Biyani rolls out ethnicity, denies retail slowdown

The Future is changing track. The pioneer of organised retail in India, the Kishore Biyani-promoted Future Group has altered its strategy. From mass to class, the aspirational top-end consumers, to be specific. The undisputed king of Indian retail tells ET that he will focus more on the group’s fashion-driven retail formats like Pantaloon and the latest, Ethnicity, to achieve a turnover of Rs 10,000 crore in 2008-09. Mr Biyani insisted that slowdown is not reflecting from consumer spend. Excerpts:

Despite retail slowdown, you have launched yet another format Ethnicity. What makes you so sure that the concept will click?

Who says there is a slowdown? Although the environment looks gloomy, the Indian consumer is spending on FMCG, consumer durables and garments. Sales do not drop even if the sentiment is negative. Roti, kapda, makaan are essentials and consumer does not stop buying them.

Ethnicity is targeted at the aspiring urban Indian consumer who is looking for exclusive ethnic product-mix during marriages and festivals. It is an attempt to go back to our roots and create a niche category of ethnic wear and products like mojris, semi-precious jewellery, handbags, home decor products, handicraft, etc.

With brands deserting Ahmedabad and two Big Bazaar outlets closing down, are the times too challenging? Do you see a retail graveyard here?

It is a wrong presumption. With Nano happening in Gujarat, there is so much positivity around the state. If Nano can happen, so can Ethnicity. As it is, the success rate of any brand is 20-30%. While we had to wrap up one of the stores because of high rentals and another because we targeted the wrong consumer, we are expanding other formats (in Ahmedabad).

We have plans to set up eight Ethnicity stores across India in the next two years at Rs 8 crore per store spread over 25,000-30,000 square feet. Considering the urban poor customer is devoid of aspiration, a Big Bazaar would not click with them. At the same time, we have realised that we have to focus more on fashion even in Big Bazaar outlets to draw the aspirational `India One’ customer. (Future has re-categorised its target segment under India One, India Two and India Three.)

You are known to experiment with different retail formats. Which one has been your favourite?

All formats launched by the group are close to my heart. At this point in time, Ethnicity and Pantaloon are my favourite formats. That’s where the money is. Pantaloon is overachieving its target. We expect to record a turnover of Rs 10,000 crore in 2008-09 compared to Rs 6,500 crore in the last fiscal.

Ethnicity alone would fetch us revenues worth Rs 25 crore in the first year of operation.
How have real estate prices hit you?

Real estate scenario in a city like Ahmedabad is not inhibiting. In fact, realtors are so welcoming that they let us set shop without expecting any rentals for the first six months. We will add 5-6 million square feet of retail space in the near future.

There was a simultaneous boom in retail and aviation sectors. Now that the crisis looms over aviation sector, do you expect retail to be hit sometime soon? Could retail sector expect lay-offs?

Growth is important to avoid such stagnation. We believe that retail is booming and so there is no question of lay-off at this point. While investors like lay-offs (as it cuts down on the expenditure), promoters believe otherwise. One has to strike the right balance between the capitalist and socialist ideologies. I am a mix of both. A socialist-capitalist and vice-versa.

After Ethnicity, what next?

We are going to open the first stand-alone outlet of John Miller in Mumbai on Friday. The outlet will be located at Kala Ghoda and at the same store where I had started my first journey as an apparel supplier.

Ab har kisaan ho kamyaab

Recent economic woes—sparked off by rising oil and commodity prices earlier in the year, then sustained by the ongoing Wall Street crisis—would suggest that retailers should be a worried lot today. But accounts from across the world offer a mixed bag of good and bad news. In the US, with the holiday season standing around the corner, the National Retail Federation has said that sales growth will be down to the worst in six years. Other forecasts are even gloomier, with TNS Retail Forward predicting the worst holiday showing in 17 years. On the other hand, China, where economic growth has slowed for the fourth straight quarter, is yet seeing retail sales growing at close to the fastest pace in at least nine years.

As for India, although some headlines have been focusing on organised retail taking a hit, most analysts remain upbeat about future prospects. A Northbridge Capital report released late last month finds that this segment is growing at 40% a year. Organised retail is currently valued at $300 million, with only 7.5% of the total retail pie, but this share is projected to grow to 20% by 2010. There are other reports offering other figures, but what they all have in common is 1) a certain bullish tone on growth projections and 2) a certitude that a big chunk of this growth is going to take place in the country’s hinterlands, which extend from tier II and tier III towns to rural India.

By some accounts, the rural market puts away almost 50% of the goods consumed in the country and about 35% of the offtake for FMCG products. And the affluent sector in rural India is growing faster than the urban one, with per-households spending in rural India forecast to reach current urban levels by 2017. The news is good even on the employment front, with an Icrier study showing that the 3.93 million jobs added in rural retail during 2000-05 put the urban growth of 0.51 million to shame.

Recently, the Rural Marketing Agencies Association of India and Francis Kanoi Marketing Research conducted a study of the retail habits of rural India. According to Francis Xavier, managing director of Francis Kanoi, “the main finding from the study is that the number of retail outlets in rural areas is booming, with nearly 45% of them set up in the last five years, and the rural folks seem to be favouring the retail outlets in their villages to meet most of their daily needs.”

All’s under one roof

ITC, which has already scripted a great success story with its groundbreaking eChoupal initiative, whereby local internet kiosks link farming communities with global markets by providing information on everything from comparative crop prices to weather forecasts, is now creating a physical version of the same concept with Choupal Saagars. These are being set up at the hub of every 40 eChoupals, to facilitate all the material transaction needs of farmers, ranging from the sale of produce to the purchase of household goods. From one in 2004, the Choupal Saagars have now grown to 23, with ITC shooting to scale these up to 100 in the near term. Guiding mantra: Jaruratein Anek, Jagah Ek.

The one-stop shop idea is integral to DSCL’s Hariyali Kisaan Bazaar (HKB) initiative as well, which has also been on an expansion spree, with the five projects set up in 2002 having grown to 203. Their motto: Ab har kisaan ho kamyaab. As for the future, HKB president and business head Rajesh Gupta says that the company has an all India plan, but location decisions for each new unit are based on intensive microanalysis of whether the demographics and spending ability of a given catchment area suits the HKB business model: “This includes factors like literacy, receptiveness to new ideas at the agricultural level and even TV penetration.” This data dynamic is also critical to determining the product mix being carried at different stores. HKB’s merchandise list is made up of 60-70% core commodities, with the variables being determined by local brand and price preferences.

In the last three years, according to Xavier, the strongest growth in the number of retail outlets has been in the North zone at 38% as against an all-India growth of some 30%: “Notwithstanding the popular stereotypes, the prosperity levels now seem to be growing the most in the North.”

The entry of such enterprises has transformed product choices. With the rapidly expanding outlets offering both branded and non-branded versions of consumer goods, electricals, durables, kitchen appliances, construction materials and, of course, agri-inputs, Xavier says: “Even the infrequently bought products are entering villages rapidly.”

S Sivakumar, who heads the international business and agricultural division of ITC, points out: “The buying and usage habits of consumers in villages and small towns are changing rapidly with increasing incomes and greater exposure to media. They have started experimenting with newer products and also at higher price points. The demand for the products that were not available earlier through normal retail channels is also growing.” Here, he gives the example of how ready-made garments now comprise 95% of his apparel sales, in sharp contrast to how 80% of these are in fabric form as far as traditional rural retail channels are concerned. Another fast growing category Sivakumar points to is that of products that provide innovative solutions to day to day needs, “where organised retail has taken the role of a market maker”. A good example: the BP Oorja stove that uses biomass pellets as fuel.

Too much , too soon?

Still, at a time when retailers’ shares are going South along with the rest and when various players are paring down their headcounts and expansion plans, shouldn’t rural retail be a worried sector as well? Was the bugle sounded too early on this frontier? Gupta says that there is no question that a shakeup is on the way, and we will see some players fall by the wayside in the next few months. This, he predicts, will be as much on account of faulty business models as of failures in the due diligence processes propping up these models. HKB, however, seems to be on a strong wicket so far because of its traditional agri-strengths, which complement a robust and efficient supply chain in a sector where the cost of servicing the markets is very high.

Vishal Retail chairman Ram Chandra Aggarwal, who opened his first hypermarket in 2003 and now oversees 135 of the same spread across tier II and III towns, explains that his company’s strength lies in its foresight: “We want to be among the top five companies in Indian retailing, and any company operating in the retail space today has to recognise that a major chunk of consumers is in the hinterlands. This is where the masses are located and all the players are eyeing them. In these virgin markets, our first mover’s advantage will reap exponential returns.”

For a sector that predominantly relies on farmers and agriculture as a source of business, the future is also dependent on the government. As of now, Sivakumar says that the laws restricting agricultural produce marketing, procurement of essential commodities and futures trading constrain companies in significant ways. If theAPMC, Futures Trading, and Essential Commodities Acts were to be reformed, this would help the players procure in large quantities, hedge against risks and so on.

Sivakumar also identifies two factors as critical for any player’s future in the rural sector: First, every market has to discover its own ideal model and this discovery process involves experimentation. What is also natural in this process is that some formats wind down over time while others, the more prescient ones, move on and on. Second, in contrast to the FMCG goods for which there is a well laid out map for moving brands through the country’s interiors, stores have to sort out supply chain issues, delivery formats and reaching out processes for many other goods from scratch.

His final word: “There is no question of the rural retail revolution having been mistimed. Even if it had occurred five years later, we would still have to go through a process of consolidation and shakeouts. But as for whether the rural Indian is ready for this format, he always has been.”

Big Bazaar footprint explodes all around

Kishore Biyani does not subscribe to the view of a global meltdown. His Future Group's strategy is paying off in numbers and his outlets seem to have more and more goods to offer.

In effect, he is increasing the real estate that has been leased out to his company for more and more retail outlets. 
One wonders whether people are buying more things if they enter a pretty looking showroom or a mall such as Pantaloons or Big Bazaar. To put it in John Donne's language , "Wasn't the customer weaned till then?" 

For one, the Future Group's retail chain Big Bazaar is itself is planning to have 300 hypermarkets in the country by 2010-11 . 

The company may also increase its annual turnover to Rs 13,000 crore by 2010-11 , up from Rs 3,600 crore last fiscal on the back of its expansion. They had reported begun with their first store in October 2001 and till date have crossed the 100-store mark. This was capped with three stores that opened recently in Pune, Cuttack and Delhi. The company's top brass plans to increase the number of stores to 300 by end of the 2010-11 fiscal. 

Big Bazaar chief executive officer, Rajan Malhotra has reportedly concurred on that figure. The company has also gone on record saying that it would have another 35 stores by the end of its fiscal in June 2009 to take the total number to 135. To achieve this they are targeting a turnover of Rs 5,000 crore in the current fiscal year and have formulated plans for reaching a figure of Rs 13,000 crore by 2010-11 fiscal. 

Malhotra has also reportedly concurred on such figures as well. 

Ror the expansion, the company would be looking at both the metros and Tier I cities, besides Tier II and smaller cities. 

The strategy seems to be perfectly on track as the Big Bazaar hypermarkets had a footfall of 11 crore last fiscal and the company is aiming for an increase in the numbers up to 14 crore this year. The average size of a Big Bazaar hypermarket is 30,000 sq ft to one lakh sq ft. 

The retail industry is the largest in India among the new and the old economy industries. It employs around 7.93 per cent of the total workforce in this happening economy and also contributes to over 11 per cent of Indian's GDP. 

The retail industry in India will keep growing as it is not yet targeting even one per cent of the potential customer base and their day to day needs. 

The industry as a result is expected to rise by 25 per cent yearly growth being driven by strong incomes, mutating lifestyles, and a young and spending populating compared to an aging one in other parts of the country. 

It is widely believed that by 2015, the burgeoning retail industry in India will be worth $175 - 200 billion. Incidentally, it seems that India's retail industry is one of the fastest growing with revenue to touch $320 billion in 2009. It may also be growing at a rate of six per cent every year. 

A still higher increase of seven to eight per cent is expected owing to growth in spending in urban areas, rising incomes, and a parallel rise in consumption in rural areas.

Reliance may merge retail arms to beat slowdown

Faced with a difficult retail environment and on the lookout for a winning formula, Reliance Industries is mulling the merger of its different formats to make its retail arm more efficient. 

The company is considering merging the management of hypermarkets (Reliance Hypermart), supermarkets (Reliance Super) and convenience formats (Reliance Fresh) just a year after these formats started as separate profit centres , according to people familiar with the development. The idea of the merger is still at a conceptual stage and the company hasn’t taken a final decision. 

A Reliance spokesperson denied that the company was proposing any move to merge its three formats. Reliance Retail, which operates around 650 stores under different formats, has already taken several measures to cut operational cost, ranging from rationalising manpower to cutting office expenses. It has also reduced by almost one-third the size of its hypermarket in Ahmedabad. 

The merger of three formats will potentially kick in economies of scale and help the company rationalise its human resources, thereby bringing down overall recurring expenditure. Sources said the company is close to taking the first step in this regard by merging the respective IT and HR functions of Reliance Super and Reliance Hyper. 

Lack of experience in retail adds to Reliance’s woes 

Sources say the company’s decision a year ago to have all three formats as separate profit centres was aimed at bringing in higher efficiency and more accountability. Three formats , even if they offered several similar products, targeted different audience and needed to have separate strategies, the company had felt then but it is now re-examining this. 

India’s potentially multi-billion dollar retail industry has attracted mammoth interest from Indian and overseas corporate heavyweights in the past few years. Reliance too jumped on the retail bandwagon two years ago with a bigbang announcement. 

The outlook for the retail sector, however, has changed since then. Lack of experience in retail has only added to Reliance’s woes. The company though is not alone in battling a tough time in retail industry. A 16-year-high inflation, high interest rate, slowing Indian economy and the world teetering on the brink of recession is spelling trouble for domestic retailers. They have been struggling to keep up sales even at the cost of losing a fair share of their margins. 

Due to this, despite its financial muscle and ability to attract the best talent in the industry, Reliance has, in its short journey in retail, regularly kept revising strategies. The biggest strategic shift has been its decision to forge joint ventures in over half-a-dozen speciality formats and logistics spaces. 

Unlike other retailers, which have been more cost-conscious, Reliance is said to have been more extravagant and possibly because of that, sources say, it may be forced to take stricter measures. The company has had more employees than required on its payrolls, augmenting its costs. However, Reliance is also more capable of withstanding difficulties.

Slowing economy may offer respite to retail sector

Inflation may be eating into consumers’ wallets, but domestic retailers are not giving up just yet. Retail rentals are showing signs of fatigue after soaring multi-fold until recently. A slowing economy, hardened home loan rates and liquidity crunch indicate rental rates will soon fall in a manageable range. As of now, rentals have dropped by 5-10 % and are set to see a further fall of 15-20 % in the next few months. Even older deals are being renegotiated towards lesser per sq foot cost. 

Currently, lease rentals account for 15-25 % of retailers’ revenues in India and constitute the second-largest cost head, next only to merchandise cost. Salaries & wages and energy bills are next in line. Given the fact that operating profits of major retailers range from 5-10 % of their net sales, small savings on lease rentals can have a dramatic influence on their profitability. 

For instance, Pantaloon Retail’s rental cost for FY07 was Rs 209 crore, which was 6% of its net sales. The 80% growth in rental costs, compared to the 73% increase in sales, has hit operating margins. Though a part of the rise in rentals can be attributed to the company’s rapid expansion, the effect of soaring realty prices last year can’t be ignored. 

However, one cannot help miss the savings in the total operating cost. Even if we were to consider that rentals will stabilise at current levels, it will help Pantaloon Retail’s operating margins as the company continues to grow its revenues. 

The scenario is quite similar for Shopper’s Stop with rentals bills at Rs 101 crore for FY08, comprising 8% of the company’s turnover. Here also, the rental growth has doubled vis-a-vis the increase in retail sales. If rentals were to decline by an average of 10% at the current sales level, the company would have ended FY08 with a positive bottomline. 

EMERGING TREND: 

The domestic retail industry is following in the footsteps of its international counterparts. Having attained a decent geographic reach, players are experimenting with various formats to suit their respective business models. This is done keeping in mind the needs of the catchment area as well. 

Another important trend that has emerged from this drop in rentals is the co-existence of the revenue-sharing model in the domestic retail sector. In this system, there is no fixed monthly rent. Instead, there is a minimum guarantee amount, plus a revenue-sharing percentage between the landlord and the retailer. 

For instance, a typical co-existence deal will consist of the minimum guarantee of Rs 20-25 per month per sq ft with about 5% of revenue, compared to the Rs 70-110 per month per sq ft rent for an anchor tenant. 

In the current scenario, this model works well for the bigger players rather than the smaller players, as it is difficult to keep track of their ,sales. Big Bazaar, Shopper’s Stop, Provogue and Vishal Retail are going ahead with their expansions as planned. Some of these players have already worked out deals on a revenue-sharing basis. 

Online retailing or e-tailing is another format which is fast catching up with the conventional brick and mortar form of retailing. The fact that products can be delivered anywhere makes it a seamless form of shopping. Retailing through mobile phones, though a very recent phenomenon, is also catching up. 

GLOBAL VS INDIAN: 

Typically, international retailers pay just 3-4 % of their sales as rentals. Moreover, it is during similar downturns that global retail majors like Wal-Mart , Carrefour and Tesco increased their store presence, as rentals were low. Till not too long ago, real estate developers in India were not ready to negotiate prices, as there was ample demand for any mall located in a good catchment area. 

As retailers went on an expansion spree to attain geographical reach, it was a seller’s market. However , things have changed now. Not only have these organised retailers realised the importance of a sizeable reach, but they also know that good mallmanagement is important for a thriving business. 

Internationally, good facility management seems to be the key differentiating factor for the success of any mall. In India, too, it is now being recognised as an important deciding factor. As they say ‘customer is king’ ; it will be the customers who can make or break this entire euphoria about the retail industry’s success.