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Priority #1 – Store Productivity, Same-Store Growth

January 31st, 2008 by Devangshu Dutta

Dominos India

It’s quite amazing that “store productivity” doesn’t grab the attention of most people in the retail trade in India, despite the fact that real estate costs are riding an all-time high. It’s become quite typical for rentals to range 20-25% of sales, and in many cases even higher than that. (In those instances, a retailer could only hope to make money out of illegitimate activity or illegal merchandise, which is not part of the business plan of anyone I know!)

Many brands will (and possibly can) justify paying absurdly high rentals with the rationale that in the store portfolio, some locations will never make money, but are needed as marquee locations for “must-have” visibility. This can work if you do have a balanced store portfolio. The question is whether the low-rent locations actually have the capability to generate enough margin to support the unprofitable locations.

While some of the rentals are comparable to expensive real estate in the developed markets, gross margins in India are typically thinner than in Europe, USA etc., reducing the spread a retailer has for its operational expenses. Add to the mix over-estimation of consumer demand, and the scenario looks even gloomier.

In this context, to my mind, each store needs to be made as productive as it can be. There needs to be fairly sharp focus on store performance and category performance data.

However, in the last 18-months or so, conversations with Indian and international brands and retailers operating in the Indian market, showed that topline (sales) growth and new store openings were the focus for most retailers (even till a few weeks ago).  Most branded suppliers have also shown unprecedented sales growth on the back of new store openings – their own exclusive stores, as well as new sites being added by department store chains carrying their brand.

For instance, in March 2007, one (new) brand said that their business plan called for 50 stores by the end of 2007, and 100 by the end of 2008.

When sales growth can be achieved just by opening more new boxes (stores), productivity and efficiency don’t appear to be important.

I believe 2008 will see a change in management priorities. I don’t think the unnamed brand above will open its 100 stores. It is very likely that they will want their already opened stores to work harder.

Productivity is obviously linked to store operations (people, process, technology) – when the merchandise and the customer are both in the store, you need to make sure the two are matched quickly and effectively, and that there is a focus on conversion, average transaction values and efficient inventory management. But that is only one part of the story.

Support functions, such as marketing, supply chain, buying and merchandising have a huge role to play as well.

Category management, efficient and responsive supply chains, optimising store-footprint and catchment to ensure maximum walk-ins … these are some of the issues I believe top management needs to look at carefully in the coming 24 months.

If you are in a senior management position in a retail business, what are your priorities this year?

Posted in Apparel, Branding, COLUMN-Progressive Grocer, Food & Grocery, Footwear, India, Lifestyle & Fashion, Market Research, Marketing, Retail, Soft Goods, Strategy, Supply Chain, Textiles, Uncategorized | 3 Comments »

Slices of the Bread Basket

October 11th, 2007 by Devangshu Dutta

The sector of retail that has been attracting the most corporate interest over the last few years is the food & grocery market.

Quite logically so, since this comprises the largest slice of spending – well over 40% in urban markets and above 50% in the lower income towns and rural areas. It, therefore, offers the maximum opportunity for rapid scaling. Working in sequential logic, the nature of that large business would be highly capital intensive, and the large amounts of investment and large footprint should logically act as entry barriers for competitors. Size should also drive costs down through efficiencies of scale and raise margins by removing intermediaries.

By that reasoning, the bulk of the small retailers should be out of business very rapidly, as the well-capitalised corporates buy their way into the market, whether by opening their own stores or by acquiring many retail chains and mashing them together into one company.

This has led some commentators and consultants to predict that within the next 5-10 years, as much as 25-35% of the food and grocery market would be taken by the so-called organised retailers.

That, in my opinion, is a gross overestimation of the pace of change.

Fortunately for the smaller retail chains and the independent mom-and-pop stores, and unfortunately for the large corporates, scale and efficiency is not enough of a competitive advantage at the local level. Retail is a business in which you have the opportunity of growing or diminishing your business’ future prospects every time a customer buys at your store, or chooses not to.

And the food and grocery business is tougher still, since you cannot impose a product top-down in India, with a mix of cuisines and cultures that are as varied as different countries in Europe.

Yes, change is coming to the food business. Like other products, food retailing in India will convert more and more towards modern retail, but it will happen in slices of percentage points. It will happen only when the modern retailers understand and respect the cuisine boundaries rather than imposing a sea of sameness for consumers across the country. It will also need retailers to plan and manage the supply chain and vendors at micro-levels.

There are plenty of speed-bumps and potholes on the way – proceed with caution.

Posted in Consumer, Food & Grocery, India, Marketing, Retail, Strategy, Supply Chain, Uncategorized | No Comments »

Are investors ready to get malled?

August 31st, 2006 by Devangshu Dutta

Mall Mania, Mall Madness – alliterate as you will – it’s a phenomenon that is certainly taking over the newsprint, airtime and, quite possibly, your neighbourhood.

A study published in 2005 estimated that by 2007 over 360 shopping centres would be operational around the country, with approximately 90 million square feet. A meagre increase of 0.08 sq. ft. in per capita shopping space doesn’t seem like much in a country of a billion-plus people.

But most of it is concentrated around the big cities – Delhi and Mumbai account for more than half of the total space projected, with the other metros and mini-metros such as Bangalore, Pune, Hyderabad etc. taking the total up to 90% of the space.

One may argue that money (real estate development) is only following the money (consumers) – after all, there are more consumers and higher incomes in these major urban centres.

But why would mall developers expect Delhi’s consumers to suddenly switch en-masse to shopping in Gurgaon, where 6 malls are already active in a short distance of about a kilometre, 3-4 more under hectic construction in the same area and several more scattered around that suburb? Or why do Mumbai’s developers expect people to drive several kilometres from the suburbs on a regular basis to the centre of town to grace only their shopping centre? It is only such expectations that can explain the gold rush mentality that is overpopulating certain areas with shopping centres and malls.

While per-capita availability of A-grade shopping real estate looks really low, in certain areas we foresaw oversupply, with developers thinking in terms of “property” rather than as retail space managers.

Most shopping centre developers have carried out only cursory studies on the customer catchments that their tenants will be expected to live-off. As a result, conversion of footfall into sales is low for the tenants, except for food-courts, which are benefiting from the window-shoppers rounding off a day or an evening of roaming the malls with a meal. There is a lack of differentiation in product and service offer between the shopping centres and, with nothing distinctive on offer, repeat visits and – more importantly – repeat purchases are a challenge.

Developers in smaller towns seem to be following the same model, scaling up space or scaling it down based on the capital cost vs. expected capital gain and tenancy income. They are pitching for much the same brands as tenants as the developers in the bigger cities.

There is competition for customer traffic between the shopping centres and large stores (such as Mumbai’s newly opened Hypercity, across the street from InOrbit Mall, both developed by the Rahejas), between the shopping centres and the traditional high street, and between large format stores and speciality malls.

For the most part shopping centre development in India in the recent years has been seen as an aspiration to be fulfilled – hence, the most important factors have been the size of the shopping centre, quality of fixtures, marquee tenants who can provide the glamour or the legitimacy). The focus has been more on the “positioning”.

The business will begin maturing and will begin taking developmental leaps forward when centres are seen as commercial infrastructure to be planned with the end-consumer in mind, and to be serviced over a certain lifetime.

Until then, we can look forward to announcements of many hundreds of shopping centres, the launch of a few hundred, and the conversion of many of those into uses other than as shopping centres within a few months or years of their launch. And for investors also it might be a game of Roulette rather than Patience.

Posted in Apparel, Branding, Consumer, Entrepreneurship, Food & Grocery, Footwear, India, Leadership, Lifestyle & Fashion, Luxury, Marketing, Real Estate, Retail, Soft Goods, Strategy, Textiles, Uncategorized | No Comments »

Are The Investors Ready to Get Malled?

August 8th, 2006 by Devangshu Dutta

Sahara Mall

Mall Mania, Mall Madness – alliterate as you will – it’s a phenomenon that is certainly taking over the newsprint, airtime and, quite possibly, your neighbourhood.

A study published in 2005 estimated that by 2007 over 360 shopping centres would be operational around the country, with approximately 90 million square feet. A meagre increase of 0.08 sq. ft. in per capita shopping space doesn’t seem like much in a country of a billion-plus people.

But most of it is concentrated around the big cities – Delhi and Mumbai account for more than half of the total space projected, with the other metros and mini-metros such as Bangalore, Pune, Hyderabad etc. taking the total up to 90% of the space.

One may argue that money (real estate development) is only following the money (consumers) – after all, there are more consumers and higher incomes in these major urban centres.

But why would mall developers expect Delhi’s consumers to suddenly switch en-masse to shopping in Gurgaon, where 6 malls are already active in a short distance of about a kilometre, 3-4 more under hectic construction in the same area and several more scattered around that suburb? Or why do Mumbai’s developers expect people to drive several kilometres from the suburbs on a regular basis to the centre of town to grace only their shopping centre? It is only such expectations that can explain the gold rush mentality that is overpopulating certain areas with shopping centres and malls.

While per-capita availability of A-grade shopping real estate looks really low, in certain areas we foresaw oversupply, with developers thinking in terms of “property” rather than as retail space managers.

Most shopping centre developers have carried out only cursory studies on the customer catchments that their tenants will be expected to live-off. As a result, conversion of footfall into sales is low for the tenants, except for food-courts, which are benefiting from the window-shoppers rounding off a day or an evening of roaming the malls with a meal. There is a lack of differentiation in product and service offer between the shopping centres and, with nothing distinctive on offer, repeat visits and – more importantly – repeat purchases are a challenge.

Developers in smaller towns seem to be following the same model, scaling up space or scaling it down based on the capital cost vs. expected capital gain and tenancy income. They are pitching for much the same brands as tenants as the developers in the bigger cities.

There is competition for customer traffic between the shopping centres and large stores (such as Mumbai’s newly opened Hypercity, across the street from InOrbit Mall, both developed by the Rahejas), between the shopping centres and the traditional high street, and between large format stores and speciality malls.

For the most part shopping centre development in India in the recent years has been seen as an aspiration to be fulfilled – hence, the most important factors have been the size of the shopping centre, quality of fixtures, marquee tenants who can provide the glamour or the legitimacy). The focus has been more on the “positioning”.

The business will begin maturing and will begin taking developmental leaps forward when centres are seen as commercial infrastructure to be planned with the end-consumer in mind, and to be serviced over a certain lifetime.

Until then, we can look forward to announcements of many hundreds of shopping centres, the launch of a few hundred, and the conversion of many of those into uses other than as shopping centres within a few months or years of their launch. And for investors also it might be a game of Roulette rather than Patience.

Posted in Apparel, Branding, Consumer, Food & Grocery, Footwear, India, Lifestyle & Fashion, Market Research, Marketing, Real Estate, Retail, Soft Goods, Strategy, Textiles, Uncategorized | No Comments »

Retail FDI – Rains or Drought?

March 3rd, 2006 by Devangshu Dutta

In February, just before the mega-blitz of “India Everywhere” at the World Economic Forum, the Indian government took a step forward.  Amidst shrill outcries from its coalition partners and domestic anti-FDI lobbies, it finally decided to bell the cat, and let foreigners invest in retail again!

About a month has passed since the cabinet announcement, the dust has settled, and it is a good time to consider what has happened.

Since the initial euphoria of the early-to-mid 1990s when international retailers entered the market including companies such as Benetton (50% JV) and Littlewoods (100% subsidiary), this revised policy provides the first opportunity for large global companies to participate in the Indian market’s growth.

The key questions being raised are:

  • Will the new policy bring in a rush of companies?
  • Will domestic retailers be able to stand up to the competition from foreign retailers?
  • What impact will it have on manufacturers?

What Is Allowed, and Who Might Enter?

Let’s first deal with what the government has actually allowed. In a nutshell, a foreign retailer can set up a company in India in which it holds 51% equity, the balance being held by an Indian partner. This subsidiary can operate retail stores in India under one brand name.  All products in the store must also carry the same brand name, and this branding must have been applied during the process of manufacturing.

This means that, as yet, a foreign department store selling multiple national and international brands cannot set up its own 51% owned operation in India.  Nor can a supermarket or hypermarket chain like Wal-Mart, Carrefour or Tesco, sell their wide range of products under any name but their own, if they decided to take a majority stake in a retail operation.

In theory, you could have a Wal-Mart store selling Wal-Mart cola (not Pepsi), Wal-Mart butter (not Amul or Mother Dairy), Wal-Mart chocolates (not Cadbury’s), Wal-Mart cookies (not Britannia or Sunfeast), Wal-Mart T-shirts (not USI or Duke).  You could have Tesco jeans (not Levi’s or Numero Uno) or Carrefour luggage (not Samsonite or VIP).  This obviously dilutes the consumer proposition of the store, which may then have to primarily focus on a single-point agenda – such as low prices – to draw consumer footfall.

On the one hand, the cabinet decision clearly allows companies such as Starbucks and The Body Shop to step in with a majority stake, provided the branding is clearly by the primary name (store name) – thus, you may not be sold the famous “Tazo Tea” in Starbucks, but get “Starbucks Tea” instead.

However, to a brand such as Starbucks, this policy change is significant as its international expansion is largely through owned operations, especially in potentially large and strategic markets such as India.  Starbucks would now have the option of not only controlling the retail operation through a 51% ownership, but also the raw material sourcing, storage and wholesale operation.

On the one hand, this may mean nothing to a retailer such as The Body Shop, whose international strategy in Asia has been largely driven through franchise relationships.  This is true now of India as well, as The Body Shop announced its master franchise arrangement with Planet Sports in India.

A retailer such as Gap would need to set up separate retail operations for Gap, Old Navy, Banana Republic and Forth & Towne.  There obviously are ways to consolidate operations even with the diverse retail corporate structure, but it does mean that the foreign retailer will be operating several corporate entities in India.

An existing company such as Benetton does not benefit from this change in regulation. In 2005 Benetton actually increased its stake in its joint-venture to 100%, but in the bargain had to forego the stores it was running. Its current network comprises entirely of franchise stores, and will have to remain so, unless Benetton reduces its stake to 51% in order to be able to run stores in India, which is highly unlikely.

Other existing international brands such as Levi Strauss, Adidas and Nike are not retailers in themselves, and are not dramatically affected by the change in policy at all.  All of them operate subsidiaries in which they have complete or majority ownership.  Brands such as Tommy Hilfiger, Wrangler and Lee are also present through licence or franchise relationships, and unlikely to change their strategy.

Will Global Retailers Come?

All of this obviously raises the question whether government regulations preventing foreign investment in retail were or are actually keeping foreign companies out of the Indian retail market.

The answer to that is both “No” and “Yes”.  The reason is that companies that are looking at international expansion apply criteria that are specific to their own business needs which can lead to very different evaluations by each company.

Laws allowing or preventing FDI in retail are only one of the several factors that any global retailer would look at, when considering a market.

Other factors, such as various market options possible at the time, the state of development in the market, existing sourcing and other relationships, scale and scope of investment required vs. the rate of return expected, the risk factors involved, and the retailer’s own business strategy, all play a part in their decision-making process.

Thus, in one company’s case India may be the hottest market in which it would like to open a store at the earliest possible date this year, while for another company India may be of interest only after 5-7 years.

Opening single-brand retail to foreign direct investment, therefore, is at best an encouraging signal that the government has provided.  It is unlikely to prompt international retailers to look at India any sooner than they might otherwise have.

The second key issue is whether FDI itself is of any consequence to whether the retailers enter India.  This again is related to the individual retailer’s own strategy and business context, as well as how they perceive the risk-return ratio.

Thus, while China may not have any restrictions on foreign investment in retail, western retailers may still prefer to go with a local partner due to the differences in cultural and market nuances.  Even in other unrestricted markets international retailers may prefer to enter through licensees or franchisees because the effort and investment in setting up their own company may not be compensated by the size of the opportunity, or their own investment strategy may not be in line with setting up international subsidiaries.

Some companies such as Wal-Mart, Tesco, Gap and Starbucks prefer to invest in international operations themselves, as ownership gives them a higher degree of control over the business.  Of course, both Tesco and Wal-Mart have set up joint ventures in markets that are starkly different in cultural and business norms from their home markets but, by and large, where feasible these companies prefer majority or 100% stake in the business.

Other companies, such as Mothercare, Debenhams and The Body Shop, have expanded their international presence through franchises.  Their premise is proprietary product and an enormously powerful brand that translates well across cultures.  These companies have taken the less intensive route of franchise.  In India, too, they have signed master franchises. Mothercare has assigned master franchise rights to the Rahejas’ Shoppers Stop. Debenhams and The Body Shop have both signed up with Planet Sports (soon to be renamed Plant Retail), which is also the franchisee for Marks & Spencer.

Thus, while allowing FDI may help some companies, it is unlikely to have investors beating down the door in a rush to enter.

What Does FDI in Retail Mean for India?

Permission for foreigners to invest in retail businesses in India obviously mean different things to different stakeholders in India.

For real estate owners, especially shopping centre developers, new entrants are always welcome, since it provides a wider basket of brands to present to the consumer, and the opportunity to differentiate one shopping centre from another.

To existing retailers, it does mean potentially more clutter in the market, possible higher marketing expenditure for them to maintain their position.  However, it also means that more players can encourage the growth of the market, which otherwise can end up looking stale and in-bred.  Brands that are entering the market for the first time can also bring fresh ideas in terms of merchandise, store planning and display, advertising etc.

To the question of whether Indian retailers are prepared to handle the competition, I would say that, while global best practices help, retail is a uniquely local business.  Indian retailers who bother to listen to the consumer and constantly upgrade their own business are possibly in a stronger competitive position than a foreign brand that wants to impose its own alien sensibility on the market.

For suppliers, new brands bring in new avenues for business growth.  Many of the international brands will look to increasing their sourcing from India, to take advantage of local labour costs and skills, or to down-play the disadvantage of duties on imported merchandise.  Thus, especially for suppliers of fashion goods this is definitely a growth opportunity.  Retailers might even prefer to work with the supply base from which they already source for their operations in other markets.  Thus, the growth opportunity exists for exporters – the question is how many of them are willing and able to make the transition to begin supplying locally.

Not only do new retailers bring the prospect of increased business, but also the possibility of better systems and skills, improved product development, and in all, an opportunity for the supply base to upgrade itself.  This will certainly have a positive fall-out for exporters, since their business is likely to become overall more competitive globally, too.

Let’s consider another stakeholder, who we tend to miss – the government itself.  Organised retailers, including global companies, tend to be more constrained by law than a retailer from the unorganised segment. Based on that assumption, a large international retailer (and his Indian counterpart) will set up a local company that will carry out business by the book, recording all sales and purchase transactions.  All local sales and purchases will be subject to VAT and sales taxes, while all imports would be documented and therefore subjected to import duties. All of this means more revenue for the government.

On the other hand, do foreign retailers pose a threat at all?

Well, there is certainly a threat to those retailers who insist that the market needs to remain structured the same way that it has been for years, and who refuse to upgrade their own business. There may even be a threat to the large Indian corporate retailers who are competing on the basis of their scale relative to the rest of the market.  With the presence of global retailers with deeper pockets, these large Indian retailers will no longer be the big boys on the block.  But the positive outcome for the many seems to outweigh the negative outcome for the few.

What I would certainly like to see is how quickly the government translates the promise of opening into a concrete plan that can benefit the Indian consumer, the Indian supplier, the Indian real estate market and the government itself.

Posted in Apparel, Branding, Consumer, Food & Grocery, Footwear, India, Leadership, Lifestyle & Fashion, Luxury, Market Research, Marketing, Outsourcing, Product Development and Design, Real Estate, Retail, Soft Goods, Strategy, Supply Chain, Textiles, Uncategorized | No Comments »

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