>RETAIL SECTOR (JM FINANCIAL)

Mantra for retail success in India – Read between the lines of consumer spending patterns!
Retail performance is fundamentally affected by the consumer’s willingness and ability to spend.

The Achilles' heel:
Weak Demand = Slowdown in new store roll-outs; restructuring to infuse cost efficiency of existing stores.

Drop in Footfalls = Slowing Same Store Sales = Lower Inventory Turnover = Higher Working Capital = Liquidity Pressures

The Opportunity – A Sunrise Sector!
Despite the current headwinds, well positioned to leverage revival in consumer demand emanating from a stable government; anticipated change in regulatory policies and fall in reality prices


The story line seems all wrong but ……..
“Standing on the threshold of a retail revolution and witnessing a fast changing retail landscape, India is set to experience the phenomenon of a global village. India presents a grand opportunity to the world at large to use it as a business hub. A ‘Vibrant Economy’, India tops A T Kearney’s list of emerging markets for global retailers. The 2nd fastest growing economy in the world, the 3rd largest economy in terms of GDP in the next 5 years and the 4th largest economy in PPP terms after USA, China & Japan, India is rated among the top 10 FDI destinations.”

- Source: India Retail Report 2007

The level of exuberance was high for an industry that had worked wonders in developed markets. An opportunity to grow exponentially was seen with India being the favored destination for retail – a growing population; good demographics, under-penetrated modern trade. What went wrong for an industry projected as the “sunrise sector” to fall out of favour for both consumers and investors? Was it a case of “too much too soon” or was it “not understanding the Indian consumer psyche combined with a general global slowdown”? The optimism of the last two years seems to have died down burdened by the woes hitting the industry – was it misplaced optimism or are there some hidden jewels that will shine in the future?

INDUSTRY
The retail industry, tagged as a sunrise sector on the Indian landscape 3 or 4 years ago was expected to emulate the retail revolution of the west. Now the long-term opportunity for modern trade in India, due to the current economic turmoil amongst other things, is being questioned. The road ahead for modern trade in India will be exemplified by a period of painful restructuring. Mergers, regulatory changes, acquisitions and consolidations will be the forte going ahead and only a few big players will survive the current chaos.

The Retail Opportunity in India
The uniqueness of the organised retail revolution in India has been exemplified by the wide demographic consumer spectrum it caters to. Formats had been created to achieve maximum operational efficiency and augment profitability when targeting an identified consumer category.
India has tremendous potential in Modern Trade with a highly under-penetrated organized retail market - 4% of the total retail sales US$ 322 bn (2006) as per the study conducted by ICRIER

Retailers were extremely enthusiastic to leverage this nascent opportunity. The last few years have witnessed retailers funding their expansions through the equity route with Vishal Retail, Koutons and Provogue hitting the equity markets with their primary offerings. Trent had a rights issue whilst Pantaloons and Indiabulls undertook private placements. Retailers increased their use of equity and debt financing. Internal accruals which were previously used to finance close to 30 per cent of retailers funding requirement fell to a mere 12 per cent, leading to gradual increase in gearing and borrowing cost.

To see full report: RETAIL SECTOR