Flooding the retail boom

SMARTSHARE

One downside of a market economy is overcrowding when too many people rush to exploit the same opportunity. This not only hurts capital, it hits labour and consumers (frequently the same people with different hats).

We saw a crowding out in media during the channel rollouts of 1994-95, which led to a sudden expansion-contraction. That was followed by the Internet era, which produced magnified versions of the same effects.

We may be into another cycle of overcrowding as several players scramble for the Mumbai print market. Note that while the market itself is undoubtedly big, it has been identified and targeted by too many people.

Will this also happen in retail? There is huge opportunity in a sector bound to grow quickly. But listed players are overpriced and competition may force retailers (listed or not) to shave margins to the point where everyone loses.

People moving up the income-ladder create an expanding market. Fat margins imply that volumes can be driven with price cuts. Improvements in infrastructure enable cheaper warehousing (on low-priced real estate at locations removed from points of sale) and quicker, cheaper transportation to PoS. Low interest rates enable bigger inventories.

Both listed players are priced high. Pantaloon, which moved from Rs 52 in January 2003 to Rs 1,600-plus last week, is trading at around 90 times its 2004-05 PE (it has a June year-ending and this estimate is on the first nine months, 2004-05).

In the last two fiscals, sales grew from Rs 658 crore in 2003-04 to Rs 713 crore between July 2004-March 2005, and profits grew from Rs 19.77 crore to Rs 28 crore in the first nine months of 2004-05.

Trent moved from Rs 245 in January, 2003 to Rs 900-plus last week. It's trading at 61 times the 2004-05 PE. In the last two fiscals, sales have grown from Rs 153 crore (2003-04) to Rs 235 crore and profits from Rs 17.18 crore to Rs 19.25 crore.

Trent's future may be difficult to project until one has discounted the acquisition of Landmark, the book and music chain. Trent paid Rs 103 crore for a 76 per cent stake in Landmark, which had a turnover of Rs 95 crore in 2004-05.

Books, music, greeting cards, etc, are high-margin but there's also huge inventory and warehousing costs. On the face of it, Trent seems to have made a good deal by adding maybe 40 per cent to its future revenues and the market has responded positively.

Indian retailers may currently be protected from the threat of Walmart due to the ongoing battle about FDI limits. But there's a policy risk in assuming competitors will always be kept out. The current players may have problems maintaining the future growth the high valuations demand.

There are some straws in the wind that suggest potential problems. In prime locales across NCR, there is low mall occupancy. Is the metro market saturated?

In the hinterland, small towns, which could be serviced by one mall, are now served by three supermarkets/malls "" will all these survive? The new petrol pumps chains all have attached retail outlets, which compete at various points especially on the F&B chain.

The optimists will argue that there's room for everyone. But the retail chains will have to fight to establish dominance and there will inevitably be price cuts. Those will hit bottomlines. In the end, retail is not just about locations, it's also about bottomlines.