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Organised Retail- Losing its Path
Organised retailers remain unsure as to which format works best and, given their loss levels, cannot even invest in the kind of supply chains they need to be competitive. Each square foot of retail needs Rs 2,000 of capital, organised retail makes a profit of just Rs 300! So who’s going to fund it?
With more than $300 billion of retail sales annually, an economy growing at seven per cent, 500 million people below the age of 24 who don’t have any guilt about consumption, I’m a big fan of organised Indian retail. But in the near future, organised retail’s story is a poor one. Superimposing a new channel in a non-differentiated business is always a long haul — even after being in the market for more than 15 years, some of India’s largest consumer companies like ITC, HUL, Nestle and the Tatas have got less than three per cent of the branded staples market. The same applies to all the attempts to digitalise the cable industry.
India is one of the most over-populated retail destinations in the world with one outlet for every 100 persons. Around 95 per cent of shopping is from the neighbourhood retailer who offers convenience, credit and personalised service — so why would consumers switch to modern formats which offer little differentiation in pricing (in the absence of scale or superior logistics) or location (convenience store formats like Subhiksha or Reliance Fresh are proving unviable)?
When there’s no major differentiation on offer, a ‘push’ strategy could help, of the sort DTH did with big subsidies — in 2008, the industry did 1.5 times what was achieved in five years. But the supply-side dynamics don’t quite favour organised retail. While inadequate investments on retail-ancillary and retail-logistics businesses curtail the ability to compete on pricing or product, poor economics of the existing operations and lack of investments in retail infrastructure will put the brakes on future growth plans. While the industry leader (Pantaloon Retail) is not adequately funded for growth, funded players like Reliance Retail/Tata and Birla have still to establish adequate scale to be competitive.
Since retail is all about logistics, the supply chain is critical as this is what allows retailers to extract that extra two to three rupees in low unit-price categories, especially agri-commodities. But investments in retail-ancillary and retail-logistics have been limited (barring Future Group and Reliance Retail). And the current scale of operations has not permitted players to scale up their private label portfolio (for higher margins).
All this has meant the economics of the industry have deteriorated. Every square foot of retail space calls for Rs 2,000-2,500 of capital, while the most profitable retailer generates Rs1,000-1,200 of cash profits at the store level, and Rs 300 at the net level. So, at best, internal accruals can support just 15 per cent of space addition. Given this, the fact that the books of rapidly-growing retailers are highly leveraged, and that the current environment is making access to external capital difficult, retail growth has hit a roadblock. Though there are capitalised players like Reliance, Tatas and Bharti operating in the space, retailing cannot exist in the absence of a retail environment — the competition also has to be funded.
The industry was anticipating over $20 billion of investments over the next five years. For the industry to sustain a 30 per cent growth would call for an addition of around 20 million square feet of retail space annually — that’s Rs 6,000 crore of annual investment on retail real estate development alone. With the real estate industry in a major cash crunch, this isn’t going to happen soon. The industry is scalable in the long run, but it will be a long haul. And the current turmoil puts a question mark on the survival of many of today’s industry leaders.
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