The Hindu Business Line : Taking stock of retail brands

FOR confirmation that retailing, as an idea, has captured the imagination of investors, look no further than the valuations enjoyed by Pantaloon Retail and Trent. These stocks trade at price earning multiples higher than those commanded by several mid-cap information technology stocks.

While this may partly be because they are the only options in the retailing space, it is indicative of the growth prospects in what is a nascent business domain for organised players. Retailing is attracting the bigwigs in a manner not witnessed until a few years ago.

Shop till you drop! That is what the Pantaloons, Shoppers' Stop, Lifestyle, Giants and Big Bazaars scream out to the thrifty Indian consumer turned shopaholic. The mushrooming of multiple formats in retailing — departmental stores, hypermarkets, malls and discount stores — has spurred interest in the retail sector, which has now started to attract the attention of investors. Even companies such as Raymond and Zodiac Clothing are viewed as an opportunity to play the retailing theme.

The universe of stocks in the retailing space and the size of their underlying operations are bound to expand over time. Organised retailers have a market share of just 2 per cent now. KSA Technopak, a retailing consultant, expects the share to increase to about 10 per cent by 2010.

Such a rapid pace of growth would be in line with what has been the case in other developing countries such as Thailand and China. No longer can investors ignore the emerging growth story that is the organised retail business.

At the global level, retail stocks attract considerable investor interest. One of the top ten companies by market capitalisation is Wal-Mart — a retail chain that pioneered the discount store format with its "Every Day Low Pricing" policy.

An emerging play

The retail sector in India has, however, so far been largely out of the stock market loop, with only two pure retail plays listed: Pantaloon and Trent. This is set to change, however, with the imminent initial public offering (IPO) of Shoppers' Stop. It may not be long before other companies take the IPO route (the RPG group is considering a floatation in the near future).

A few retailers have resorted to private equity funding and would have to provide their investors exit options once they attain critical mass or after the expiry of a defined period specified in the agreement with shareholders. The listing window may open up investor interest on a scale other options will not.

Several listed companies, whose core business interests lie elsewhere for now, have also increased their thrust on building a retail presence over the past few years. Textile companies, such as Bombay Dyeing, Himatsingka Seide and Welspun India figure prominently in stepping up their retail presence; Bombay Dyeing, plans to open more retail outlets through its own resources or through franchisees, while Himatsingka and Welspun are in the process of setting up retail outlets across the country.

Companies such as Raymond, Grasim and Indian Rayon, which already have a significant market in apparel retailing, are consolidating their presence.

These companies are expanding their retail presence now more as part of a strategy to increase visibility and brand awareness; in the process, they also have positioned themselves to ride the retail boom. These companies are better placed on the resources front than most pure retail players.

That retailing is the flavour of the day is clear from the plans of Indo Rama Synthetics, one of the larger polyester players, and Deepak Fertilisers, which have indicated plans to enter into retailing.

Indo Rama intends to foray into food and grocery retailing, which is a rapidly growing, high-volume low-margin segment.

Rising consumer spending levels, the increasing demand for a better shopping environment, and the success of select players in creating distinctive retail formats, are encouraging new entrants in the business. Investing in the stocks in the retailing sector could, however, be risky.

At the global level, investors in successful retail players such as Marks & Spencers, Sears and K-mart have suffered steep losses as the businesses floundered.

A host of qualitative factors determines the success of the business, which is driven by the ability to conform to the consumers ever-increasing standards.

This makes it difficult to make a call on the likely success of various initiatives and plans announced by new entrants and existing retailers. If you are considering an investment in retailing stocks, do keep track of key factors that drive profitability:

Selecting the right location

Location. Location. Location. This is the cornerstone of a retailer's business.

A good location would attract footfalls (a measure of the average number of people who visit the store in a day), which could lead to higher sales and also lure visitors who could be potential customers at a later date.

One of the stumbling blocks in selecting a location is the limited availability of high quality, low-cost real estate. This is one reason why large retail formats in India are few and far between.

Cities such Chennai and Bangalore and, increasingly, Gurgaon and Hyderabad, have emerged as retail destinations because of the availability of the relatively lower-cost, real estate compared to Delhi and Mumbai.

The location depends largely on the format retailers choose to operate in. For instance, a supermarket is located within a 2-3-km radius from a particular neighbourhood, while hypermarkets (30,000-40,000 square-foot stores that retail general merchandise and grocery), on the other hand, target customers who are willing to travel some distance to meet their bulk requirements at lower prices.

A mall (a shopping complex where several retailers compete for buyers' attention) has to be in a prime, central location to attract footfalls.

Pantaloon, for instance, has its departmental stores both in malls and other locations; its Big Bazaar outlets are located in the suburbs where space is not a constraint. A mismatch between the retail format and the location could have a negative impact on sales.

Managing the supply chain

Location is a key factor in India for another reason. Poor infrastructure (particularly, roads and ports) leads to inefficiency in the supply chain, which impacts profitability. The retailer has had to ensure proximity to his source and his customers.

Logistics is of particular significance to food and grocery retailers, as freshness of food and grocery is highly valued by customers.

The stiff supply chain costs (such as multiple sourcing, cold chain facilities and multiple warehousing) associated with the effort to ensure delivery of fresh food products, have constrained the expansion plans of most grocery retailers.

The selection of vendors also has a bearing on operations and costs. The presence of a large number of intermediaries delays the time to market a product, and adds significantly to cost. Retailers have tried to cut costs by pruning the use of intermediaries, and by backward integration.

For instance, Pantaloon buys its dry staples directly from millers for its Food Bazaars; it is now experimenting with contract farming, too, to lower its cost structure.

Managing inventory levels is crucial in retailing. A few retailers have managed to do this well, aided by information technology. Inventory management assumes even greater significance in apparel retailing, where stocks have to conform to rapidly changing fashion trends.

Scaling up

The need to strike a balance between keeping prices affordable and enhancing margins necessitates rapid expansion to gain operational efficiencies. Pantaloon, one of the more aggressive players in the market, plans to almost double its retail space to about 2.1 million square feet by 2005.

With organised retailing still a fledgling industry, industry players feel the pie is large enough to accommodate such aggressive expansion plans as well as newer entrants.

Regional players are attempting to expand into Tier-II cities (Jaipur, Lucknow, Hyderabad, Kochi, Coimbatore, for instance) to consolidate their presence.

Competing with the kirana

Striking a balance between providing a good shopping ambience and maintaining an affordable price is essential for a retail chain's success, particularly in grocery retailing. Even as supermarkets and other grocery stores build on their competencies in managing the supply chain and providing a wider range of products, they have not been able to win over customers completely; the latter are still comfortable with the kirana store (general store) and the street vendors.

Apparel retailers have also found that the scope for charging premiums on high-quality garments is limited.

Department stores such as Pantaloon and Westside have tried to make garments more affordable and profitable through the use of private labels (a product line is owned, merchandised and sold in the retailer's own store).

Private labels do not require the heavy advertising expenses associated with branded products, and contribute to higher margins.

The use of private labels is catching on in grocery retailing as well. Walk into a Nilgiris or Food World store and you will notice the dominant share of private labels of shelf space.

Grocery stores are also initiating door delivery services in an attempt to compete with the local stores. Persistent efforts along these lines may enable organised retailers to get a better grip of the market.

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