`We are in the first phase of modern retail'

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`We are in the first phase of modern retail'

Post  Anand on Wed Aug 20, 2008 5:30 pm

Shanthi Venkataraman

As Pantaloon is an entrepreneur-driven company, we believe in taking our chances. We believed that the biggest chance was to take up all the land that was available.

At Pantaloon Retail's Hyderabad Central. Venturing into multi-store formats is a big idea in a country where people think small.

THINK of Pantaloon Retail, and you instantly link its success to Mr Kishore Biyani who is also the poster boy of Indian retailing. His unique perspective on retailing and the Indian consumer has caught the imagination of everyone in his management team, as Business Line found on a visit to the company's office in Mumbai. Mr Prashant Desai, as Head, Knowledge Office, works closely with Mr Biyani in steering Pantaloon through its rapid expansions and as it manages multiple store-formats.

We get a glimpse of how Pantaloon has grown at such a scotching pace and Mr Desai gives us an interesting perspective on the Indian supply chain.

Mr Prashant Desai, Head, Knowledge Office, Pantaloon Retail

Excerpts from the interview.

Pantaloon Retail has expanded at a rapid pace. How?

What we realised, early on, is that retail is all about size. If you look at retail companies, margins are thin. So it is important to grow to such a size that even if margins improve by ten basis points, the impact on the bottomline is large.

As Pantaloon is an entrepreneur-driven company, we believe in taking our chances. We believed that the biggest chance was to take up all the land that was available. We got on a tremendous ramp up.

Also, being a multi-format retailer helped us. We cut across classes with Big Bazaar (Pantaloon's hypermarket chain). Because of that, the entire country opened up for us. After Big Bazaar gained acceptance, we opened stores in Sangli, Durgapur, Bhubaneswar... Last week, we mapped 110 towns where we believe Big Bazaar can go. Of them, we believe we can go to 83 with our eyes closed. We have already signed properties in 30 more cities /small towns.

Big Bazaar and Food Bazaar are now present in smaller towns. Once we increase the ticket size of the customer and we know the customer is ready for the next level, we will see a Pantaloons coming up in these towns. We were also fortunate to be in the right time at the right place with the right opportunities and with not too many formidable competitors.

Value retailing (discount stores retailing food and household items) now accounts for nearly 60 per cent of your revenues. Was there a conscious attempt to focus on this segment?

The opportunity in value retailing is far more than that of lifestyle (retailing non-food items, such a Pantaloons and Central). Pantaloons can enter 30 cities. Big Bazaar can enter 83 small towns, forget the bigger cities, and within each you can have many more stores. So, the growth opportunity is much larger than lifestyle retailing. The latter touches just 5-7 per cent of the population. Value retailing touches the entire population. But over the next two years, you will see a correction happening.

We have already opened five Pantaloons this year and we will open five more. We will open ten next year. That is doubling the number in two years. With Central format, perhaps we will open one more this year, but there will be six more next year and six more the year after that. The mix (lifestyle and value retailing) will again come back to 50-50 or 60-40 in favour of lifestyle. But do not read too much into the mix. We are in the first stage of modern retailing. Opportunities are tremendous.

The mix will vary year on year depending upon how many properties are ready. I would like an equal mix, but it depends upon the developer. Noida Mall at 1.4 lakh sq ft is going to take more time than the Borivili Pantaloons. So it is purely a question of availability of space rather than strategic. You can sign the location but other than that there is not much you can do.

Your business is working capital intensive and cash flow from operations have been negative...

It would be, so long as fashion constitutes a significant part of the business. We are in fashion, food and general merchandise. My margins... at a weighted average EBIDTA (operating profits)... are about 8 per cent, higher than what hypermarkets make at the global level, which is four-and-half to six per cent. The reason why we have a higher margin is because fashion constitutes 45 per cent of our business. Fashion is a positive working capital business. We can become negative working capital by increasing the foods business, but then my margins will come down. We work on ROI (return on investment) models. Our ROI is currently about 22 per cent. Our incremental ROI comes to about 45 per cent. So every year this ROI will move up by 300 to 400 basis points. After two or three years, when we reach a critical size, we can start squeezing our suppliers. Right now we are concentrating on relationship-building exercise with suppliers. The mindset of people here is they think small. The way we are expanding we need very strong domestic suppliers. Maybe three-four years from now, we will move towards negative working capital.

Also, India has a strange trading market now. If we put cash on the table, we get 2-3 per cent discount a month. My weighted average cost of debt is 7.5 per cent. I might as well borrow at 7.5 per cent, take a 24 per cent discount and pass it on to the customer.

Pantaloon has also tried to limit the share of its food business to 30 per cent. Why?

Till a week ago, yes, but now we have liberated that cap. Now we have told the food business that it can grow as much as it wants. Because it has become a Catch 22 situation! Till you reach a certain size in your food business, you cannot squeeze the FMCG guys. In the next two years, lifestyle retailing is going to contribute significantly, so we do not see too much dampening on the margins front. So why not use the next two years in building our food business to Rs 1,500-crore level. Once that happens, we get into what is called a-slotting-fees position. That is if you want your product on my shelves at Food Bazaar you have to pay a certain fees.

Why have you have experimented with multiple formats at such an early stage?

Look at Wal-Mart or Carrefour. We are not selling anything they are not selling. In India, retail developed in the mid-1990s. In the US, retail developed in the early sixties. They have gone through five decades of evolution. In India, we are in the first phase of modern retail. At this stage if we try to sell everything under one big-box format, the customer may not be ready. A housewife does not want to buy fashion when she is buying food. In none of our Big Bazaars would you see fashion and food being sold on the same floor.

First, I have to sell things as you are used to buying them. Ten-fifteen years from now we might sell everything under one roof. Now we are selling everything that everyone else is selling, only we are giving you different formats to make the customer comfortable. Today, you may not want to buy everything in a 200,000-sq ft Big Bazaar. And where is the space for a 200,000 sq ft Big Bazaar? But we did not want to miss out on the format.

Are there concepts or products that you are not ready to take on or have not considered?

We are not in services in a big way. Travel and money exchange is a huge opportunity. We are not in financial services selling. We are not in the pure entertainment space right now multiplexes/value-plexes. We are looking at value-plexes as an opportunity. There are businesses we are not present in now, but gradually, yes (we will be).

How will you manage your merchandising needs as business grows in these formats?

We are working with our vendors, sharing our vision, if they require mentoring, we do that, if they require funding, we give funding. But it is a very big challenge, because in India people think small.

Take on FDI

"WE are not saying that we want FDI to be delayed. It is a question of when and how. No country has opened up modern retail so early... China opened when modern retail was 15 per cent. Retail is the last leg of the value chain.

How can we open it up so early? Also retail is normally valued at market capitalisation to sales.

Currently, the value of Indian retail market is $300 billion and is growing at eight per cent. At 1.5-2 times market-cap to sales, it would be $450 to 600 billion. Even if we give away five per cent share in the next five years, the market value of that opportunity is $30 billion.

How much will the foreign retailer bring in? We believe not more than $1 billion. The moment Indian retailers gain size, they will invest in supply chain.

People say India does not have an efficient supply chain. But Harvard Business School just did a case study on Pantaloons' supply chain and it says that Pantaloons' is the most cost-effective supply chain in the world. We might not be using Volvo trucks.

But in India, 40 per cent of the delivery happens through bullock carts, cycles and bikes. These are people in need of employment... he starts at two in the morning to make sure it reaches me at eight in the morning. But if we were to replace him with an LCV, the cost of this cycle is Rs 1,100, the cost of the LCV is Rs 8 Lakh.

Will I be able to keep giving potatoes at Rs 6 per kg if I use the modern supply chain?

India may not have a modern supply chain but it definitely has a cost-effective one. Retailers have made use of the existing supply chain.

We are not opposed to FDI. Let foreign retailers bring brands and products that are not available to customers. Let them come in lifestyle retailing."


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