Retail Sector-- What went wrong?

I was going thru an article "Lights dim in retail sector", this made me ponder what went right with Pantaloon and what did not go right with likes of Subhiksha and Reliance, though it is too early to compare Subhiksha and Reliance.

Let us start with, where the story begun.

Industry parlance uses term, Modern Trade for Organised Retail and General Trade for un-organised retail. Of-late the open format outlets, say a single self service outlet in a city with a sq ft area of 2000 would also be counted in Modern Trade or generally referred as MT. It was late 2001 that MT picked up and in major cities of south India it was rampant in year 2003-04, where as in Northern India and Western part of India it was still at nascent stage. At that time companies started taking MT as a seperate division with different sales force, different modus operandi of supply chain (from distribution catered to direct catering) and different payment terms.

Where a distributor would buy products from company on cash basis and limited credit days, MT started enjoying prolonged credit days and greater margins. More than margins, MT became a tool for various consumer offers, to increase impulse purchase. These consumer offers may differ from price offs to freebies. In early 2007 arrival of Reliance into retail and carpet bombing by Subhiksha changed the whole scenario. Retail was the new sunrise industry along with Telecom. Apart from chains like Relaince, Pantaloon, Spencers, owned by big corporate houses, middle sized chains like subhiksha, Trinetra, Vishal also started boming. Local Businessmen were not behind in grabbing the oppertunity and odd single stores and local chains also started business.

Major push was obtained by this sector with the Bharti - Walmart alliance and Birla take over of Trinetra. In between many changes occured, Adani's sold off there stores in Gujarat to Reliance, Tata's coming into supply chain of F & V thru Tata-chem-JV-Total Produce, Adani opening up supply chain venture - Adani Agrifresh etc etc. Foreign retailers were also showing more interest in Indian MT business. Metro came with its cash and carry business, French giant Carrefour scouting for partners etc etc.

Over all by begining of year 2008 the sector was no-looking back. 800 stores of Reliance, 1500 from subhiksha and many more to come. It was believed that those corporates who did not entered the business had missed the bus. REI Agro, Mahindra's, India-bulls, Cholamandalam group etc etc and who so ever not, just made an entry from wher ever possible.

Back to Basics

All this story seems very bright and beatiful till the global recession caught the air in September 2008. And the windtalkers started blown away by the wind per-se. It was not that the global slow down and liquidity crunch opened the doors abruptly. The effect was felt by most in the middle of year 2008 itself, but the over-optimism and huge plans in forefront made it ignore the giant fall.

Basically if we see, MT is nothing but another "Kirana and Sabji outlet", difference being former is run by a professionals hired by big wigs and later by a "baniya or similar". Both employee people, both bargain with companies, both anticipate more margin, and so on. But, basics, totally differ for both of them. Where the local baniya wins and professional loose is in "Costs". Where Big Bazaar won and others lost (Pantaloon’s revenue jumped 52% to Rs5,052 crore for the financial year ended June, while net profit was up by 5.1% (year-on-year) at Rs126 crore.), was in basic model.

A neighbourhood store like Subhiksha and Reliance is no different from local "Baniya or Kirana" store, both are selling same FMCG or Fresh items. Though a MT outlet used to get 5 times the turnover of local kirana at same location, its cost of operation was 50 times more than that single outlet. Some MT stores tried to give consumers more than FMCG and Fresh by putting Mobiles and Consumer Durables etc etc but they forgot the habits of Indian Consumers. The consumer would still go for buying Premium products and hi-value products from speciality store or big discount store, which the neighbourhood MT was not at all.

So on one hand pressure of Costs and then declining sales (in comparison to business model with break-even atleast), these MT outlets were unviable and here it was the liquidity crunch which hit them to completely ransack the expectations.

It is where the Big-Bazaar won, it for once clearly targetted the middle class, who would love to go to big malls and do shopping on sunday's. To increase impulse purchase it gave extreme offers and discounts (though got from Companies only) and it more than FMCG and Fresh, relied on apparels and Consumer Durables. Because, what ever one may do, FMCG margins are very thin and Fresh products ask for too much wastage costs.

Now let us just summarize the Waterloo of Retail, though it may be early to say whether it is waterloo or "just a battle lost but war to begin".

1. The supply chain or the back end built was in view of 2010 with over optimism and that increased costs to huge extent.
2. The management of these stores was lead by highly paid professionals, though it was another kirana shop.
3. Fresh fruits and vegetable were thought to be boon of this industry, but no one was able to judge the wastages and model of business(which is still with commission agents dealt thru mandis)
4. FMCG always works on thin margins.
5. Money was never in the system, it was just rotation and credit, which liquidity crunch tok to its nemisis.
6. It forgot the habits of middle class, who would still purchase kirana from "baniya" and premium and consumer durables from speciality and big stores with discounts and offers.
7. It was a like bubble of IT which crashed, both were built on over optimism rather than sound basics.

My agenda to deal with 7th point of IT-big bubble was to raise an optimism that after the crash the way IT and ITES have built them on sound basics Retail can be another comeback.

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