The Hindu Business Line : A bagful of woes

By 2011, of the 750 planned malls in India, 350 will close down at the drawing board stage, around 175 will be greatly successful, while 175 will do moderately good business. The rest will disappear without a trace.”

This statement by B. S. Nagesh, Managing Director and Chief Executive Officer, Shoppers’ Stop, at the Asian Apparel Conference recently reiterated the concerns surrounding the growth of the retail industry.

The retail sector is poised to grow from $330 billion in 2007 to $427 billion by 2010, according to the 2007 AT Kearney Global Retail Development Index. The organised retail sector is to grow to 22 per cent from the current four per cent in the next three years, making India the fifth largest retail destination in the world.

However, the retail revolution in India is a recent phenomenon, three to four years old, and retailers are at an experimental stage, says Arif Sheikh, Director - Marketing, Plaza Centres. The Israeli mall developer Plaza Centres is ready to enter India and has announced the launch of 50 malls in the next five to seven years.

Indian retailers still have a long way to go to be able to compete with their Western counterparts, explains Sheikh. “The infrastructure, technology and customer relationship management has scope for improvement. Furthermore, basic concepts such as load carried per sq. ft. of flooring, so important to formulate a mall floor plan, are alien to Indian retailers and we are trying to acquaint them with such ideas,” he said.

Abraham Rami Goren, Executive Vice-Chairman, Elbit Imaging Ltd, on his recent visit to India, expressed disappointment over the quality of malls here. “Barring a few, the others are not much of malls,” he had said.

Defending domestic retail, Nagesh said that the malls in India were up to the mark though there was still much learning to be had for the industry. “The gross margins are impinging as the properties are not being delivered on time to retailers by the real estate developers. Plus, the service tax on rentals is extremely high along with the legislation cost,” he says.

Shoppers’ Stop is lagging behind by 12 months in the opening of its stores and the situation is no different for other retailers, he adds. Shoppers’ Stop currently operates 49 stores. Nagesh expects the rentals to come down post-2010, when the situation would stabilise. For now, retailers need to capture locations and that is what everybody is doing, he says. Aniruddha Deshmukh, President – Retail & FMCG, Raymond Ltd, says, “The malls which came up initially, like Metropolitan, Phoenix … they might not be great malls, but the ones coming up now – Gurgaon Ambi Mall, Saket and Unitech are fairly good.” However, according to him, the main problem gnawing the retail sector was wastage, by inventory build-up.

“I do not see the retail business plateau out, but merchandise management, controlling wastage, should be undertaken as a separate agenda to make the business profitable. A lot of cost goes into unsold inventory,” he says.

Commenting on the recent Bhubaneshwar Development Authority’s move to issue show-cause notices to Pantaloons, Big Bazaar and The World for inadequate parking space, he said, “The importance of providing basic comforts to shoppers – such as easy parking facilities – is not being considered by some of the top retailers. Apart from that, public transport should be made accessible around the retail destinations. It will bring in revenues for the government as well as bring in more customers for the malls.”

Meanwhile, the malls in Bhubaneshwar will be treated as unauthorised constructions if they do not respond to the BDA notice. They face the risk of being demolished if no alternative is found, say media reports. Kishore Biyani, Managing Director of Future Group which owns Pantaloons did not want to comment.

Deshmukh cites 100 per cent attrition rates in front-end retail a year ago to be a problem.

“Though the attrition rate has been brought down to a certain level, and back-end attrition is not that high, training initiatives are quintessential to be brought in at this stage along with incentives to retain staff,” he says. Some retailers, like the Tatas, have plans of starting in-house training institutes to tackle the problem.

Rahul Mehta, Clothing Manufacturers Association of India, welcomes this initiative but also points to increasing manpower costs pulling down the margins. “The cost of manpower has increased by 15 to 20 per cent this year. This is a factor the retail industry has to live with, so they should chalk out a way to maintain healthy profits, while at the same time rewarding their employees,” he says.

The manpower costs did pull down the September quarter results of some retailers, especially Shoppers’ Stop, which saw an increase of 57 per cent in its manpower costs hitting the revenues. Other retailers like Pantaloons also showed unsatisfactory results in the September quarter, due to squeezed margins.

A worrisome aspect of organised retail are the protests witnessed in Uttar Pradesh, Jharkhand and West Bengal, where small retailers have expressed their fear of being wiped out with the entry of big retailers like Reliance.

A study by the Indian Council for Research on International Economic Relations (ICRIER) on the impact of organised retailers on the small and traditional retailers was undertaken in the beginning of this year and it is due to be released early next year, according to Dr Mathew Joseph, Senior Consultant, ICRIER.

“The numbers reported in newspapers are exaggerated and we have not released any data on the retail report yet,” says Dr Joseph.

The report is a sample survey of customers and small retailers from important cities and some big retailers and farmers,and will cover all formats of retailing, he says. It is a policy based report and will make suggestions to the Ministry of Commerce and Industry on the measures to be taken.