The Retail Rats...

Yesterday it was Subhiksha. Today it’s Vishal Retail. Auditors are smelling a rat all over the place, not just inside the retail stores. The charge – Books are cooked, inventory depletion happening at an alarming pace. All in the midst of a CDR process in tow.
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Retail is a fantastic sector to book cooks. The characteristic of the business also helps. There is a huge inventory base and is all meant for trading. They don’t manufacture anything and so it’s just sourcing, shelfing and selling. Now that leaves enough scope for spillage, wastage, damage and an issue of age itself in case if the goods are slow moving or just…non-moving.
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The Agarwals of Vishal Retail have played it to the hilt. They raised about Rs.110 crores by IPO in June, 2007 then went on to raise over Rs.800 crores of debt that is now seeking reprieve from lenders. The news was that the lenders have also agreed to finalize a CDR package of Rs.730 crores. Now there is the demand for forensic audit. A la Subiksha scam where ICICI Ventures was an early investor, played along the Board, then Renuka Ramnath, CEO of I-Ventures quit pretending ignorance when she was about to be hauled up for investigation but not before palming off a substantial stake to Azim Premji’s PE fund.
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I say everyone is an accomplice. A fraud of this magnitude, at a very base level (i.e.rapid build-up of inventory and writing it all down in double quick pace cannot happen unless everyone including Auditors, Bankers, Board members all collude. Ordinary investor is the only one that is left off circle. This is bullshit and it should clearly stop.
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Or just do away with Auditing as it exists now. Make the Auditors directly responsible to shareholders – not just making certificates and disclaimers.
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Better the land prices sink

The official line of bullshit from Real Estate developers is that slowdown is only in residential segment; commercial properties are still in demand. I said cheese off!

Now hear it from the Future Group CEO Kishor Biyani –

“We are about to conclude two deals where we do not have to pay rentals for three years” – No rentals for 3 years? Huh? Hear more. He only expects surplus space to be larger in 2009. Why shouldn’t he?

The man who started off India’s retail revolution can’t be wrong. I don’t want him to be. Real estate in a third world, infrastructure starved, poverty ridden country like India shouldn’t be costing so much. Look at wafer thin retail margins. Can they be housed in expensive real estate? I can understand if India’s IT vendors that once enjoyed a margin of 35% did that. Now dollar has tanked and their margins have also been hit. Uncertainty looms everywhere. Why should real estate be any different?

The land prices/rentals have to sink, otherwise the structures they erect over the land will. You like that?

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At crossroads or just cross eyed ?

Office space rentals have risen 30 per cent in the city central business district Nariman Point and 20 to 25 per cent in Lower Parel in the past year. Leading developers including DLF, Indiabulls, Peninsula and retail pioneer Future Group now are rethinking. Why not convert space reserved for retail malls and hyper markets into large office space…?

But then you have Lakewood malls, the retail arm of Hiranandani (Haiko) zeroing in on supermarkets, lifestyle stores and culture shops as its focus.

An industry at crossroads or is it just cross eyed vision? I'd like to believe it's strategy. But they say, strategy means folding in the future. Not extrapolating the past. Soon we'll figure that out.

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Rediscovering Kirana

Retailers are rushing ahead with their plans, but is there enough demand for the merchandise being sold? Asks Shobhana Subramanian today in BS.

With over 130 to 180 million sq ft of new mall space coming up in the next few years, and much of it in the big cities, the catchment for each mall will reduce. And that could completely alter the competitive dynamics. Abheek Singhi, partner, Boston Consulting Group posits that “A throughput of at least Rs 600-Rs 700 per sq ft per month would be required to sustain gross margins of 30 per cent if rentals are around Rs 40-50 per sq ft.” So, higher rentals of Rs 60-70 per sq ft would mean a much larger throughput. Building the store it seems, is the easy part. Getting cutomers to buy might not be that simple.

After factoring in 39 different licences that a hypermarket requires in India and yields on an average an operating margin of just 6%, what explains the rush (Wal-Mart, Carrefour, EON) for such a low margin business? Volumes ? The slice will be too thin when you’ve too many of them around. Large population shouldn’t be an attraction either since footfalls don’t necessarily mean customers.

In this entire melee, it’s the kirana (corner store) guy who gains. We rediscover the street corner vendor who is fast shedding sloth and getting nimbler by the day. Last time I checked, he does some brisk business in his store that no longer resembles the mess it once was. All items were neatly stacked and in full display. And he home delivers stuff on a phone call and I think that’s a sure win strategy. Competition induced innovation, perhaps !

Even if big ticket retail gets large scale supply chain advantage and can use its direct sourcing efficiencies to keep prices low, it would be interesting to watch how they deal with a nagging bureaucracy and rising rentals. The kirana guy is getting smarter and stauncher – quite contrary to the initial prediction that his breed will soon be extinct.

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Kirana choice

Indian market research consultancy Market Pulse spoke with close to 350 consumers in Delhi, Mumbai and Chennai to understand their attitudes to modern retail and their spending patterns.

The typical Wal-Mart customer earns less than the US national average income. And some reports say that one in five customers does not have a bank account; that’s twice the national average.

The Indian approach to big-box retail is slightly different. The less affluent still walk down to the corner store and call the bania (shopkeeper) to deliver their month’s groceries. Despite all the hype around malls, Kirana (corner store) accounts for 94 per cent of the $320 billlion organised retail trade in India. That ratio isn’t going to change anytime soon, so manufacturers would do well to pander to the convenience stores.

More on those interesting findings, here.

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The Retail kettle rattled ; now it’s Multiplex’s turn to quake.

Even as the Indian retail industry is geared up to meet the impending arrival of global retail chains like Wal-Mart, Carrefour and Tesco, their knee-jerks do betray their internal jitters however best they try to conceal.

And now this. Wal-Mart, the no. 1 retailer in the US, known as the 800-pound gorilla, unveiled a movie and TV download service yesterday and all the major studios have joined the party. Wal-Mart Stores said the download movie service offers more than 3,000 titles from Twentieth Century Fox, The Walt Disney Co., Lions Gate, Metro-Goldwyn-Mayer, MTV Networks, Paramount Pictures, Sony Pictures Entertainment, Universal Studios Home Entertainment, and Warner Bros. It also includes content from television networks Comedy Central, Fox, and Nickelodeon

The entry of foreign retailers has been a contentious issue for many years, with the government unable to convince the political establishment to support the move, given the stiff resistance from the powerful trader lobby who argues foreign players would wipe out the mom-and-pop stores ( called “Kirana stores” in local parlance). Under existing foreign investment norms, international players can own up to 51% stake in companies that sell only one brand through a chain of stores. The commerce & industry ministry is, however, planning to expand the scope of foreign participation to select sectors like electronics and sports goods, where global chains can open retail outlets.

But the truth is that with the emergence of the Indian retail formats like Big Bazaar, Subiksha and others have already begun to impact the fortunes of these kirana stores. Their customers have been deserting kirana stores en masse because of the better shopping experience and apparent discount offers at the neibhorhood mall. In fact, the real threat for Kirana stores are from retail supermarket format itself regardless of the nationality of its owners.

So it is in fact the Indian branded retail lobby which is running scared of the foreign retail chains.

The ruling Indian Congress party President Sonia Gandhi, had written to Prime Minister Dr.Manmohan Singh asking the government to take into account the implications that these transnational giants could have on neighbourhood kirana stores.

Lately the big Indian retailers including Big Bazaar, Ebony, Shoppers' Stop, Landmark, Westside or even Subhiksha are looking to source merchandise at the lowest rates globally. Future Group's Pantaloon Retail India has just set up global sourcing offices in Hong Kong and Mainland China - the first overseas sourcing operation by any domestic retail chain.

“For retail chains across the globe, the world is becoming a single market. We are looking at markets across the world from where one can source merchandise at the lowest price. We have opened our global sourcing offices in Hong Kong and China a few days back,” Future Group's CEO Kishore Biyani reportedly told a correspondent.

Now it’s the 800 pound gorilla’s turn to shake up the Indian Film industry and the budding online DVD rental outfits funded by Venture Capital firms in India. Huge PE investments ( $ 7.46 billion in 2006 across industries, bulk in infrastructure and real estate including multiplexes ) have been made in India anticipating blockbuster performances of these businesses.

The fun has just begun. With Indian VC investors quaking in their boots, it sure has all the trappings of an edge-of-the-seat thriller. Watch the space.