Organised retail business is a comparatively new phenomenon in India, and is still in the process of finding its feet in terms of location, size, format, product ranges, and segment targetting.
Before figuring out whether organised retail is a great business or a mediocre one, let me digress a bit and relate an interesting bit of news that appeared in the local newspapers.
South City Mall is one of the flashy new edifices in Calcutta's retail industry, with flagship large-format stores like Pantaloon and Shopper's Stop. With the city's four-day annual celebration of Durga Puja round the corner, the Mall has been teeming with shoppers of all ages.
Many shopper's were confounded recently by a closed Pantaloon store. Several smaller stores were also closed. Even the food court had most shutters down. This, at a time of peak shopping in the city.
The next day's papers were all agog with the inside scoop. Reportedly, the mall authorities had turned off the power supply to the Pantaloon store for non-payment of a large electric bill. The smaller stores and the food court - which apparently were part-owned by Pantaloon - had shut down in 'sympathy'.
Turns out that the mall authorities had agreed to lower the 'astronomical' store rents for a few months because of the economic down turn, after representation by a group of retailers allegedly led by Pantaloon. Raising of the rents back to the earlier levels caused the non-payment of bills. Wonder what they were thinking, when they agreed to the high rents before moving in!
That Pantaloon is badly in need of money, and they are not finding anyone who will give them a loan, is not news any more. (All their 'profits' are accounting fiction - negative cash flows from operations on each of the last 4 years paint the true picture.)
Neither is the story of losses incurred by the likes of Shopper's Stop, Subhiksha, Spencer's, Vishal Retail. Even a big company like ITC is incurring losses on its retail garment stores.
What went wrong? Organised retail was supposed to be the ideal service industry for the future of India, with a huge potential of employment of an unskilled but literate work force.
Several things. The most basic being the business fundamentals. You need to spend several Rupees to earn one. Real estate has to be purchased or leased at exhorbitant rates in large cities - where small format stores are not viable. In smaller towns with cheaper real estate, large format stores may not draw adequate footfalls.
Stores need to be air-conditioned, well lit, frequently remodelled. New products and fashions have to be constantly introduced and the older models and shop-soiled garments sold off at highly discounted prices.
Margins are wafer thin. The constant requirement of cash sooner or later overwhelms the business because of the large interest burden. Add to that, the competition from mom-and-pop outfits that have lower infrastructure costs and have long established customer relationships.
Highly streamlined bulk procurement processes, tight inventory control, live assessment of customer preferences are some of the ways by which some actual profits can be generated. Such activities require expensive computer hardware and software, further adding to the cost.
The banning of overseas retail businesses - except in single product stores - has ensured that Indian retail companies will not benefit from established processes at Walmart, Krogers, Asda, Costco, Target.
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