Retail business is growing not only because people are buying, they are buying more

The retail industry in India has seen some of the wildest swings during the past decade. Three years ago, retail was the biggest business opportunity for any entrepreneur.  Almost every major industrialist jumped into this sector with mouth-watering plans. 

Then came the slump, and when the waters receded, as Warren Buffet would have put it, some of the players were found to have been swimming naked. The economic meltdown, the bursting of the real-estate balloon, and the exposure of fanciful projects in the harsh media glare hurt the industry and it became the whipping boy. 

But the past year has seen things change.  There is a surge of confidence among big retailers. They have more focused plans, greater determination to avoid the mistakes of the past and an economy that promises to grow at 8.5% year-on-year.

That is why DNA decided to call some of the best names in this sector to hold a ‘Conversation’ with us. 

These included (in alphabetical order) Kishore Bhatija, CEO, Inorbit Malls (India) Pvt. Ltd., Nikhil Chaturvedi, managing director, Provogue India Ltd., Jay Gupta, MD and CEO (and customer care executive) of The Loot (India) Pvt Ltd., Manish V Parekh, director, Nilkamal Limited which runs ‘@-home’ range of stores, and Govind Shrikhande, MD (and customer care associate) of Shoppers Stop Ltd. Moderated by DNA, these industry stalwarts spoke of their perspectives on the industry, its strengths and challenges. Excerpts:

DNA: This sector has been in the news for the right reasons and the wrong reasons for years. How do you grow the business? How do you talk about it? Is there a strategy behind the seduction that you hope to introduce in the market?  How do we see the current market?
Bhatija: I think market sentiment is really good. Retail growth has been good. Some [retailers] have done very well, some marginally well. I think business has grown by almost 25% over last year. And this growth is coming not only by more people buying but from the same people buying more. We see more footfalls, but we also find more buying. And just to comment on one of the other issues you were talking about — the growth story, the effects of retail — we were just making a study from a retail development point of view. Typically, our centres are 5-5.5 lakh sq ft in size and spread over around 4 acres of land. I don’t think there is a parallel industry where [in a limited] 4-5 acre can creates an employment for 3,000 people and accounts for an annual trading in the region of Rs 700-800 crore. We are very convinced that it’s a great opportunity from a business perspective, growth perspective, and from an employment perspective.
Shrikhande: When you look at the scene four years ago versus two years back and today, the key thing that happened is that consultants in India sold the retail industry far too much. It brought too many people into the industry. We saw the entry of the biggest of industrial houses in India — The Bharti-Mittals, Birlas, Tatas and Reliance. Now, what this did to the market was [unexpected].  On the one hand the consultants pushed the industry, on the [increasing number of players] pushed rentals through the roof. And it pushed people’s demands too through the roof, It seemed as if there was no end to demand.  That pushed the industry into a problematic situation — on the one side higher rentals, on the other spiralling manpower costs. Then we saw a combination of factors that were security related.  Then we had Swine Flu and followed by an economic downturn worldwide. All impacted consumer sentiment and [curbed] spending power. [All these] impacted the industry badly.

DNA: You mentioned manpower is a big problem?
Shrikhande: It continues to be.

DNA: You do not get the right manpower?
Shrikhande: I won’t say the right kind of manpower. I think we have not understood the whole metrics of salary versus requirement of career versus employability. So, there is a  challenge of understanding — where we believe that by paying a minimum salary, we should be able to get the right candidate.
But retail is a tough industry. We were discussing earlier how serving the customer is the most important thing and having a smile, understanding the product and standing on the floor for 8-10 hours [are critical requirements]. Now this is not an ability that everyone has. Standing on the floor for 8 hours is not very easy. So, I think we have not arrived at the right metrics in terms of training them well, grooming them well, paying them well.
Gupta: In the past three years, we have seen a lot of ups and downs. It has been good learning for this industry. Today, I think, we are seeing a very clear real business. This is a reality we are seeing. Three years of adventure have taught us a lot of things, especially what not to do. The learning has come the hard way.
Bhatija: But, unfortunately, people have very short memory, you know.
Chaturvedi: I think retailers by definition are eternal optimists. So, what Kishore said about people having really short memories is extremely true. There are learnings and there are lots of hard learnings. It is a very different environment and I believe that market is finding its balance. I think there will be lot of M&As [mergers and acquisitions] even in this industry. A lot of environmental changes are taking place and retail right from the beginning was a business of winner-takes-all. There is no space for the number five, number six or number seven. You have to be in the top league for consumers if you want to win.

DNA: Three-four years ago the focus was on Walmarts and Carrefours coming into the country. People were little sceptical about the Biyanis and smaller players with a wholly Indian outlook. How do you see the foreign-versus-Indian strategy today?
Shrikhande: I think it has been proven that nowhere in the world does  the international retailer take everything. In China, which actually opened FDI [foreign direct investment] 20 years ago in a gradual manner, many of the top 10-20 retailers are still the local Chinese. Carrefour, Tesco, Walmart, you name it, everyone is there. You must remember that Walmart is not the winner in every country. It has withdrawn from Japan. It has withdrawn from a number of countries. So deep pockets really don’t guarantee you success. What it guarantees you is access for sure. But, in reality, it is the customer-connect that is very important.
Chaturvedi: I totally agree with this. Statistics exactly show that. Walmart has come into top 10 in China only by acquisition. Carrefour has come into top 10 in China only come by acquisition. So, as I said earlier, M&As will take place. When international brands come in, they bring in a particular learning along. Ultimately, whether it is an international brand or an Indian brand, Indians are going to run it. So the knowledge base is with the international players, they have deep pockets. It depends on how quickly they learn.

DNA: So mergers and acquisitions will come into a bigger swing in the coming years?
Shrikhande: Most likely. Yes.

DNA: So many Indian players might develop the business but may decide to opt out and collect their money instead?
Chaturvedi: I strongly disagree. There could be Indian players buying out international brands. Sometimes you may have great deep pockets, but you may not have got your focus right. Let’s say, I walk in to Jhumri Talaiya as a retailer called Provogue. I have deeper pockets than every local retailer there but I just cannot find my balance. To the local retailers, it is their market. I may not be able to get the hang of it. I may feel cheated in that environment and decide to walk out.

So decisions are based not only on financial success or financial failure. There could be people who would be ready to be funded for 7 years and there could be someone who says, I don’t want to do this right now. I will come from the top later and just acquire some business. A lot of people have learnt their lesson from China and other countries and they might be actually sitting back and saying, let them do the hard work.  I will come at the very end and acquire. You might be surprised that this might be already happening. Indian retail are surely available for cheap right now and I feel anyone who is sharp will see the opportunity.
Bhatija: From our perspective, we want more retailers, we want more brands because I guess with the kind of progression happening in the country, people are demanding more; and are [getting increasingly] exposed to international brand and products.
I agree the brands would have a challenge. They need to understand what works here.

DNA: What is the share or organised retail in cities like Mumbai? And what would be the share of unorganised retailers?
Bhatija: I don’t think anyone has a clear picture.  But studies with various consultants suggest that organised retail is still 6-7% of the overall market. The overall market is said to be Rs.425 billion and organised retail is a 5-6% game, and could grow to 10% in the next couple of years.
Parekh: In cities it is much higher.

Shrikhande: In cities it would be about 30-35%.

DNA: Do you expect this share could grow, because trends indicate that more and more people are willing to go to the mall for small purchases?
Bhatija: Unfortunately this is becoming a a very difficult business model. Property prices are increasing day by day. If you look at tier 1, tier 2 cities and with construction cost, the time to construct, the interest cost, government approvals, the whole business is becoming very expensive.. Today, nobody wants to pay rentals. They would all want to go into revenue shares. Revenue share is not an issue we are fine with it. But then you find that retailer doesn’t want to discuss anything with you, he doesn’t want to submit his accountant’s certificate. You call them for business reviews and they don’t turn up. So the whole model today is a very difficult model. The investment is put in by the developer, but the success will come in only when 125 retailers inside the mall succeed. I find, going forward, there will not be too much mall space available.
Shrikhande: In smaller cities you still might get space; but in metros it is definitely a big challenge.
Chaturvedi: I think it will be a challenge, across the board.
Gupta: I think the market is very big. India has 6,000 urban cities.If this type of market has to be looked into, you need to look into mass formats with a good value proposition and a need-based proposition.

If you go into China, a particular format can go to 5, 000 stores or 10, 000 stores. In Goa, a very small city, we have 8 stores. In Mumbai we have 38 stores. If I look at that and compare with 6000 urban cities, you can still reach the 10, 000 store mark in the next 5-7 years. Yes, the challenge is going to be the backend. To manage manpower, technology support that is customised as per the Indian ground realities. We are spread in 75 cities with 150 stores, and I feel the backend is the bigger challenge then the front-end.
Parekh: I believe, we need more players for sure. I completely agree with Kishore about having more retailers coming in as the market is really huge. Going forward for the next 10-15 years everyone will have a role to play, and that will actually grow the market. It will facilitate the market to grow whether it is small developers or even the retailers. Both the arenas need huge expansion.

This should increase the consumerism in this country because currently there is a mismatch. The cost that we are paying for the utilities like power, rent, even supply-chains is still expensive. Chaturvedi: The retailers and the mall owners in India are unable to find the right balance. This is because if you don’t pay rental, the bankers cannot bank the document. This is because most of the players do not have a balance sheet which you can take to the bank and discount.

In this industry what typically happens is that for every Rs 5,000 per square feet investment, you will get Rs.7,500 per annum of sales. As a ballpark rule, if you say India’s retail sales have to grow by $7.5 billion over the next 5 years, infrastructure development will require investments of $5 billion. Now if you kill the goose that lays golden eggs, the eggs won’t come. So basically it’s the hen first or the egg first situation.
Bhatija: Business is growing. But one thing we should keep in mind is that we have so far been an economy where consumption was a vice. Now, we are moving to where consumption is a virtue. Consumption is creating employment. But what has happened is that you still have a lot of people who have the wealth and the saving, who still are not in that mindset.

Your current generation has that mindset of spending. What is value for me and for my son is a different world altogether. So, consumption is going to rise.
Shrikhande: Costs are rising faster.
Bhatija: Real estate cost is one. Everybody talks about employment costs, infrastructure costs, power costs, and unless there is a very tight synergy and working between retail and the retail development to support each other, and grow in a very systematic manner, this is going to be very stressful for both.
Gupta: On funding side, you will see that bankers don’t fund your deposits. They don’t fund your interior design costs. And if you are a first generation promoter, and if that is the only business you are doing, it is very difficult to keep bringing in funds, And bank funds are very very expensive
Shrikhande: To summarise, India’s GDP is going to double in next 10 years, and India’s population which is younger wants more consumption. Overall consumption is also going to go up because the per capita income is also going to more than double. So, the demand side is looking pretty steady and growing, there is no issue there. On the supply side of the retail business, we are clearly seeing that in two years, the pipeline is going to dry.

So, the issue really is, where does the developer get land at a reasonable price to give me the store at a reasonable rental, so that both of us can make money.
Gupta: The challenge is also that the ticket size of the consumer is very small and therefore power, rental, taxes, manpower required per store are all high. You travel out of India, a person manages a 1, 000 square feet store, but in India, you need at least 10 people per store.
Chaturvedi: Basically, we all are in agreement that the only government initiative we need is that it looks at consumption as a positive move. Almost 64% of our consumption drives GDP, and retail contributes 60% of it. Retail is second largest employer in the world after the government.

Instead, today, the government catches hold of the mall owner because he is the rich guy, but they are making us pay. But the government is charging extra to the consumer because we will have to obviously load our costs. At the end of the day, if driving consumption is seen in a positive way, the whole thought process will have to change.
Parekh: That’s what I meant by integration.
Shrikhande: I think the biggest impact is going to be employment generation.
Bhatija: But what about compliances? Today, the organised retail is the person who is transparent, who is giving you taxes fully.
Shrikhande: Correct.
Bhatija: He is creating employment, he is seeing that his employees get the benefit of ESI [employees state insurance], PF [provident fund] and he is paying sales tax. So as a matter of fact, organised retail is possibly the best complier. And that’s why you are ensuring that whatever taxes, be it service or sales tax, is paid correctly.
Parekh: To open a store alone you require you 10-12 different licenses.
Shrikhande: 40 permits. We counted them yesterday.
Parekh: And for labour there are some 75 different formalities. So, all of this is a hindrance.
Bhatija: And those permissions, especially which are to be taken after you have fitted out the store, become very stressful.
Gupta: Let me give an example, a shopping establishment licence is something you don’t get before opening the store. You get it only after opening the store. So what happens when the government of India decides not to give you the license after you have put in the investment to open the store?
If you see the organised versus the unorganised retail in India, the organised is 5% and unorganised is 95% of the market. Now this 95% of the market is not going through any compliances, they do not pay all the taxes. The cost of doing business for them is much lower. The government must look into this.
Chaturvedi: 20% of the rental is power alone.
Parekh: It is Rs10-11 per sq ft for a small store and much higher for a bigger store.
Chaturvedi: For our kind of store it is not less than Rs25 psf.

DNA: Everyone wants foreign funds to come in. Do you see them coming in?
Chaturvedi: It is inevitable.

DNA: Is there anything where you would like the policy to be changed because newspaper is a good vehicle to push for certain policy changes?
Shrikhande: I think every retailer is worried about service tax on rent. It is a tax on cost, not income. And the tax is high at 12%. The other is liberal grant of 365 days permit.  This is because customers want to shop on the day they are free. And they should have freedom to shop any day they want. But we are not being allowed to operate 365 days across India. The last is power. Getting the right pricing for power.
Gupta: Octroi is another issue.
Parekh: And the Weights and Measures Act is also a big problem.