Of shrunken pockets and frugal buys

It was a year of consolidation for the retail sector, which was badly hit by the global economic turmoil and liquidity crunch. Purchasing power of consumers fell, as some lost their jobs and others witnessed pay cuts. This had an adverse effect on companies across the board, as consumers reduced their discretionary spending and impulse purchases.

Many retailers had planned massive capacity expansions before the financial crisis struck. Companies had hired huge number of employees and rentals were sky high when the damages happened.

Collectively, poor demand hit revenues and higher costs further damaged retailers’ profitability. Many retailers ran into losses and some even shut shop; at least a major part of their operations, if not completely. Chennai-based, Shubhiksha closed its nation-wide network of 1,600 stores on account of acute financial crisis relating to liquidity. However, recent news reports state that Shubhiksha is planning to re-open some of its stores under the franchise model.

Shoppers Stop posted an annual loss of Rs 63.72 crore for the year ended March 2009. Retailers witnessed decline in footfalls, which is reflected by slowing same-store sales (SSS). This also prolongs the break-even for new stores. Break-even is a no profit-no loss situation. During the crisis, companies saw negative growth in SSS. This prompted players to extend their sale season beyond the normal time-frame to attract buyers and dispose off inventory. Retailers resized their stores and sought the exit route from unviable operations.

Last year, big international luxury brands left the game due to poor outlook. Italian fashion and lifestyle brand GAS, brought in by Raymond, froze its India operations. French brand Etam, distributed by Pantaloon, withdrew from the market.

On one hand where players exited, Wal-Mart Stores Inc launched many of its global private labels in India last year, through its joint venture (JV) Bharti-Walmart. Recently, Trent, the retail wing of the Tata Group, announced a JV with Inditex Group, to develop and promote Zara stores in India. Further, Carrefour, Europe’s biggest retail chain, has agreed with Kishore Biyani of Pantaloon Retail to set up franchisee stores in India.

It was also a time when players restructured their businesses. Pantaloon Retail India considered restructuring its business along three verticals. Big Bazaar and Food Bazaar would be transferred into 100% subsidiaries, making Pantaloon a pure retail play. Secondly, non-retail businesses Future Brands and Future Knowledge Services would be transferred into a separate company. Thirdly, there would be value unlocking in the financial services business including Future Capital.

Tough times require tough measures and so retailers resorted to consolidation, which meant reworking their manpower costs, renegotiated rental costs and aggressive cost-cutting on every possible front. Basically, every player used the crises to make the organisation leaner.

In recent times, the situation has been looking up for retailers with improvement in the economic scenario and better liquidity in the hands of the consumer. For the quarter ending December 2009, all retail stocks outperformed the BSE Sensex.

According to an analyst, Shoppers Stop emerged as a clear winner in December quarter. “SSL, Titan Industries and Pantaloon outperformed the benchmark BSE Sensex by 38.8%, 15.5% and 14.2%, respectively,” he said.

Festive season coupled with revived consumer sentiment in the December 2009 quarter resulted in an increase in footfalls leading to an increment in the SSS and the sales per square feet (SPSF).

Retailers have become cautious in their approach now with regards to size, and look at opening stores keeping in mind the SPSF.