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Bhavana Acharya

The Indian retail story is much talked about and discussed. With the build-up of mall space in the country, increased spending and resilient demand, retailing promises to be an attractive sector. Major retailers have, therefore, aimed at expanding their footprint aggressively and upgrading their stores over the past couple of years.

Raising funds through primary market offers (initial public offers) appears to have been the popular route to fund these expansions, what with seven major retailers taking the IPO route in the past two years, raising a total of Rs 667 crore. But how far have expansion plans laid out in the offer documents materialised?

The primary reason for which most retailers accessed the markets was to open exclusive own-brand stores. All retailers aim at improving their brand recognition and the route they see as most effective is through exclusive branded stores. National chain stores, such as Globus or Lifestyle, are the second choice, after exclusive outlets. Other common objectives include renovation of existing stores and ramping up of manufacturing capacities to supply to the stores. The cost of setting up a retail store includes rental deposits, interiors, furniture and fixtures, lighting and electricals and signages, to name a few. The costs depend on store location and size, type of finishing used and so on.

The IPO plans of six retailers — Shoppers’ Stop, Provogue India, Kewal Kiran Clothing, Celebrity Fashions, Koutons Retail and Vishal Retail — were considered for our study. This universe included a good mix of large format stores (Shopper’s Stop), lifestyle retailers (Provogue) and value-oriented chains (Koutons, Vishal).

Of these, Koutons had, by far, the most ambitious plans, with an aim to open as many as 140 new outlets in the space of two years, i.e., by the end of March 2010. Kewal Kiran Clothing came next with plans to add 114 outlets followed by Provogue, eyeing an expansion of 61 new stores. Celebrity Fashions intended to open 20 outlets in a span of two years. Shoppers’ Stop set an objective of expanding into 11 new stores across India. Vishal Retail, while not specifically stating the number of planned outlets, earmarked Rs 105 crore for expanding and increasing visibility in 2007-08.

The objects set out in the Offer Documents have largely been met; in fact, for many retailers, the expansion in network has been more than targeted. For Koutons, the extent to which IPO objectives have been met will be fully visible in 2009-10, as it raised funds as recently as September 2007. However, the retail chain has already gone in for large-scale expansions beyond the scope of its IPO objectives.

As of March 2008, Koutons had 1,175 outlets against the 999 at the time of IPO, well beyond the 140 additional planned stores. It has utilised about 90 per cent of the issue proceeds earmarked for expansion. About 48 per cent of its stores are located in northern India and plans are on to expand into the South.

Vishal Retail came out with its IPO in June 2007 and raised close to Rs 110 crore. It had a network spanning 101 stores by March 2008, up from the 49 stores when it went in for an IPO. IPO proceeds have been fully utilised, Rs 104 crore for expansion and the rest to meet issue expenses. The company also plans to raise additional equity up to Rs 250 crore. It also plans to ramp up store count to 190 by FY 09.

Provogue’s target of 61 new outlets by end of March 2008 was met and the company spent a total of Rs 58 crore towards expansion of retail network, manufacturing and product design and development facilities besides meeting working capital requirements. By March 2008, it had opened 124 stores, 22 stores over the IPO target.

Indian Terrain brand owner Celebrity Fashions too met and exceeded IPO targets of 20 new stores. Its stores now number 34; including the five it had open before its IPO.

How did these companies manage to finance these additional stores, over and above the IPO targets?

A major source of funding could have been debt. Four companies have substantially increased total debt in the period between their IPOs and March 2008.

The total debt of Vishal Retail more than doubled in FY08 to Rs 532 crore, and standalone debt of Koutons also increased by Rs 209 crore in FY 08, a 100 per cent jump over the previous year. Total debt of the other two companies, Provogue and Celebrity Fashions, saw smaller increases.

Shoppers’ Stop faced delayed deliveries of store premises and therefore fell short of its IPO mark by one store. The ‘Objects of the Issue’ stood modified with changes in new store locations, store renovations and allowing utilisation of funds for general corporate purposes. It has, however, undertaken new initiatives tying up with domestic and international players to open outlets catering to food & beverages, cosmetics, infant and toddler care and lifestyle bookstores.

A similar problem was encountered by Kewal Kiran Clothing, which owns the brands Killer, Lawman, Easies and Integriti.

Delays in securing delivery of retail and manufacturing premises, and difficulty in securing affordable, quality retail space saw the company miss its projected 143 stores by a sizeable margin of 40 stores by March 2008. Piramyd Retail, which raised capital in 2005, was acquired by the retail arm of the Indiabulls group- Indiabulls Wholesale Retail Services in December 2007. The move complemented the retail plans of Indiabulls and provided an inorganic entry point to multiple retail formats.

Store openings appear to be on track for several of the players. So have these delivered the expected contributions to the earnings picture? It may be early days yet to analyse this. Sales generation and break-even for new stores take time and vary based on the location and the format. For example, a Koutons franchisee store might take anywhere between three and four months to break even in northern India while taking six months in the South.

However, recent numbers suggest that value retailers who have expanded at a furious pace have managed strong sales growth. Koutons has the highest increase in sales at 97 per cent in FY 08, followed by Vishal Retail at 67 per cent.

These companies have been the most aggressive in store openings and have large format, value-for-money stores as opposed to the lifestyle format of the other players. Sales, however, grew at a slower pace in FY 08 compared to FY 07 for most retailers.

Only Shoppers’ Stop recorded a marginal growth of 150 basis points in FY 08 over a year ago figures. Provogue witnessed an 11 percentage points decline in sales growth to 42 per cent in FY08. The decline was, however, far lesser than the fall registered by peers.

While exclusive own branded stores are lucrative, owning and operating all of them is being increasingly viewed as unfavourable, given the costs involved. One method of large scale and cost effective expansion endorsed by retailers such as Vishal Retail is the franchisee route.

The market size for Indian retail is projected to touch $450 billion by 2015 according to a report by McKinsey. Organised retail, though challenged currently by higher costs, is expected to grow to 14 to 18 per cent of total retail in the same period, throwing open a wide market opportunity to be tapped.

With an expanded store network already in place, the existing players in the listed space are certainly positioned to tap this opportunity.

More Stories on : Retailing | Retailing | Insight | IPOs

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