But supply chain is yet to match demand

Bangalore , Dec. 5

Is the average Indian consumer retail-ready or is retail readying the Indian consumer? Either way, changing shopping habits in the country are giving global retail giants the perfect setting for their Indian entries.

Take a look at this: the average ticket value (transaction value of goods sold) of the Indian consumer in large retail formats like Lifestyle, Shopper's Stop and even malls has doubled in the last two years.

Lifestyle International stores across the country clock an average of Rs 1,500-1,600 ticket value per consumer, and during festive seasons such as Christmas and Diwali, spending goes up by 40 per cent averaging around Rs 2,000 ticket value per consumer, says Mr Sankar Suryanarayan, Vice-President, Marketing, Lifestyle International. He is expecting a footfall of 1.5 million at 11 Lifestyle stores across the country during the next one month.

Mr Gibson G. Vedamani, CEO, Retailers Association of India, said that average spend in large formats hovered around Rs 800-900 two years ago when the country was in the first stages of the retail boom.

"It has doubled now. Even supermarkets have doubled their ticket value. From Rs 250-300 a couple of years ago, they are now seeing an average family billing worth Rs 600," he said terming this "a good ticket size."

Lack of variety

While demand and potential for more formats will grow, the country's supply chain is yet to match the requirement, according to Mr Govind Shrikhande, CEO, Shopper's Stop.

Lack of enough merchandise and variety is still restricting the Indian shopper, but there has also been an increase of cash memos by about 20 per cent.

This growth is also accompanied by a significant change in the billing value of non-apparel products such as cell phones, watches and personal care products.

"This was a 75-25 ratio and now has changed to 69-31," he said.

In fact, considering such big plans from retail behemoths, there are new players foraying into the retailing market to grab a larger pie of the retail market that has a shallow penetration of less than 3%. A case in point is two-wheeler maker Hero Honda's plans to foray into retail sector.

The cash and carry is a wholesale format that involves shopping of retailers and shopkeepers. The format has a ballpark margin of 2-3% and volumes quite high. Consider Bangalore-based retailer Metro. For this, a retailer needs to subscribe for membership of "Metro" and give in requisite information.

Department stores are multi-brand outlets that include apparel, lifestyle products, except food and grocery. The format generates a margin of 30-40%, if strong brands are kept for selling. Also if private-label like a company's own brands are sold, it could generate a margin of 50-60%.

While speciality stores are single concept outlet. They can be a jewellery stores or a footwear stores. Again here if the stores sell their own brand, the margins are around 40-50% or else it is around 20-30%.

Hypermarkets and supermarket are analogous. Both include household and general merchandising stuffs like food and groceries. The only difference is pricing. Also, though volumes are high the margins that this format gives are around 15%. Despite such positive developments, what needs an immediate attention is whether this is the real case. There are challenges that may negate the positive impact of such developments.

Fragmented nature

The Indian retail sector per se is fragmented in nature. Of the total retailing, 3% accounts for organised retailing, while the remaining 97% is dominated by the Kirana shops. The paucity of data has given a cloudy vision to the industry. So it has become difficult to gauge the growth of the sector. It has also resulted in limited access to capital, labour and suitable real estate options.

Supply chain

Inefficient back-end supply chain has been one of the major emerging issues that the retail sector has been contending with. It has also added to the costs of the retail companies. Deepankar Halder, CEO, Spinach Stores of the Wadhawan Food Retail avers, "It is indispensable for the distribution network to fall in place, otherwise goods that are not delivered, when required, add to the burden of retail companies."

Manpower and retention

The sector is in dire need of skilled manpower that will make a difference for retail companies. Says Halder, "The executives that we employ at the front-end need to have right attitude as they are the reflection of the company's brand." Due to dearth of skilled workers, poaching people is evident amounting to bidding up for salaries. Manpower Retention has also become a daunting task for companies. Pantaloon spends at least 7% of its revenue in training and educating its staff.

Inventory management

This primarily refers to the execution aspect of retailing. Companies increase their efficiency through better inventory management. Inefficiencies at the inventory level result in cost additions like goods remain in the warehouse without being delivered along with the rent paid for the unproductive period. In order to avoid this, companies like Pantaloon has plans to invest in at least $25 million in IT to ensure minimum inefficiency and better inventory management.

Lack of infrastructure

The retail sector is deprived of investments from the government's side. In fact, this is the reason for private players jumping into the sector to cash in on the still-to-mature domain. More so, good margins of companies are more an outcome of absence of competition than anything else. In this case, foreign direct investment (FDI) may change the situation.

And with the government allowing 51% FDI for single brand retailing there are few good news ahead. In fact, according to a PriceWaterhouseCooper study, India will see a whopping $412 billion in the retail sector by 2011. And the influx of foreign players Wal-Mart in the Indian retail domain will have a positive impact, if things fall in proper place at a right time. Also the increasing presence of foreign players will ensure participation of Indian manufacturers in the international goods, outsourcing market-an area where China is ahead of India. The CEO of Spinach Retail puts, “It is a good thing. Endeavours (mergers and acquisition) like these will see best retail practices and discipline brought into the market.”

Also the advent of foreign players will lead to improvement and increase in the overall profile of employment in the sector, not to mention, the overall improvement in the brand perception of the industry.

Analysts believe that retail stocks will scale new heights due to the influx. It is also perceived that the market share will be distributed and hence reduced, prompting retail companies to manage competition with a difference. However, it will also result in a curb in margins in the long-run.

Investor’s perspective

One of the challenges that dawns on the sector is the soaring real estate prices. India's real estate prices have gone up by 80 to 100% over the last year. And it is estimated that the Indian retail sector will need an additional 200 million sq ft in the process of its expansion. But the impact of increasing real estate prices on operating profit of retail companies remains to be seen. How much impact it will make on the market is also too soon to be answered.

Some analysts opine that currently most stocks are at high valuations, given the expansion plans of the retail companies, which seem good in the longer term. Pantaloon, the market leader, has a P/E ratio of 57, while Wal-Mart has a P/E of 17.37. Also the growth opportunities that the sector entails call for patience and those investors who have long-term perspective will see good appreciation.

Investors considering the sector as an investment opportunity should understand the local dynamics and should decide accordingly.

Analysts expect Pantaloon and Provogue to emerge as aggressive players against Shoppers Stop, considering their good growth visibility. As regards Reliance Retail, it is perceived that the company will take around 2-3 years to match Pantaloon and Provogue's performance.

Though Reliance has aggressive plans like tie-ups and acquiring co-operatives that are not doing well, it is a matter of time that will determine the potency of such plans.

It is perceived that saturation will hit the sector in five years hence; sustaining growth will emerge as a Herculean task for the retail players. But what investors need to look at is growth, profitability and cash flow of the players. Also, the competition from Wal-Mart and Reliance Retail, both of which reflect robust ability to change market dynamics, must not be ruled out.