higher price tags for similar items, which most Indian consumers– even high-end– do not accept), sliding demand (unprecedented consumer inflation being the major culprit), competing brands getting crowded in the same geographic areas (resulting in split demand) without any differentiation (all brand appear to be fighting on discounts alone), poor service, inadequate staff training, and inadequate inventories.

The original thesis of consumers getting benefited from efficiencies of supply chain over the period have been belied as several statutory regulations impede seamless trade between all stake holders. In fact, the dream of efficient supply chain has remained just that– the dream.

In short, India still has many impediments to take advantage of ‘farm to fork’ strategy as the ‘farm’ end continues to remain beyond the reach of many retailers.

Every thing, though, has not been lost as consumers have begun to expect a lot from their retailers as they been exposed to good shopping ambience and experience.

The current slow down, in the long run, may also turn out to be good for the sector as fly by night operators ready to make quick buck will think twice before venturing into the sector. While, investors will resist unrealistic valuations, financiers will look high sales and earning projections with suspicion.

Existing players will also have breathing time to rework and rationalise their strategies and tweak their operations. There will be no mad rush to match growth plans of their competitors.

Bharti Retail’s President and COO Vinod Sawhny has made an interesting comment in this regard, saying, “We plan to have pan-India presence, but are in no hurry to roll out stores everywhere. Our aim is to understand the dynamics of retail and evolve the right model. We are not here to prove anything in a year or two, but looking at 5-10-year period.”

Inevitably, there will be some casualties, leading to M&A opportunities.

This, we hope will ensure survival of the fittest players with deep pockets and long term commitment to the sector.