Amit Bagaria's Blog

“Growth in our organised retail business is reflective of the changing habits and increasing aspirations of millions of fellow Indians who seek modern conveniences without losing focus on value. In a short period and as a reflection of consumer preferences, Reliance now has leadership positions in food, apparel and consumer electronics retailing in the country. With over 1,300 stores operational and more being opened, Reliance is positioned to be India’s premier retailer even as organised retailing becomes a more meaningful part of the changing consumer preference in the country,” says Mukesh Ambani’s in his Letter to Shareholders published in the 2011-12 Annual Report of Reliance Industries Limited (RIL), India’s second largest company (by sales), after the public sector Indian Oil Corporation.

In the first time in six years since Reliance entered the retail business, this business has managed to get almost 10% share of Mr. Ambani’s Letter to Shareholders and more than 15% share of the Business Performance portion of the Management’s Discussion & Analysis section in the latest Annual Report. More importantly, RIL has invested Rs. 5027 crores ($967 million) in the retail business last fiscal – more than it ever did earlier.

Does this mean that the time has come for Reliance Retail to shed its diapers and start taking big boy steps? After all, a six year old cannot be considered a baby any more.

With a sales turnover of Rs. 7599 crores ($1461 million) in FY12, RIL’s retail business is a small drop in the ocean for this megacorp, representing just 2.24% of its total turnover, not even finding a separate mention in RIL’s segment wise revenue.

And if RIL itself continues to grow at a CAGR of 30.2% (like it has grown over the last five years), then a growth of only 25% per annum in the retail business will just make the share of the retail business smaller by the year.

Despite being present across several formats, Reliance Retail now ranks as only the fifth largest Indian retailer, after Future Group (Pantaloon Retail India Limited), Malabar Gold, Kalyan Jewelers and Titan Industries Limited.

It is senseless comparing Reliance with other Indian retailers, as it is bound to become No.1 in the next 2-3 years. But we all know that this will not satisfy Mukesh Ambani’s ambition. For him, the real competition is not Future Group – it is Walmart.

So how does Reliance’s retail business compare with Walmart and other global retail giants?  The table below shows Reliance’s turnover compared with the Top 4 global retailers and the Top 4 Asian retailers – with additional comparisons based on the purchasing power parity (PPP) index, as well as the Big Mac Index.

 

 

RETAILER	HOME COUNTRY	ACTUAL REVENUE ($M)	PPP-CORRECTED REVENUE ($M)	REVENUE PER BIG MAC INDEX
Walmart	USA	446,950	446,950	446,950
Tesco	UK	115,778	104,998	127,295
Carrefour	France	104,995	82,785	99,544
Metro	Germany	86,172	73,255	81,698
Seven & I Holdings	Japan	63,767	47,825	64,380
Aeon	Japan	59,885	44,914	60,461
Yamada Denki	Japan	26,940	20,205	27,199
Suning Appliance	China	24,749	39,979	42,601
Reliance Retail	India	1,461	3,538	3,788
	Asipac Research, Data based on published information available

 

Obviously, Reliance is currently nowhere on the radar. Even on a PPP basis, Reliance’s revenues are less than 1% of Walmart’s, just about 3.4% of Tesco’s and less than 9% of the revenues of China’s largest retailer Suning Appliance. Can Reliance therefore do a Pearl Harbour on the American behemoth Walmart? Seems highly unlikely for the next 30 years, even on a PPP basis.

However, if Reliance continues to grow at a steady 25% p.a. for the next several years, it can probably cross Asia’s largest retailer Seven & I Holdings (the operator of 7-Eleven stores, Denny’s restaurants and other retail formats) on a PPP basis in 16 years and on real revenue terms in 22 years, assuming that Seven & I will grow at only 4% p.a.  With the same growth rates, Reliance can also overtake Europe’s largest retailer Tesco in 20 years on a PPP basis, and 25 years on real revenue terms.

What will make Reliance a global retail giant and make all of us (Indians) proud? For this, we need to do an analysis of the company’s different retail formats and predict what may be a winning strategy going forward.

The Annual Report says: “Despite challenging macro-economic conditions most of the retail formats have delivered well over 20% same store sales growth. Same stores sales growth has been well above the growth declared by peer retailers in respective formats which indicates the robustness of the business model.” Let us take a close look.

Reliance Fresh, Reliance Super and Reliance Mart

The food & grocery (F&G) business contributed more than 51% to Reliance Retail’s revenues in FY12. With sales of almost Rs.4000 crores, Reliance is now clearly No.2 in F&G retailing, behind Future Group, which was estimated to have sales of more than Rs.7000 crores from its four F&G formats (Big Bazaar, Food Bazaar, KB’s Fairprice and Food Hall) during the comparative 12 months (Future Group’s listed flagship company, Pantaloon Retail India Limited, has its fiscal year from July to June, compared to the standard April to March fiscal year for Reliance).

It will probably take another three years for Reliance to overtake Future Group as India’s largest food & grocery retailer.  As it is probably quite well known to most of the readers of this publication, Reliance has had three major changes at the top layer of management in this business and this is perhaps the main cause that Reliance is still more than 40% behind Future Group in F&G retailing.

At the time of commencement of operations, the F&G business was led by former Unilever executive Gunender Kapur, who ran it for the first three years. He was reporting to the Late Raghu Pillai, who was with Reliance Retail from inception.

In December 2009, Reliance brought in four senior executives (two Thai nationals and two Britishers) from Tesco Lotus (Thailand) to spearhead this business. Tesco Lotus operates 660+ F&G stores in Thailand, including 88 hypermarkets. Both Pillai and Kapur quit Reliance Retail within a few months.

About 21 months later, the top management was rejigged again. This time, perhaps realizing that it needed people experienced in a far bigger market than Thailand, Reliance brought in Rob Cissell, former COO of Walmart China, as CEO, and Shawn Gray, vice president of store operations of the same company, as COO. Walmart China has around 333 outlets, generating $7.5 billion in revenues. Cissell was responsible for store operations, merchandising, marketing and supply chain at Walmart China. Before going to China, Cissell held senior positions in different British retailers. Gray was with Walmart for over 19 years, having spent nearly 13 years in China where he led the team that opened and integrated hypermarkets.

It perhaps makes better sense for Reliance’s F&G business to be led by senior executives from Walmart China, than by people from Thailand. However, it has (unfortunately) taken five years for Reliance to realize this. And this has hurt the company.

The change is already becoming visible to consumers – the foods sections and the FMCG section of the new (or revamped) Reliance Marts (hypermarkets) are amongst the best in the country. Now Cissell and Gray must revamp all the Reliance Fresh stores and start opening new ones at underserviced locations. They must follow Sam Walton’s strategy of servicing small towns and semi-urban areas instead of concentrating on the Top 30 cities, as Reliance has done in the past. They must identify new locations from a chopper or small aircraft rather than from a car.

As the chart shows, as per Asipac’s estimates, Reliance already has a 12.7% share of the organized food & grocery retail market, but only a 0.5% share of the total market. This is the opportunity.  China’s largest F&G retailer, Bailian Group, had revenues of RMB 141.5 billion ($22.4 billion) in 2011, giving them a 2.3% share of the $975 billion Chinese F&G market. If Reliance can replicate this in India in the next five years, its F&G business alone can have revenues of Rs.33,000 crores.

I would like to point out that RIL’s annual report states that the Indian F&G market is worth Rs.16,25,000 crores, which translates to about 68% of the total Indian retail market. A correction is needed here. We have been reading about food & grocery being 65-70% of the total retail market for the last two decades, if not more. India has moved on. The share of F&G in total retail is not as high today, as it used to be 2-3 decades ago. At that time, mobile phones and laptops did not exist, there were no branded apparel and lots more that we consume today.

As per Asipac’s research, the personal automobile retail industry alone is estimated to be worth Rs.2,33,500 crores, and the CDIT (consumer durables, IT and telecom) retail sector is estimated to be worth Rs.1,89,300 crores.

The total consumption of food & grocery (including FMCG products) in the country is estimated at Rs.11,30,000 crores, or about Rs.9200 per capita. However, the retail market comprises just about 73% of consumption (or Rs.8,26,600 crores), as the rest is accounted for by farmers or fisherman consuming their own produce. Thus, the F&G retail market accounts for only 33.4% of the total Indian retail market, and not 65-70%, which was the case 20-30 years ago. Reliance should be happy that it has a smaller market to conquer.

Before I move on to the next format, I would like to suggest that Reliance should look at the possibility of creating an Indian equivalent of 7-Eleven, the small neighbourhood convenience store which is ever so popular across the rest of Asia. There are more than 42,000 7-Eleven stores in 16 countries worldwide, with 13,300+ stores in Japan alone and more than 6500 in Thailand. The chain has global revenues of approximately $112 billion, putting it at almost the second spot amongst global retailers, if all franchisee sales were consolidated with the Japanese parent, Seven & I Holdings.

Given the size of India, there is easily a market for 20,000+ such stores in the country. Being much smaller in size compared with Reliance Fresh, finding real estate will not be such a challenge. Like in other countries, 50-70% of the stores could be franchised. The average sale of a 7-Eleven store in Thailand is 31.7 million Baht. In India, such stores can easily achieve sales of Rs.25 million apiece. Thus, 20,000 stores would translate to sales of Rs.50,000 crores. If Reliance does implement this idea, I will send them an invoice for the advisory services.

Reliance Digital

Perhaps, the most successful amongst all of Reliance’s retail businesses is its CDIT format – Reliance Digital. This business achieved a turnover of Rs.1249 crores, including its servicing business resQ, in FY12. From a total of 48 stores (31 Reliance Digital and 17 iStore) at the end of FY11, the CDIT segment almost doubled total store count to 94 (75 Reliance Digital and 19 iStore) at the end of FY12. Opening 44 Reliance Digital stores in a year – one every 8.3 days – was a feat in itself.

The credit for this stupendous growth goes to Brian Bade, an American who joined Reliance Digital as its CEO in August 2010. Bade had worked at the now defunct American CDIT retail giant Circuit City for more than 17 years, starting as a District Manager in 1991, and rising up in 2007 to the position of vice president responsible for sales development and merchandising for all of Circuit City’s 712 stores. For a year before joining Reliance, Bade also served as vice president at Big Lots Stores, a $5.2 billion discount retailer in USA.

While Reliance Digital is now the No.1 large format (average 7500+ square feet) CDIT retailer in India in terms of number of stores (compared with 72 stores of Croma, a joint venture between Tata and Woolworth of Australia), it still lags behind Croma in revenue terms – Croma had revenues of Rs.1970 crores in FY12. Further, Croma’s revenue per store is almost 70% higher than that of Reliance Digital.

The Indian CDIT retail market is estimated to be worth Rs.1,89,300 crores, as per Asipac’s research. The organised sector has just 19% market share. In a category where consumers would like to buy from a “reliable” source, there is no reason why the organized sector cannot capture 50-60% of the market.

The total market is estimated to reach Rs.3,90,000 crores in five years. So, if the organized sector can capture 60% of this market in five years, this would translate to revenues of Rs.234,000 crores. And the market leader should ideally have a 15% share, or revenues of Rs.35,000 crores. (Note: Croma already has 5.5% share of the organised market)

Japan’s Yamada Denki has 2700+ stores and revenues of more than Rs.1,40,000 crores. China’s Suning Appliance has revenues of Rs.1,28,700 crores from 1300+ stores. There is no reason why Reliance Digital cannot reach revenues of Rs.35,000 crores in five year or even lesser time. Will Reliance reach this milestone first or Croma? This will truly be a battle of the titans.

Reliance Trends

The apparel arm of Reliance Retail has also been an above average performer. In terms of number of stores, Reliance Trends (with 91 stores) is now larger than Max (68 stores), Pantaloon (65 + 21 factory outlets), Westside (62), Shoppers Stop (51), Globus (35) and Lifestyle (33). This in itself is a commendable feat, considering that all the other retailers named here have been in business much longer. As many as 48 stores were open during FY12, rivalling the pace of Reliance Digital in terms of expansion.

However, while Reliance Trends may be No.1 in terms of stores, its per store sales are much lower than most of its peers – namely Pantaloon, Westside and Max.

Japanese value fashion giant Uniqlo, whose business is similar to that of Reliance Trends, has 1700+ company operated stores worldwide, with sales of more than Rs.55,000 crores. Value fashion retailing has huge potential in our country, given that urban India alone has more than 120 million consumers who like to shop in modern retail outlets, but are also seeking value. In comparison, Japan’s urban population is just 85 million.

So, if Uniqlo can have 1213 stores serving 85 million consumers (one for every 70,000 persons), why can’t Reliance Trends have at least 857 stores (one for every 140,000 persons, or half the ratio of Uniqlo stores in Japan)? If it manages to reach that number in five years, with an average per store sales growth of 12% p.a., this value fashion retailer can achieve revenues of more than Rs.11,000 crores.

Uniqlo is not the only example. American retail group TJX has 1753 stores of TJ Maxx and Marshalls (both discount fashion retaiers) in USA, and 215 stores of Winners (also a discount fashion retailer) in Canada. Its European subsidiary TK Maxx has 307 stores. As per TJX’s 2011 Annual Report, 37% of Americans shopped at a TJ Maxx or Marshalls store in 2010.

The total apparel and fashion (A&F) retail market in India is estimated by Asipac to be worth Rs.5,95,000 crores. Of this, the organised sector is estimated to have just 5.77% share. With deeper pockets than others in the business, Reliance can take the leadership position. However, it cannot address a Rs.5,95,000 crore market with just one format which averages a store size of 16,000 square feet. Uniqlo’s largest store occupies 53,400 square feet. TJ Maxx has an average store size of 30,000 square feet; Marshalls and TK Maxx have 32,000 square feet each.

In RIL’s annual report, it is stated that the overall apparel market in India was estimated at Rs.175,000 crores in 2011. Without knowing the source of this estimate, I wish to categorically state that it is way off the mark. A total market size of Rs.1,75,000 crores would put average per capita consumption at just Rs.1423 per annum. How can this be believed? This figure is close to the bare minimum spent by the 400 million deprived people in India on must-have clothing.

If Reliance has to capture a substantial chunk of the Rs.5,95,000 crore Indian A&F market, it must come up with more formats in this segment. And there are opportunities galore.

Reliance Trends, along with Lifestyle, Shoppers Stop, Pantaloon, Marks & Spencer, Westside and Max, are all catering to the 22 million “urban upper middle class” population.  As per Asipac’s research, this section of the population is estimated to have a total consumption expenditure of about Rs.4,65,000 crores, of which apparel & fashion is estimated at about Rs.40,000 crores. The 167 million “urban middle class” either shops at discount formats (such as Big Bazaar or other hypermarkets or Brand Factory) or at unorganised retail outlets.

In comparison, the 10.5 million “urban rich” are estimated to have a total consumption expenditure of about Rs.5,03,000 crores, of which apparel & fashion is estimated at about Rs.65,500 crores. Even though this market is 64% larger than the “urban upper middle class”, no retailer is catering to this segment.

What I am suggesting is that Reliance should seriously consider opening department stores to cater to the “urban rich”. Not pseudo department stores like the ones we have in India (where more than 80% of the merchandise is apparel), but proper department stores, which sell apparel, furniture, home appliances, electronics, hardware, toiletries, cosmetics, jewellery, toys and sporting goods, merchandise that is generally sold in department stores worldwide. If we include all of this, the “urban rich” buy Rs.2,20,000 worth of such merchandise annually. If one includes some amount of food & grocery (which many department stores sell), we are talking about a market of almost Rs.2,50,000 crores.

Since there is no competition in this segment, the task is not difficult. As the rich don’t mind traveling a bit (most have chauffer driven cars), Reliance would only need to open 3-4 stores of 150,000 – 200,000 square feet each in NCR and Mumbai, 2-3 each in Bangalore, Chennai, Kolkata, Hyderbad and Pune, and 1-2 each in Ahmedabad, Jaipur, Surat, Nagpur, Lucknow, Ludhiana, Indore and Vizag. So we are talking a total of 30 stores in 15 cities, occupying a total of about 5 million square feet.

This “upscale” department store chain should contribute revenues of about Rs.12,000 crores. Together with the value fashion format Reliance Trends, Reliance can look forward to achieving sales of Rs.23,000 crores in the apparel & fashion segment.

Reliance Jewels

What could have been a jewel in Reliance Retail’s crown is perhaps its biggest failure. With sales of just Rs.475 crores, Reliance Jewels does not even figure amongst the Top 30 organised sector jewellers in India. Compared to market leader Malabar Gold & Diamonds (estimated sales Rs.8800 crores in FY12 from only Indian stores), its turnover is just 5.4%. Compared to its more comparable peer Tanishq (sales of Rs.7064 crores in FY12), from where it poached most of its senior executives, its turnover is just 6.7%. In fact, Reliance Retail’s total turnover from all formats is less than that of these two jewellery retailers.

Skeptics may argue that Malabar Gold & Diamonds and Tanishq have been in the business much longer. But then, so is the case of Future Group vs Reliance’s F&G formats, or eZone vs Reliance Digital, or Westside vs Reliance Trends, or Titan Eye+ vs Vision Express.

Apart from other factors, one of the most important factors for the success of a jewellery retail business is the ability to invest – and who better than Reliance as far as this is concerned? It is therefore inexcusable that Reliance Jewels has manged a turnover of only Rs.475 crores, in a total market size of almost Rs. 2 lakh crores, where the organised market comprises Rs.82,730 crores.

Reliance Jewels’ share of the organised jewellery retail market of just 0.6% is much lower than the market shares of other Reliance Retail formats in their respective segments, and less than a third of Reliance Retail’s market share of the total Indian organised retail sector.

China’s Chow Tai Fook, with 1450+ points of sale across 320 cities in China and 60+ stores in Hong Kong, and sales of about Rs.23,000 crores, is the world’s largest jewellery retailer.  Tiffany & Co., with global sales of about Rs.19,000 crores, is the second largest jewellery retailer in the world.

But we don’t need international comparisons in a segment where as many as 18 Indian jewellery retailers have turnovers of more than Rs.1000 crores each, and the Top 5 more than Rs.3000 crores each.

Malabar Gold & Diamonds will most likely cross a turnover of Rs.10,000 crores this fiscal within India. There is no reason why Reliance Jewels should be aiming at less than this figure in five years. In order to achieve this, it will have to get its act together.

Reliance Footprint

This is another of Reliance’s formats that has done reasonably well, by carving a niche for itself in a sub-segment not addressed by any others – of being a sort of multi-brand value superstore in the footwear segment.

With a turnover of Rs.155 crores giving it a 3.2% share of the organised footwear market, Reliance Footprint has done reasonably well. However, eight other retailers/brands (Bata, Reebok-Adidas, Metro-Mochi, Khadims, Woodland, Liberty, Nike and Sreeleathers) are ahead of Reliance Footprint in terms of turnover.  Of these, the legendary Bata, with a turnover of Rs.1659 crores (12 months ending March 2012) from 1300+ stores, is almost 11 times larger.

Like Reliance Trends and Reliance Digital, this Reliance format also added 50 stores this year, more than doubling its stores to a total count of 88. But Reliance Footprint has a long way to go, as Bata has 1300+ stores, Khadims has 630+, Liberty and Woodland about 350 each, and Metro-Mochi 215 stores.

Internationally, a similar format to Reliance Footprint is Famous Footwear in USA. Part of Brown Shoe Co., this 1089-store chain had a turnover of about Rs.7600 crores in 2011. Average store size is 6900 square feet, compared to about 4000 square feet in the case of Reliance Footprint.  Another American retailer Designer Shoe Warehouse has 335 stores averaging a size of 22,000 square feet. UK’s Shoe Zone has 570 stores. The world market leader in this segment is Payless ShoeSource (PSS), with a whopping 4300+ stores in 34 countries across the world. The average size of a Payless ShoeSource store in USA is 3200 square feet and in international markets 2800 square feet. Payless’ domestic operations had a turnover of about Rs.10,300 crores from 3642 stores in USA. Their international operations had a turnover of about Rs.2440 crores from 661 stores.

So, whether we compare it with international value footwear retailers or with Indian footwear single brand or multibrand retailers, Reliance Footprint still has a long way to go, both in terms of the number of stores and turnover. There is no reason why this retailer cannot aim for a turnover of Rs.5,000 crores in five years, by when the Indian footwear market would have crossed Rs.1,00,000 crores.

Reliance Timeout

With a 5.3% share of the organised retail market in the segment it caters to, Reliance Timeout comes second only to Reliance’s F&G business in terms of market share capture. However, a turnover of less than Rs.100 crores in a Rs.89,000 crore total market means it still has a long way to go.

This retailer grew much slower than its counterparts – perhaps due to the fact that, globally, retailers in this segment are facing challenges due to eBooks, MP3 downloads and all kinds of other impediments brought about by the internet. Only time will tell whether Timeout will survive – after all, many global giants in the books & music retail segement are floundering.

Other Formats

Reliance Living, Reliance Home Kitchen and Reliance Wellness have all been disasters and it is not clear if Reliance will continue these businesses.

Reliance Brands has done reasonably well by bringing to India such iconic brands as Diesel, Timberland, Steve Madden, Brooks Brothers, London Fog, Quiksilver, Paul & Shark, Roxy, Thomas Pink and Ocean Pacific. This business could easily give Reliance revenues of Rs.3000+ crores in five years.

Hamleys has been somewhat of a disaster in the country. Three years after Reliance got this iconic British toy retailer to India, only two stores have opened – one each at Mumbai and Chennai – while the opportunity exists to open stores in at least five other cities. Dubai alone has two Hamleys stores.

Marks & Spancer has done much better in India after forging a joint venture with Reliance, compared with its earlier avataar of franchising the concept to Planet Retail. This retailer is likely to do even better by shedding its inhibitions and opening larger stores – after all, its average store size of 15,000 square feet in India does not do justice to the fact that M&S is opening stores of 70,000 – 180,000 square feet in the UK.

The Vision Express joint venture has done very well, with 155 stores now operational across India.  At its rate of growth, this retailer is on track to surpass Titan Eye+ and become the largest eyewear retailer in the country.

Conclusion

In summary, what has been presented here is not just an in-depth analysis of Reliance Retail’s performance, but also a potential roadmap for the company to achieve a sales turnover of Rs.1,60,000 crores in five years – 21 times its present turnover.

If the parent RIL continues to grow at 30.2% p.a., it will have a total turnover of Rs.12,71,000 crores in FY17. At Rs.1,60,000 crores, the retail business will contribute 12.6% to the parent’s topline and will thus be a part of the segment-wise financial reporting of RIL.

 

 

The 24^th of November 2011 was a historic day for Indian retail. The cabinet of ministers of the Government of India cleared the commerce ministry’s proposal to permit 51% foreign direct investment (FDI) in multi-brand retail (with several riders), as well as 100% FDI in single-brand retail (51% was already allowed in single-brand retail).

On a panel discussion on CNN-IBN, serial consumer activist Bejon Misra was shouting at the top of his voice that FDI in retail is not good for Indian consumers.  When being asked by R.Subramanian, founder of Subhiksha, to explain his logic, Misra retorted that his kirana, Guptaji, gave his family goods on credit, while organized sector hypermarkets and supermarkets did not.

“I don’t need credit, I need the choices that hypermarkets offer me, which kiranas don’t” said Sriram Khanna, Managing Trustee, Consumer Voice, “while no one is stopping you from continuing to shop at Guptaji’s kirana store, how can you stop me from getting the choices I want? After all, India is a free-market democracy, so let 1.2 billion consumers decide where to shop, instead of you deciding for all of India.”

This probably sums up the mood of the Indian consumer – GIVE US CHOICE. As one travels through Rishikesh in the North, Ajmer in the West or Mysore in the South, you can see more and more consumers flocking to neighbourhood supermarkets which are giving them a choice of brands and products at different price points, allowing them to participate in India’s consumer boom. How can anyone representing a small section/segment of society decide how 1.22 billion people should shop?

Raj Jain, MD & CEO of Bharti Walmart said: “We are grateful that the Government has realized and appreciated the value that Wal-Mart will bring to strengthen the Indian economy.   This will positively impact the Indian market and will also contribute toward India’s image as one of the world’s fastest growing economies and a welcoming destination for international businesses. We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation.”

Bharti Walmart Private Limited is a joint venture between Bharti Enterprises (better known for their telecom brand Airtel) and the $405 billion Walmart, the world’s leading retailer, renowned for its efficiency and expertise in logistics, supply chain management and sourcing.  Walmart employs over 2.1 million people across 9826 stores under 60 different banners in 28 countries. The joint venture has wholesale cash-and-carry and back-end supply chain management operations in India. The JV has nine Best Price Modern Wholesale stores which employ 3,372 people. Bharti Retail, wholly-owned subsidiary of Bharti Enterprises, operates neighbourhood stores called Easyday, compact hypermarkets called Easyday Market and hypermarkets called Easyday Hyper.

Kishore Biyani, MD of Future Group (Pantaloon Retail India Limited) agrees: “Its a big win for the agri-sector as investments in back-end in the agri-sector will result in better prices for the sector and reduce inefficiencies, thereby getting better prices for the farmers.”  Pantaloon Retail had sales of Rs.122.12 billion ($2.35 billion) in fiscal 2011, with operational retail space of 15.24 million square feet, with more than 50% of that space occupied by its hypermarket format called Big Bazaar.

“It will help at the farm level by improving productivity and possible better earnings for farmers, as well as investment in food processing. It will also help in generating employment at the farm level as well as in the supply chain,” commented Saloni Nangia, SVP Retail, Technopak Advisors.

Adds Goldie Dhama, Associate Director, PwC India: “Increased investment in back end (supply chain and cold storage) infrastructure will help in reducing the wastage percentages of 30-40% of food produce from farm to fork. Technology transfer to Indian companies will enable best practices in crop management and food safety and hygiene – thereby improving the quality of food products across the board.”

One needs to ask how kiranas will get affected differently by foreign food & grocery (F&G) players, compared with Indian giants in this business (Reliance, Tata, Aditya Birla, Raheja and Future Group) and by foreign retailers such as Wal-Mart and Spar, who are operating through licensing or similar arrangements. What can new foreign retailers do (to harm kiranas) that these players cannot?

“This is a very progressive step and consumers will get a far wider range of quality products at better prices,” said Viney Singh, MD of Spar’s licensee Max Hypermarkets, part of the Dubai-based Landmark Group, “it will also benefit farmers and the industry that feeds into retail. Currently, many states do not permit us to procure directly from farmers, as these state governments feel that farmers will get exploited with so few organized F&G retailers in India. With many more players (with the capital, scale and organizational capabilities) now coming in and building the scale required at the front-end, the same state governments will understand that the farmer will get the best prices, as he will have many organized buyers to choose from. So I expect a lot of change in local APMC laws going forward.” Spar currently has 10 operational stores in India and Singh expects to close the current year with a turnover of Rs.5.8 billion ($0.116 billion). In 2010, Spar worldwide had retail sales of $39 billion from 12,136 stores in 33 countries. Singh does not believe there will be any change in the Spar – Landmark Group relationship, as Spar does not invest in most foreign markets, where it follows a licensing/franchising model.

By 2015, Urban India will have a population of 423 million people. They will need 635 million square feet of total space for food retailing (includes grocery, pharma, beauty & FMCG), at 1.5 square feet of per capita food retail space, compared to about 511 million square feet today, including space occupied by modern trade as well as traditional retailers and neighbourhood kiranas. The western world has an average of 3.1 square feet and South-East Asia 1.82 square feet.   If we assume that the organized sector (including existing players) will capture only 7.5% market share in four years, we will have an estimated 47.63 million square feet of hypermarkets, supermarkets, convenience stores, pharmacies and drugstores by 2015, compared to about 15.3 millon square feet today.

The main opposition party BJP and the permanent opposition left parties say that foreign retailers will cannibalise the business of kiranas. Even if foreign retailers capture 50% of the organized sector’s total market share (which itself is a tall order) and thus have 23.82 million square feet of retail space, at an average ownership of 1200 square feet of retail space per small business (kirana) owner, this will only affect 19,850 businessmen and not crores of businessmen, as has been hyped by some politicians.

Most discussions about opening up multi-brand retail only talk about food & grocery, but there’s much more to retail than just food & grocery.  423 million urban Indians will need 3680 million square feet of space for non-food retailing, at 8.7 square feet per capita. Assuming 20% market share for the organized sector in non-food retail, the organized sector is estimated to have 736 million square feet of non-food retail space.

Let us look at how many jobs will be impacted. “My initial estimates are that it will create over 4 million jobs in the country and in logistics about 5-6 million jobs in three years,” Commerce and Industry Minister Anand Sharma told reporters.

At one direct job for every 180 square feet of retail space (across formats), an estimated 4.354 million people will be employed across the 783.63 million square feet of space occupied by organized retail.  With 1.5 indirect jobs (in supply chain and logisitcs) per direct job, it adds up to a total of 10.89 million jobs.  Therefore, Anand Sharma is bang on.

A vast majority of the employees will be those who have studied only up to primary school.  What other job opportunities (of this magnitude) are there for such people, who either cannot afford to finish high school, or just don’t have the IQ required?  They will have benefits such as PF and ESI, thus bringing them lot of stability and security.  More importantly, the organized sector is not just giving these people employment, but is augmenting their skills through training and personality development, thereby making them more marketable.  So what does the kirana do to increase India’s Human Development Index?  In other words, more FDI = better HDI.

“Today, about 90% of children do not pursue education beyond schooling. With a large number of new stores opening, modern trade will become a preferred choice of employment to them,” says Sanjiv Goenka, Chairman of RP-Sanjiv Goenka Group, which runs 220 retail stores including 30 Spencers hypermarkets.

Why would any political party would want to favour 19,850 small businessmen over 10.89 million youth who don’t have many other other job opportunities? The left parties and left-leaning regional parties should be at the forefront of supporting FDI, if they really stand for the upliftment of the economically weaker sections of society.

Let us look at the fine print in the announcement made by the Government of India. In allowing 51% FDI in multi-brand retail, the following restrictions apply:

1. Minimum investment of $100 million.
2. 50% of the investment (or minimum $50 million) has to be in back-end logistics, not including investment in property.
3. At least 30% sourcing from SMEs or small-scale industry.
4. Stores can only be in cities with a population of more than one million people. (Please see chart with list of these 39 cities)
5. Government will have first right of procurement of farm produce.

 

 

Indian Cities with >1 million   population
Rank	City	State	Population (2011)
1	Greater Mumbai	Maharashtra	19,130,565
2	NCR	Delhi	15,828,138
3	Greater Kolkata	West Bengal	9,209,301
4	Bangalore	Karnataka	8,425,970
5	Hyderabad	Andhra Pradesh	6,809,970
6	Chennai	Tamil Nadu	5,751,981
7	Ahmedabad	Gujarat	5,778,884
8	Pune	Maharashtra	4,844,790
9	Surat	Gujarat	4,462,002
10	Jaipur	Rajasthan	3,073,350
11	Lucknow	Uttar Pradesh	2,815,601
12	Kanpur	Uttar Pradesh	2,767,031
13	Patna	Bihar	2,405,421
14	Indore	Madhya Pradesh	2,250,069
15	Raipur-Bhilai-Durg	Chhattisgarh	1,904,463
16	Bhopal	Madhya Pradesh	1,795,648
17	Visakhapatnam	Andhra Pradesh	1,730,320
18	Nagpur	Maharashtra	1,683,200
19	Vadodara	Gujarat	1,666,703
20	Ludhiana	Punjab	1,613,878
21	Agra	Uttar Pradesh	1,574,542
22	Nashik	Maharashtra	1,486,973
23	Meerut	Uttar Pradesh	1,309,023
24	Rajkot	Gujarat	1,286,995
25	Varanasi	Uttar Pradesh	1,201,815
26	Srinagar	Jammu and Kashmir	1,192,792
27	Aurangabad	Maharashtra	1,171,330
28	Dhanbad	Jharkhand	1,161,561
29	Amritsar	Punjab	1,132,761
30	Chandigarh	Chandigarh	1,125,397
31	Allahabad	Uttar Pradesh	1,117,094
32	Ranchi	Jharkhand	1,073,440
33	Coimbatore	Tamil Nadu	1,061,447
34	Jabalpur	Madhya Pradesh	1,054,336
35	Gwalior	Madhya Pradesh	1,053,505
36	Vijayawada	Andhra Pradesh	1,048,240
37	Jodhpur	Rajasthan	1,033,918
38	Madurai	Tamil Nadu	1,016,885
39	Kota	Rajasthan	1,001,365

“Although the announcement has taken away the uncertainty, the number of clauses make it quite difficult and very serious concerns remain about state-level decisions,” said Mark Ashman, MD of Hypercity Retail.

“This will definitely help the SSI sector, as they will have a wider choice of buyers,” says Kabir Lumba, MD of the Rs.28 billion Lifestyle (part of Dubai-based Landmark Group), “import duties are very high, so manufacturing will get a boost.”

Darshan Mehta of Reliance Brands had a different point of view. “To source locally, you need to buy minimum 1000 metres shirting of the same colour and design. This will produce 833 shirts, which will require at least 30 stores to sell them from – how long will it take for new entrants to get to 30 stores – so imports (even though costly) will continue for a few more years.”

So what does all this actually mean?  $50 million in front-end by the foreign 51% partner translates to Rs.5.1 billion in total investments by the entity, including the Indian partner’s 49% investment. It will be a similar amount for the back-end.

Of the Rs.7000 per square foot investment required in front-end infrastructure, about Rs.4500 per square foot will be done by the landlord and Rs.2500 per square foot by the retailer. Thus, a retailer has to create 2.04 million square feet of front-end retail space to meet the Rs.5.1 billion minimum investment requirement.

This completely rules out a specialty retailer like the $1.46 billion Sephora (the LVMH-owned world’s largest beauty retailer) from coming in, as they will need to open 680 stores of average 3000 square feet. With only 750 stores worldwide (17 countries) and 400 stores in USA (including 150 shop-in-shop counters at JC Penney), Sephora is certainly not going to open 680 stores in India anytime soon. Bijou Kurien of Reliance Retail should be happy, as Sephora will still need a capable Indian partner (read licensee) and Reliance is reportedly a front-runner.

However, the UK-based Boots ($31.3 billion health & beauty retailer with a presence in 25 countries) may come in. With an average store size of 10,000 square feet, Boots only needs to open 204 stores. With 3,280 Boots stores worldwide, opening 204 in India is certainly not a tall order.  Similarly, the $72 billion American health & beauty giant Walgreens (7,779 stores) can come in.  So can the Hong Kong based $18 billion AS Watson, which has 9,400 stores globally, and will need to open 510 stores of average 4000 square feet each, which is quite feasible in the 39 cities.

The Indian health & beauty retail market is currently at $36.5 billion and is growing at 17% per annum. Organized sector penetration is only 3.2%, compared to >23% in jewellery & watches and >15% in CDIT (consumer durables, information technology and telecom) – this should be exciting enough for any global health & beauty giant.

Let us look at another popular and fast growing multi-brand category – CDIT. With an average store size of 15,000 square feet, a new foreign entrant only needs to open 136 stores (Croma has 73 stores and Reliance Digital 51 stores).  The $32.7 billion Indian CDIT market can easily absorb 850 CDIT megastores doing annual business of $7.7 million each, which will give these types of retail formats a 20% market share.

However, there is another problem here. How will they source 30% from the SME/SSI sector? Surely, Indian consumers will prefer buying LG, Samsung and Sony products, compared to those made by Kumar & Sons or Venkatchalam Industries. Perhaps they will be able to work out the maths by sourcing accessories, components and the like from the SME/SSI sector, but this will need further and deeper study. This may lead to some global players coming in.

“All SME and SSI vendors of the automobile industry became billion dollar market cap companies, so we will see the same benefits coming to retail industry vendors now,” said B.S. Nagesh, Vice Chairman of Shoppers Stop, who now runs a trust called TRRAIN, which is committed to upgrading the lives of people in retail both at work and home,  “Ikea is already sourcing from several Indian vendors for exports, now they will start sourcing for selling in India.”

Most retail experts agree that global bookstore or leisure store chains will probably not be able to take advantage of this policy change, as they will not be able to invest 50% in the back-end.

That brings us to the largest non-food multi-brand retail category – department stores. At an average size of 120,000 square feet, a foreign retailer only needs to open 17 department stores. Shoppers Stop has 46 stores and Lifestyle 34 stores.  Nagesh says that department stores cannot invest the minimum amount for the back-end, as they do not require huge back-end investments. He felt the policy was more oriented towards food retailers. Lifestyle’s Lumba agreed.

This can be looked at from another perspective. To open 25 department stores of 120,000 square feet each, a chain will need 10,000 retail staff and at least 1200 other staff.  At just Rs.150,000 per employee to be spent on recruitment and training, they could invest Rs.1.68 billion on training alone. With 30% sales from private labels and minimum one month’s inventory, they will need Rs.1.08 billion in inventory. That takes care of Rs.2.76 billion of the Rs.5.1 billion minimum back-end investment, leaving Rs.2.34 billion to be invested. This could be easily deployed in investing in other brands’ inventory and negotiating far higher margins than what they are getting from brands under their current business models of “sale or return” or “consignment sales”.

For the $15.5 billion Isetan or $10 billion Takashimaya (both from Japan), the $12.83 billion El Corte Ingles from Spain, $7.74 billion Galeries Lafayette from France or $5.94 billion Lotte from South Korea, $100 million is not difficult to invest. Even Central and Robinson from Thailand are strong contenders. Growth opportunities are restricted in their home markets and the Indian market growth offers a compelling story. All these chains are already present in multiple countries.

 

Company	Origin	Stores	Countries present	Total sales FY 2010
Walgreen	US	7,779	2	$72.2 billion
Lotte	South Korea	164	5	$54.2 billion
Isetan	Japan	50	11	$33.4 billion
Boots	UK	3,280	25	$31.2 billion
IKEA	Sweden	332	42	$31.3 billion
AS Watson	Hong Kong	2,300	11	$24.0 billion
H&M	Sweden	2,300	36	$18.2 billion
Gap Inc	US	3,248	90	$14.7 billion
El Corte   Ingles	Spain	70	5	$12.0 billion
Uniqlo	Japan	2088	12	$10.6 billion
Takashimaya	Japan	23	4	$10.5 billion
Galeries   Lafayette	France	63	4	$3.4 billion
Central	Thailand	18	1	$2.2 billion

Now let us look at where FDI in multi-brand retail will really come in from – the food retailers – actually the hypermarket/supermarket operators.  The Indian market size is $154.4 billion, with less than 3% organized sector penetration.

If 80% of the 47.63 million square feet of total organized sector food retail space is comprised of hypermarkets, at an average size of 70,000 square feet, we are talking about 544 hypermarkets.  India currently has 240 hypermarkets. Of the new 304 hypermarkets, if foreign retailers have to capture 50% market share, they need to build 150 hypermarkets – so there is space for 6-8 players. Who are these going to be?

There is no doubt in anyone’s mind that Wal-Mart, Carrefour and Tesco will be amongst the players. In all probability, the others would be out of the following 11: Rewe from Germany, Auchan from France, Aeon from Japan, Le’clerc from France, Ahold from Netherlands, Groupe Casino from France, Intermarche from France, Shinsegae from South Korea, Shoprite from South Africa, Lotte from South Korea and Giant from HK/Malaysia. Details about these chains are given in the table.

 

Company	Origin	Stores	Countries Present	Total Sales FY 2010
Rewe Zentral	Germany	13,148	13	$70.6 billion
Groupe Auchan	France	1,339	12	$56.6 billion
Aeon Co	Japan	5,000	9	$54.0 billion
E Leclerc	France	108	6	$41.0 billion
Ahold	Netherlands	2,970	10	$39.3 billion
Groupe Casino	France	10,783	25	$38.7 billion
Intermarché	France	2,000	8	$38.1 billion
Shinsegae	Japan	164	2	$11.2 billion
Shoprite	South Africa	331	17	$8.5 billion
Lotte	South Korea	31	5	$7.3 billion
Giant	Malaysia	206	4	$4.9 billion

“Several Japanese, Korean and South American retailers have retail business models suitable for India. I see someone like Pao De Acucar of Brazil coming in.  Even American retailers like Home Depot and Best Buy may consider coming to India. Carrefour may either buy into an existing Indian retailer or move from B2B model to a B2C model,” said Bijou Kurien, President Lifestyle Business, Reliance Retail, a company which is expected to have a retail turnover of $2.7 billion in the current fiscal, and part of the $50 billion Reliance Industries Limited, India’s largest private sector company.

“There are 25 regional hypermarket chains in the US alone, bigger than most Indian hypermarket chains,” said Mark Ashman, MD of Hypercity retail, part of the Rs.23.8 billion Shoppers Stop group. “The Tata Trent – Tesco arrangment may become a joint venture now,” says Nagesh. Singh of Spar and several others echoed the same sentiment.

Now let us look at the impact of the government allowing 100% FDI in single brand retail.  Four things will happen in this space:

(1)    Retailers who are running 51% owned operations in India with the balance 49% being held by sleeping/silent Indian partners will most likely take 100% ownership. These include the likes of Louis Vuitton, Tod’s and Christian Dior. “There are many 83 year olds in places such as Coonoor and Dharamsala who have facilitated such JVs,” says Darshan Mehta of Reliance Retail, “many global retailers will still prefer to have Indian partners, as the market here is very complex.”

(2)    Some retailers who normally operate internationally only with 100% ownership, and have thus been operating in India through licensing/franchising, will come in with some own stores, while they may parallely continue with the existing licensed/franchised stores. The first name that comes to mind is Apple. Lumba of Lifestyle feels that brands like Mango – where the franchisee has only opened 12 stores of approximately 2000 square feet each – may come in directly. Mehta disagrees: “Mango is here as a franchisor, because they didn’t want to invest; they didn’t take 51% when it was allowed.”

(3)    Retailers such as Ikea, H&M, Uniqlo and Gap/Banana Republic, who have patiently waited for 100% FDI, will now come in. “Ikea will impact Home Centre’s business – we compete very well in seven countries in the middle east region; they will help expand the market, as more people will buy readymade furniture,” says Lumba.

(4)    There are likely to be some investments in the F&B space. Entrants in this space are likely to include Wendy’s, Starbucks, Dairy Queen, Hardees, Popeyes, Quiznos, Chipotle, Panda Express and dozens of others. Many of them would be coming in through the franchising route, so would have come in any case even without this policy change. The Indian F&B market is already at $40.4 billion and is growing at >15% per annum. Organized sector penetration is less than 4.5%.

The action on single brand retail is likely to happen much faster than in multi-brand retail. In single brand, we should start seeing announcements from as early as March or April 2012. In multi-brand, we will probably have to wait till at least July-August to see any major announcements.

“The impact will be seen from the third to the fifth year,” said Nagesh. Reliance’s Kurien says that “the early bird catches the worm, as this is a property grab business”, suggesting that those who take faster decisions will benefit.

“Retailers like Ikea, H&M, Prada and Dolce & Gabbana will come in,” says Timmy Sarna, Chairman of DLF Brands, “and many developers will now start building malls all over again.” Adds Lumba “brands like Uniqlo, which are extremely relevant for India, should come in; H&M is also likely; Gap will probably come through 74% or 100% ownership – this will all lead to a lot more choice, excitement and energy for Indian retailers and consumers.”

Apart from foreign retailers entering India, FDI is also likely to come from overseas PE/VC investors who may invest in established Indian retailers. This will happen in both, multi-brand as well as single brand space, including online retail. We have already seen PE/VC investments into retailers such as Nilgiris, Nirulas, Lilliput, Kimaya, Spykar and Fabindia.  Several more old & established Indian retailers are ripe for investment.

“FII was constrained by FDI in India,” says Kurien. Ashman agrees. “Indian groups got few years to establish themselves in retail and now they will be ready to offer their platform to foreign investors to come in and also get good valuations,” adds Nimesh Shah of Equirus Capital.

There is also likely to be M&A activity. “This will certainly be met with open arms by several domestic retailers. In particular, players such as Pantaloon Retail and Vishal Retail need to ease their current debt levels. Foreigners looking to capitalise on this new policy may help support them. Vishal Retail has around Rs 70 billion of debt as of June 2011, Pantaloon Retail is also carrying a debt burden of Rs 40 billion,” says Parita Chitakasem of Euromonitor International.

At estimated sales of Rs.2000 per square foot per month in 2015, the 783.63 million square feet of organized retail space will generate annual revenues of Rs. 18.807 trillion and taxable profits of Rs.564 billion (assumed at only 3% of revenues). This translates to Rs. 2.594 trillion in GST collections (@ 16% GST) and Rs.174.28 billion in corporate income tax. The government is losing minimum 50% of this potential tax revenue because half of the business of the unorganized retail trade is probably escaping the tax net.

The organized retail sector will have at least 780,000 managers earning an average taxable salary of Rupees one million per annum. This will generate at least Rs.195 billion of additional personal income tax collections.

The total Rs.1576 billion in additional tax collections (Rs.1294 billion in GST [50% of total] + Rs.87 billion in corporate income tax [50% of total] + Rs.195 billion in personal income tax) translates to an increase of more than 11% in the tax collection of the centre and states, wiping out the revenue deficit and making India a revenue surplus economy.

Of the 783.63 million square feet of organized retail space, about 103.9 million square feet already exists – so we are talking about 680 million square feet to be added anew. This will need infrastructure investments of Rs.4.76 trillion (at an average Rs.7000 per square foot at 2012-2015 costs, for building construction, interiors and shop fit-ins) and Rs.1.904 trillion in inventories (@ Rs.2800 per square foot), or a total investment of Rs.6.664 trillion ($128 billion).

If 50% of this is foreign investment (by foreign retailers as well as financial investors), we are talking about FDI of $64 billion in four years, or $16 billion p.a., 80% increase over the actual inflows of fiscal 2010-11.

“We will get around $8 billion to $10 billion of fresh investments coming into the country over the next 5 to 10 years,” said Kishore Biyani to many TV channels and to this magazine.  “I expect at least $15-20 billion of investment over the next 10 years. Initially it will be smaller, but will pick up once international players get a hang of the market,” said Harminder Sahni of Wazir Advisors. According to the BBC, foreign retailers have said that investments will be closer to $40 billion. Certainly, these foreign retailers have done their homework.

“India has been a very exciting market and all this just adds to the excitement,” says Martin Jones, CEO of Marks & Spencer India, “we will not do anything different – we are happy with Reliance as a partner, as both parties bring different skills to the table.”

To sum up, if Dr. Manmohan Singh can make the state Chief Ministers and opposing party leaders (including some UPA allies) understand the tremendous impact that this bold move will have on the Indian economy, he will take Vijay Mallya’s recently vacated position of “the king of good times”.

Almost 11 million youth will have new (or better) jobs.  That’s almost 7.5% of the youth population of urban India. FDI will go up almost 80%, hopefully leading to the rupee bouncing back against major world currencies. The budget deficit will be wiped out, thus putting us ahead of China in this decade. Most importantly, about $180 billion will get converted from black market economy to accountable economy, and we may need a much smaller Lokpal authority.

RBI Governor Dr. D. Subbarao said on 25^th November: “For India to regain its growth momentum and indeed accelerate it further, the country has to address key challenges – raise agricultural production and productivity; expand employment; bridge infrastructure deficit; promote financial inclusion; and provide a stable and predictable macro-economic enironment.” FDI in retail takes care of most of this. Can this UPA government do it?

 

ABOUT ASIPAC

Asipac undertakes strategic research on the retail as well as the retail real estate sectors. In retail real estate, Asipac has provided development strategy, planning and lease management on reail/shopping centre projects of more than 17 million square feet, including seven of the 15 largest shopping centres in India. The company has leased more than 8.5 million square feet of retail real estate in South India alone in just six years. Asipac has current leasing mandates for nine malls in five cities, with combined GLA of 8.2 million square feet.

 

Everyone talks about them, but most don’t have a clue about the real size of their business. I am referring to the traditional Dravidian retail giants who have dominated Tamil Nadu’s retail landscape for decades, and don’t seem to be affected a bit with the onslaught of modern department stores or malls in their home turf.

Saravana Stores does annual business of Rs.510+ crores from a 7-floor store (that’s more than what any single Lifestyle, Central or Shoppers Stop store does).  From four stores, Saravana does Rs.1200+ crores. That’s two-thirds more than the Rs.717 crores turnover reported by Tata’s Trent, which includes Westside (54 stores), Landmark (18 stores) and Star Bazaar (12 stores). The Chennai Silks is estimated to be doing business of Rs.1150+ crores (excluding jewellery) from nine stores, Nalli Rs.700+ crores from 22 stores, Pothys Rs.650+ crores from four stores and RMKV Rs.510+ crores from four stores. These five Tamil Nadu retailers do sales of Rs.4200+ crores, more than the turnover of Shoppers Stop, Lifestyle, Westside and Reliance Trends put together.

This is the power of regional retail. Modern retailers are still trying to figure out how to make it happen. After months of efforts, Asipac’s research team finally got hold of two of these giants – let’s read what they have to say.

 

WHY DOES RmKV TRADE THREE TIMES’ LIFESTYLE OR SHOPPERS STOP?

Back in 1924, with India under British rule and organised retail non-existent, Rm.K.Vishvanatha Pillai set up a 1000 square feet women’s wear shop in Tirunelveli named RmKV after his initials. With silk sarees as its core product, the shop operated from this location until it shifted to a much larger 35,000 square feet megastore elsewhere in Tirunelveli in the 1950s. As it turned out, that market was to grow by leaps and bounds, positioning RmKV at the centre of a thriving retail hub.

According to Rm.K.Sivakumar (Siva), a third generation family member now running the business, “It was no coincidence that RmKV became the brand it is today. From day one, my grandfather worked with a mission of being honest and transparent, while focusing on efficiency at the back-end. In the 1920s he had a system to identify each product through a Unique Numbering System. With the advent of computers in the 1980s it became much easier, but the transition was smoother for us because of the system he had put in place, and we follow the basics of that system till date”.

For 80 years, RmKV operated a single store. Eventually, the market became so big and so crowded that, as per Siva, “the customer experience started deteriorating”. Access had become a problem, and there was hardly any parking for the increasing number of shoppers with private vehicles. With organised retail emerging at the turn of the century, RmKV decided to expand and take the brand outside Tirunelveli. A 35,000 square feet store was opened in Chennai in 2004. Four years later, RmKV opened its biggest store, a 100,000 square feet outlet in Tirunelveli. The original shop in the old market area continues to operate.

As a sign of RmKV’s desire to move with the times, the fourth store (58,000 square feet) was opened in 2010 inside a mall – Brookefields Plaza, Coimbatore. “We did a survey before we took the decision. Normally, silk sarees are sold in traditional markets, and we were unsure of the turnover we could achieve in a mall. We were pleasantly surprised with the results of the survey, with a majority of people saying if the price and quality of product stayed true to the RmKV brand, they would shop with RmKV in a mall”, says Siva. Asipac estimates RmKV’s sales at Brookefields Plaza at Rs. 14–16 crores per month, three times that of the similar sized Lifestyle in the same mall.

Another example of RmKV adapting to change was the online sales platform. A catalogue of almost 1500 sarees is currently online. Says Siva, “Weddings is our main business, and with weddings now planned, it helps a customer to visit the website and identify the products that fit their taste and budget. Even if they do not buy online because they want to touch and feel the product, by the time they visit our store, they pretty much know what they want, making the process that much easier”.

With a turnover that crossed Rs.510 crores in the last fiscal, RmKV’s ATD is an impressive Rs.1865. This is almost three times that of Shoppers Stop. This is noteworthy because their ABV is just Rs.1250, not exceptionally high by industry standards. With an average (four stores) 7500 daily footfalls and 11,000 on weekends and holidays, I estimate RmKV will cross Rs.700 crores this year.

“Competitive pricing and quality have been our strength. From the beginning, our business model has been one of ‘low margin and high turnover’, with margins usually in line with prevailing interest rates”, says Siva. During World War II, a quota system put a ceiling on the amount of merchandise a retailer could sell to each customer. “Retailers used to make a killing, selling at 2-3 times the normal price. Even then, my grandfather used to sell at 6-7% margin, equal to the prevailing interest rate”.

When asked about entering market segments other than silk sarees, Siva said, “Silk sarees define our brand. It is who we are. We are open to other segments as long as the parent brand is not diluted. We have diversified into RTW, dress material, artificial jewellery, women’s accessories, innerwear, synthetic sarees, but silk sarees is where we focus most of our energies on”. Maybe it was due to this unyielding focus that RmKV was not heavily impacted by the recent slowdown. Infact, they expanded in that phase, and ended up benefitting from lower sourcing costs during the slowdown.

I wondered why RmKV opened three stores in six years when it had taken them 80 years to open the second. RmKV has also signed a store of 60,000 square feett at the upcoming Forum Mall in Chennai. “We believe that growth is important, but so is sustainability and turnover. Planning and controlling the back-end process is critical. We did not want growth for the sake of growth, and it was only after a thorough study of new locations, competitors as well as customer behaviour that we decided that the time was right to expand”. As for future expansion, Sivakumar felt that the biggest challenge lay in managing multiple stores spread across a wider geography, and getting their formats right. He said that Nalli’s is a great example of a regional competitor that had successfully expanded across the country. When queried about how he plans to fund future expansion plans, Siva said that he would be open to external funding, although “it might be too early to think of an IPO”. I couldn‘t agree more, considering that RmKV has not yet stepped outside Tamil Nadu. PE investors will give RmKV a valuation of Rs.900-1000 crores. That’s more than listed companies such as Brandhouse (S.Kumar’s Group) and Provogue. If FDI was allowed in multi-brand retail, the valuation would be above Rs.1250 crores.

 

While on the topic of Nalli’s, Sivakumar gave them credit for spreading awareness about Indian ethnic wear amongst India’s youth, especially at a time when the general trend is towards western wear. “It is one of the challenges we face – getting younger women to wear sarees more often”, he says.

Like most businesses, identifying, recruiting, training and retaining high quality manpower remains a challenge for RmKV too. “Our frontline staff are from modest academic backgrounds and we conduct weeklong training sessions three times a year, outsourced to a professional agency, thereby ensuring that the staff’s product knowledge and customer service is top notch. Our senior management, on the other hand, comprises of educated professionals from reputed institutions. Overall, we strive to instil in our employees a sense of ownership and belonging towards the brand – it makes a positive impact on customers and it helps us counter attrition issues to some extent”, says Sivakumar.

So what makes RmKV achieve three times the trading density of Shoppers Stop and four times that of Westside? Is it because they are 87 years old? Or because they work on lower margins? Or is it because a majority of Indian women still wear ethnic? I believe it is a combination of all three. I see RmKV crossing a turnover of Rs. 1000 crores by FY 2013. Surely, a retailer of this size cannot be ignored by the industry.

 

CAN THE CHENNAI SILKS GO PAN-INDIA WITHOUT BEING IN A MALL?

Born into a family of weavers at Tirupur, in 1962, A.Kulandaivel Mudaliar set up a 100 square feet shop in Madurai, selling khadi products. Over the next 30 years, he set up 12 more “khadi vastralays” across small towns in Tamil Nadu, gradually increasing the range of products and carrying on wholesale as well retail operations.

In 1991, Mudaliar set up a 25,000 square feet store named The Chennai Silks (TCS) at Tirupur selling textiles, silks sarees and RTW garments. “At that time, it was one of the biggest stores in the area”, says P.A. Ravindhiran, General Manager – Sourcing & Operations. A store of that size in Tirupur 20 years ago (with economic reforms in India yet to be introduced) had to be a rarity.

In 1996, Mudaliar opened a 45,000 square feet store in Coimbatore. Another store of the same size opened in Erode in 1999, followed by a 125,000 square feet store in Chennai in 2001 and a 100,000 square feet store in Trichy in 2004. Two stores opened on the same day in 2007 – 100,000 square feet in Karur and a second 80,000 square feet store in Coimbatore. This spate of aggressive expansion continued, with a 75,000 square feet store opening in Coimbatore in 2008 (the third in the city), and TCS also started selling jewellery.

Another 125,000 square feet store was opened in Ernakulam in 2009, spread across nine floors. This was also TCS’ first foray outside Tamil Nadu, and an indicator of their confidence in the brand, business model and market conditions. A 150,000 square feet store is under-construction in Tirunelveli and is expected to open by end-2011.  This will take up TCS’ total retail space to over 870,000 square feet.

All TCS stores are located on high streets – not one in a mall. What’s more, TCS owns all stores, including the land under them, and has an in-house project division to identify suitable land parcels and carry out construction. Surely, they must be using third-party agencies in some form? What about market/location analysis? “Although we do have an in-house research division, they usually work in conjunction with third-party agencies, especially for customer preference surveys”, says Ravindhiran.

 

The development of all stores has been self-funded, and Ravindhiran maintains that TCS might not look at external funding for their short-term expansion plans.

This reminded me of my father’s generation, where debt was often considered ‘bad’. Leveraging, or using one’s own capital to generate higher returns while borrowing at relatively lower rates to fund income-generating assets, cannot really be considered bad, can it? But who’s to question convention wisdom, especially if it’s successful?

Ravindhiran claimed that he was not aware of the latest turnover of TCS, and was unable to provide the same by the time this article went to press, but Asipac’s research arm estimates that TCS currently does an annual business of Rs.1150+ crores (excluding jewellery). Since the TCS stores covered in this article also sell jewellery, an ATD calculated using these figures would be inaccurate; nonetheless, doing a business of Rs.1150+ crores from nine stores is impressive. This figure will increase if we consider jewellery as well.

According to Ravindhiran, TCS has managed to diversify considerably within the apparel segment. Although silk sarees is the core segment, supported by sub-categories like designer sarees and wedding silks, they also sell cotton sarees, kidswear and western wear for men and women. Ravindhiran stated that in the near future, TCS is planning to target “all segments, age groups and income levels”. That’s a mighty ambition, considering that even national players like Lifestyle and Fashion@Big Bazaar operate at opposite ends of target income segments. TCS caters to a wide variety of income levels but within a restricted range of merchandise, and how it manages to expand along both axes needs to be seen.

With more than half of their merchandise designed and manufactured in-house and separate directors for production and retail, Ravindhiran sees TCS as a trendsetter. One of the things that struck me was that they have had an online sales platform since as early as 2000. “Although it was slow to take off, it has been doing very well in the last few years and now we have a large team to handle our online operations”, says Ravindhiran. Online sales in India have become commonplace only in the last 5-6 years, and I see this as one sphere where they have indeed proved to be early adapters.

On manpower, TCS, RmKV and a lot of other regional players seem to have a similar model – fresh graduates are recruited as store staff and then trained, professionals with corporate experience are recruited for middle management positions and then groomed for more responsibilities, and people who are either from ‘the family’ or who have been with the business for a long time normally occupy the top management positions. Ravindhiran himself is related to the Mudaliar family and joined the business in 1996. Syed Mushtaq, GM – Operations, has been with the business for 30 years.

The third generation has now entered the business, handling segments like men’s western wear and designer sarees, and young blood has led to fresh ideas and strategies to take the TCS footprint further. “We will be pan-India very soon”, claims Ravindhiran. Funding (especially for expansion) is where most regional retailers seem to stumble while on their expansion plans, and TCS does not appear to have that problem.

And then there’s the precedent of Nalli’s. It’s a bit like the four-minute mile. Athletes globally tried to run a mile under four minutes for decades, and it was considered ‘almost impossible’. Finally, Roger Bannister ran it under four minutes in 1954. Once proven possible, Bannister’s record was bettered in the same year and another four times in the next 10 years. Nalli’s has already set an example by metamorphosing from a regional to a national player in a very short while. So, while a pan-India presence for TCS might take a while, I am not willing to bet against it.

Mudaliar passed away a few years back, but when he sat in his 100 square feet Khadi Vastralaya in 1962, could he imagine TCS will be one day where it is today – a $250 million turnover company with a valuation of not less than Shoppers Stop’s market cap of Rs.1710 crores? Unlikely, but he was fortunate to have lived long enough to see this success. Only time will tell whether his successors will make a national giant out of The Chennai Silks, but they sure are sitting on a solid launch pad.

Westside’s website boldly claims that “Westside is one of India’s largest and fastest growing chain of retail stores.” I wonder whether equity analysts and investors who give Trent a market cap of 4.3 times its annual revenues or 71.5 times its net profit are even aware of the existence of The Chennai Silks and RmKV, and the threat regional retailers could pose to the highly overvalued national chains.

 

ABOUT THE AUTHOR

Amit Bagaria is Founder Chairman of shopping centre development consultants and managers Asipac Group and retail chain MEN & BOYS.