The clash between large format retail and small stores in the corner of the street is the stuff of retail formula— there are all-too-many reports and documentaries like Walmart. The High Cost of Low Price that chronicles the frequently bruising impact such confrontations can have. Then there are the family-owned durable retailers in India many of whom had over 40 years to grow and thrive, and are for all intents and purposes, large format and the emerging corporate-backed chains that have grown rapidly and are promising even speedier expansion, thus laying the foundation for a territorial battle in the days to come.
Many of the family-owned stores have been at the vanguard of the durable retail revolution in India. A store called Viveks pioneered the New Year Sale in Chennai as far back as 1977, offering unprecedented discounts around what was a lean period of the year. The sale was bigger than that of festival season. Vijay Sales’ one Day sales have generated buzz and excitement. Other stores have offered gold coins to customers purchasing particular items, or whose bill exceeds a certain amount.
The total consumer durables and tech industry is valued at Rs 35,000 crore; all the organized players, including some of the smaller ones, contribute only a little over Rs 2,500 crore, according to industry estimates. The official line from retailers on both the family-owned and ‘corporate’ side of the fence is that the market has enough bandwidth to support all formats. One CEO, thinks there is no further scope and some of the players in the retail may be losing.
The growth is coming from many consumers who enter this sector for the first time. Corporate firms are seen by stores like Vijay Sales not as competitors but supporters.
On the downside, the profitability will get hit. Competitive pricing will bring down margins. But if the volumes grow, it can be compensated.
There’s plenty of fish in the sea and just about everyone is setting out in the biggest trawler they can find. Large players like Viveks and Vijay Sales are beginning to expand. They have moved in a systematic manner where each market leads to the next.
One reputed stores after deliberating four or five years realize now that it’s high time we move not just out of Mumbai but out of Maharashtra (state) to expand their operations. Another stores intends establishing a strong presence through south India. Their objective is to increase volume and market share. Thirty-nine percent of the country’s durable business happens in the Southern India.
One of the major hurdles is real estate — there are only so many properties that support the size these stores require. It’s a situation skewed in favor of the traditional retailers for the moment; players who purchased real estate when prices were low. The critical factor is the rent-to-revenue ratio. The family chains have a huge advantage as much as 15%-20 % in total operations. From a fiscal point of view, these companies have a better chance at taking to new areas without too much of an impact on the bottom line.
At firms like Croma and Reliance, on the other hand, these could be as high as 30% particularly in high street areas. These are points of bleeding since they won’t make money for a very long time until footfalls increase and conversions are sharper.
One popular retail stores of the past says even before the big guys came in, real estate was a problem. In a city like Mumbai, locations are not available and where they are, the owners ask for the moon and get it as well.
Unless real estate correction takes place, retail cannot be lucrative and it could affect big players once they realize business is no longer profitable. But corporate-backed chains owning properties are likely to be a temporary advantage. Operating a business on rentals is different from owning property. Overheads increase considerably. A mindset change is needed for family-owned chains to sustain over a long time.
Price is an area where the corporate-backed stores have an edge. Size matters, but potential size matters as much if not more. When someone like Reliance or Next says they’ll have 200 stores in the next year, it’s a big incentive as there’s no reason to disbelieve their ability to execute and deliver. But price can only be pushed so far before diseconomies of scale kick in.
Durable manufacturers have been known to supply a chain at a loss purely because of its spread or influence. The amount budgeted as a loss can only feed a certain number of pieces. Beyond that, a store can never strike a better deal, and will have to pay a more or the same price. Observers say corporate chains are already ahead on margins between 17% to 20% as opposed to 12% to 15% for traditional stores. And some of this price advantage is passed on to customers.
Players both corporate and homegrown are struggling to find a differentiated offering. Firms are eagerly looking for and investing in niches they hope will give a lasting advantage. Consumer durable retailers generally see the customer once a year or once in eight months.