Downturn teaches retailers to renew business models
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New Delhi: Instead of complaining about the slowdown, the retailers say the downturn was good for the industry. "The slowdown was the best thing that could have happened to modern retail in India," Kumar Rajagopalan, Chief Executive of industry body Retailers Association of India, told Rasul Bailay from Mint. "Suddenly, retailers stopped talking about the number of stores and began concentrating on consumers, positioning, space utilization, etc." Though the retail industry saw the closure of more than 2,500 stores last year, Damodar Mall, director of customer services at Future Group - the operator of large retail chains such as Big Bazaar, Pantaloon and Food Bazaar - says his company is better prepared to do business today. Kishore Biyani, Managing Director of Pantaloon Retail (India) and promoter of Future Group, echoes the sentiment: "We have renewed ourselves." With several retailers squeezing their margins to offer better prices, Customers became a priority again. Some introduced cheaper consumer goods, especially through private labels. "Earlier, many of the entry-level products such as detergents, oils and staple cereals were missing from our stores. (In the downturn) we added more and more entry-level products," says Vineet Kapila, President for the RPG Group-owned Spencer's Retail. The retail chain saved 12-15 percent in cost by reducing wastage in the supply chain and stores. Kapila says the company started saving on rentals and staff, and brought down the overall capital expenditure on opening new stores by one-fifth. "Costs build up in the system so you can always cut, it is not a big learning," says Biyani. "The real learning was strategic that taught us to focus, focus, focus on our core businesses." Hit by the downturn, Future Group decided to concentrate on retail, allied businesses such as logistics and consumer products, and financial services. "The industry has learned that we need (a) clear model for retail and growth has to be backed by the right capital structure," says B. S. Nagesh, Vice-Chairman of the department store chain Shoppers Stop Ltd. The company went on a restructuring that returned it to profits in June after several quarters of losses. Retailers found savings in other quarters as well. Shubhranshu Pani, managing director for retail at real estate consultancy Jones Lang LaSalle Meghraj, say store rents as a percentage of a retailers' total revenue used to be 20-25 percent before the downturn compared with a global average of 10-15 percent. Last year, rents fell by 25-40 percent, bringing down rentals as a percentage of total revenue to 15-20 percent, he said. Before the slowdown began, the hype around the retail sector had attracted major corporate groups such as Reliance Industries, Aditya Birla Group and Bharti Enterprises, who opened thousands of new stores. This pushed up the cost of retail real estate and staff salaries. Analysts say retailers in India can sustain rents of Rs150 per sq. ft per month if they do business of about Rs 15,000 for the same space in that time. However, rents had topped Rs 650 per sq. ft per month in New Delhi, Rs 478 in Noida and Rs 385 in Gurgaon, according to real estate consultancy Cushman and Wakefeild. "People were signing up unviable locations from the rent-to-revenue ratio point of view. It basically meant that given the gross margins in their business, they would fundamentally never make money," says Pankaj Gupta, practice head for retail and consumers at consulting firm Tata Strategic Management Group.

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