Retail - Riding on a promise
There’s a palpable buzz in the retailing space. Apart from the big names of India Inc. who’ve entered the sector, foreign biggies, too, are looking for a piece of the action. With major players announcing huge expansion plans, the industry is all set to triple its size to 90 million square foot of retail space by 2009-10.
Pantaloon had the first-mover advantage. It saw the opportunity in organised retailing early and set up multiple format stores across the country. Now, the difference in scale, revenues and profitability between giant Pantaloon and the rest of the retail sector is astounding.
Pantaloon is five times the size of its nearest competitor, and has a market capitalisation of Rs 10,315.1 crore (as on November 19, 2007) compared to Provogue India, which is valued at Rs 1,915.2 crore.
But that’s expected of a store that operates more than 9 million sq. ft of retail space. It added 0.6 million sq. ft in October 2007 and has set a target of a total of 10 million sq. ft in 2008.
What is it that makes Pantaloon tick on the stock markets? For an answer, look behind the cash counters. Pantaloon has multiple business formats from mass retailing to financing.
The company operates stores in many different formats and has also forayed into Home Solutions, Future Bazaar and also has a retail financing arm, Future Capital. Analysts are considering the sum-of-the-parts valuation to fix a price on the company.
As of now, the main retailing business commands a price of Rs 490, while Home Solutions and Future Capital contribute Rs 100 and Rs 95 to its current share price of Rs 685. Besides, Pantaloon’s business is on a strong growth path. Says Amnish Agarwal, Research Analyst, Motilal Oswal: “Pantaloon has fine-tuned its retail business and has expanded its business models, scaling up in different areas such as financing.”
Not many listed retailers have managed to scale up their operations like Pantaloon. Other retailers operating in the space are largely single-format companies that have one or two types of stores. TruMart, the food and grocery outlet of Piramyd Retail, plans to operate only two formats—largescale stores with areas ranging from 5,000-7,000 sq. ft, and smaller stores of about 2,000 sq. ft each.
Others, such as Vishal Retail, cater to the mass market and sell products such as apparels and home products. Provogue operates in the lifestyle segment. But it’s the multiple format strategy that has made the company what it is.
Over the last nine months, Pantaloon has doubled its market value to Rs 10,315 crore. Perhaps the only company that has come close to creating that kind of value is Titan Industries, which has a market capitalisation of Rs 6,724 crore. But it has a different business model, has invested in brand creation, and is largely operating through the franchise route, which keeps its overhead costs low.
Across the retail industry, however, formats are still evolving as companies fine tune their strategies. Reliance Retail, for instance, has put its Reliance Fresh forays on the backburner following a political backlash in Uttar Pradesh and West Bengal and has forayed into the jewellery segment with Reliance Jewels.
The Rs 64,600-crore organised retail segment currently accounts for about 5.3 per cent of the total retail pie in the country, and is set to grow at a fast clip on the back of massive investments in the segment and touch a turnover of Rs 1,32,000 crore by 2009-10, according to Ernst & Young (see Picking up the Pace).
It is also expected to increase its share of the pie to 8.2 per cent by then. The Indo-American Chamber of Commerce estimates that the Indian organised retailing industry needs to invest Rs 3,00,000 crore over the next few years to realise its full potential.
The biggest action within organised retail is in the food and groceries sub-segment, which contributes 10 per cent of total sales. This is also the segment that is going to witness the maximum competition over the next two or three years. TruMart, the food and grocery store of Piramyd Retail, is planning to scale up its operations from 30 stores to about 75 by 2008. The company is planning to open stores in Tier-II and Tier-III cities largely.
Not surprisingly, all retailers are investing in stateof-the-art supply chains and logistics support systems. Reliance Retail, Shoppers’ Stop, Future Group and several others are investing huge amounts on this. Kishore Biyani, MD, Pantaloon Retail (India) and the Group CEO, Future Group, reckons that a viable supply chain already exists, “otherwise the country couldn’t have successfully fed its one billion-plus people”. But, he concedes, there’s scope for improvement.
Currently, about 40 per cent of perishable goods are wasted due to inadequate cold storage and transportation facilities. Says Pinaki Mishra, Partner (Consumer & Retail Practice), Ernst & Young: "The supply chain has a long way to go if costs have to come down."
Retailing is a low-margin, high investment business. A typical store requires an investment ranging from Rs 1,000 per sq. ft for a low-end format to about Rs 4,000 per sq. ft for a higher end one, depending on the format.
Mass market retailers operate with margins of less than 5 per cent and, in competitive areas, these are squeezed further to 2-3 per cent. That leaves little room for error in sourcing strategies. Says Mishra: "Mass retailing has high costs, but low margins. You can't make too much money unless you get your sourcing right and exercise strict control over costs."
High real estate prices have been a deterrent for some companies. The world over, real estate costs account for about 2-3 per cent of a retailer?fs revenues, but in India, this can be as high as 7-8 per cent. Besides, poor location and inconvenient store formats further add to costs. But Biyani is not too perturbed by rising real estate prices.
Pantaloon has a real estate arm that identifies new locations for the company?fs expansion. Says Biyani: "We are among the few companies who identified the problem early on. We have identified about 30 million sq. ft of retail space and don't foresee any problems here."
It's not just Biyani who's confident of tackling rising real estate costs. On the other side of the competition, Vishal Retail, an upcoming mass market chain that has been growing in Tier-II and Tier-III cities, is foraying into more expensive real estate markets such as Mumbai.
But the next few years are crucial for the retail industry. With the likes of Bharti-Wal-Mart and Reliance Retail entering the fray, smaller and weaker players will get elbowed out. This may lead to a round of consolidation as the latter exit the market or are acquired by stronger rivals. Says Mishra: "Small players could be taken over or can become stronger by merging with others like themselves."
For now, the biggest player, Pantaloon, is gearing up for the challenge. With a presence in different segments of the retail spectrum, the company has almost insulated itself against a slump. Its newly-launched businesses, such as Future Media and Future Bazaar, have yet to build scale and add to the profitability. But Biyani is unfazed.
"We are looking at new products and are ramping up our operations. We hope to have a 20 per cent of the total floor space occupied by organised retailers in the next few years."
That's a brave assertion. Given his track record, it's difficult to reject it. But given the might of the Reliances and Bhartis of this world, it's equally difficult not to be a little skeptical. So, watch this space.
