Retail debacle:

‘Bird of Gold’ with reference to the ‘Soney ki Chidiya’ , a mascot of sorts to the Pantaloon Group and title of the famed report by Mckinsey, perhaps was the defining phrase for the Indian retail story, until now!.

We were always being served by the local kirana shop (there is one such store for every 100 people) and then came the era of organized retailing. The promise of a bird of gold in the hands of the burgeoning middle class seemed so easy to catch, for all those who had deep pockets (capital). However, Subiksha and Vishal have recently announced closure of one third of their stores. Reliance, Tatas & Birla have almost shelved their expansion plans & are about to close many of their existing outlets. The third quarter results of listed retail companies also depict their precarious state of operations.

Declining margins may be attributed by some to increasing costs of debt & real estate (yes, most of the retailers had locked in their rates) but explaining decline in sales is hard. Same Store Sales growth (once you remove sales due to new stores added) reveals that the actual sales have not just slowed down, but declined. The Indian growth story was largely fueled by the increased spending by middle class hypothesis, this decline in sales should come as a serious blow to the ‘strong fundamentals’ theory.

‘Bottom of the Pyramid’ now seems like a mirage, but we believe it is not. The consumption story of India remains, but organized retail is loosing its part in it. The problem, as R Subramanian (MD, Subhiksha) puts it, ‘Indian retail was doing too much, too soon’. Companies poured in billions of rupees into building outlets at a frenzied pace. Reliance had plans of 2,000; Subhiksha actually opened 1,500 outlets in 2 years; Pantaloon opened dozens of new formats (including one which was supposed to sell candles). All of this ‘leveraged’ investment happened at the front end, whereas the modern format of retailing relies heavily on the backend (supply chains); except a few like Pantaloon & Reliance, none of the retailers invested & strengthened their supply chains. Now, Subramanian admits ‘It was no wonder that, for most new entrants, the expansion was a disaster waiting to happen’. These retailers who faced increased costs in goods, salaries and through inefficient supply chains; were pushed to increase the prices, thereby not delivering on their promise of being the cheapest seller. We started going back to our trusted old friend at the street corner shop.

The way out (is there one?) or the way going forward- Those who continue to deliver the promise of being cheap & efficient will continue to thrive on gold. Cutting costs and reworking their system is top priority for the retailers who are hurt. We believe that a sound retailing model should always be backed by support/supply system, without which the advantage of organized retail format is lost.

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