Failed Economics of retail in India

Offering organized retail as a choice of shopping for extra price-sensitive Indian consumer was never going to be easy. Failing to attract enough footfalls into their stores, the road ahead lies in effective positioning and branding. Will the sector get there?
Few years back all looked upon organized retail as the next big thing in Indian economy. Players like Reliance, ABRL, Shubiksha launched their offerings in supermarket, Specialty and Hypermart formats. Supermarkets were opened next to Kirana shops with size ranging from 4-7k sqft. Hypermarts were opened in city outskirts where the real estate development was just happening ensuring enough parking space and recreational facilities for visitors while Specialty stores were restricted to prime market space. Rentals in a typical Class B city in India would have been INR 90 per sqft per month for Supermarket, INR 45-50 per sqft per month for hypermarts and INR 110 per sqft per month and upwards for Specialty.
Business plans developed had a pay-back period between 15-20 years with EBITDA margins of 7-9%. Merchandize mix was premised to offer 13-15% at gross levels and 7-9% at EBITDA levels. Choice of financing mix was going to be critical to ensure erosion of just 1-1.5% between EBITDA and PBT (Profit Before Tax). Players with deep pockets could have only survived and almost all had plans to bring in a foreign player by 5th to 7th year of operation.
So what went wrong?
a) Rentals increased disproportionately due to boom in realty sector
b) Merchandize mix in earlier days had limited local brands for sale which otherwise had a strong consumer loyalty
c) Overstaffing at stores
d) Supply chain flawed- procurement was centralized.
e) Limited understanding of catchment area
f) High shrinkage especially in case of fruits and vegetables (F&V)- F&V was expected to be footfall driver instead consumers stuck to Kirana store while they shopped F&V from these stores
g) Excessive Competition- multiple players opening stores in the same locality
h) Rapid expansion plans- some players opened more than 1000 stores within a year
Ultimately most of the players failed to make profits at store level. Further, challenges relating to centralized supply chain, merchandize procurement and manpower recruitment and training all impacted the operations. Within first few years of starting, operations went out of control and top management was devoting more time to review the operations and decide on appropriate merchandize for each category of stores than focusing viability of the business plan drawn.
By the time things went out-of-hand for some, they were trapped in high debt while business plan was premised on negative working capital requirement.
Today, visiting a supermarket store in locality is a pain. Billing counters have been reduced significantly. Management of stores has been outsourced to agencies that lack sales ethics and merchandize is complete only for 10-15 days in a month. 
Only FDI in multi-brand sector can provide an exit option of some of the best corporate houses trapped in the web of retail. When is it coming? Some are losing sleep over the issue…

One thought on “Failed Economics of retail in India

  1. Good review Jaspal..

    But just FDI may not be able to help, as a few fundamentals seems to have gone wrong here.. specially with regard to planning the store location, merchandise, training, etc… I suppose most of the LFR's have blindly followed what's been successful in other developed countries.. Retail is not just about tapping large potential by putting up large stores, merchandise etc… its about a cultural change in the way people shop.. and the blue prints of these should strongly consider these aspects and bring about a seamless integration of that experience to customers when they come to LFR's for shopping.. today this is completely missing…. Atleast this is what I experienced few times when I went shopping in Delhi & Kolkata recently..

    MPN

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