The retail chain changes its trading model and cuts share of pvt labels
Shoppers Stop is following the tagline of its brand campaign — ‘Start Something New’ — quite ardently. One of the biggest change in the operating strategy of the Raheja-owned retail chain is the shift in its trading model, says Managing Director Govind Shrikhande.
The 20-year-old retailer has been steadily increasing the proportion of non-bought out goods — those that are on consignment and concession basis — while reducing the bought out goods.
Here is what this means. In a consignment-based model, the retailer pays for the goods only after completion of sales and unsold items are returned to the supplier. In a concession agreement, a retailer lets some part of his space to be used by other brands for a fixed rent or share in revenues.
Shoppers Stop has increased the merchandise taken on concession and consignment from 40 per cent in FY 2007 to 53 per cent in FY 2010. In the first nine months of FY 2011, it increased to 58 per cent. “We have saved a lot on working capital and inventory costs while sustaining our gross margins,” Shrikhande says.
Working capital deployed per square feet has come down from Rs 442 per sq ft to Rs 137 in FY 2010 and Rs 101 in the first nine months of FY 2011. The company has sustained gross margins at 31-32 per cent since FY 2007.
Under consignment and concession agreements, retailers get lower margins as they do not buy goods. But savings on working capital, inventory and interest payments on borrowed funds make up for that loss. That means the 80-90 basis point margin dip in Q3 of FY 2011 due to the model change has been more than made up by a 100 basis point drop in interest charges, Shrikhande adds.
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Other department store chains such as Future Group’s Pantaloons and Trent’s Westside, however, follow a private brand-led strategy, wherein 80 per cent of their total merchandise comes from their own brands, which carry higher margins.
“Every company has its own strategy. At Pantaloons, we follow a private brand based model. Though it requires a fair amount of working capital, with right management and operations, this (private brand-led) model can be profitable,” says Kailash Bhatia, director, Pantaloon Retail, which runs Pantaloons.
In contrast, Shoppers Stop is steadily reducing the share of private labels as part of its positioning as a ‘bridge to luxury’ brand, which is the space between premium and luxury. The share of private labels has reduced from 20.6 per cent in FY 2007 to 19 per cent in FY 2010 to 17.9 per cent in the first nine months of FY 2011.
There are many who say Shoppers model is working well. Rating firm Fitch has said due to its better inventory management and slower expansion, Shoppers Stop has become “the rare listed retailer in the country with positive cash flows”.
Due to the trading model change, Shoppers Stop has also seen sharp decline in cash conversion cycle from 30 days in 2007 to below 10 days. Cash conversion cycle measures the time between cash paid to supplier and cash recovery by a retailer, and lower cycle reflects better operating cash flows.
Though others have also seen a dip in the cycle between 2007 and 2010, it is still high at 95 days for Pantaloon, 130 for Next Retail and 70 days for Trent.
That does not mean everybody agrees that slower expansion is a good strategy to achieve positive cash flows. “In an under penetrated market like India, expansion is a opportunity,” says the CEO of a lifestyle retail chain.
But there are a few other challenges as well. Analysts say operating profit margins may come down from 7.6 per cent in FY2011 to 7.4 per cent in FY2012 due to rising costs. Shoppers Stop posted 22 per cent growth in same store sales in the third quarter of FY 2011, driven by 15 per cent volume growth and 7 per cent growth in average selling price.
But this could come under pressure due to rising cotton prices and the recent proposal to impose 10 per cent excise duty on branded apparel.
The business model is not the only change the company has initiated. Shoppers Stop is also shedding its image of a slow mover. It took 20 years to open the first 30 stores. But the company plans to spend Rs 450 crore over the next four years to add more stores. It is planning to take the number of stores to 60 in the next four years from 36 at present.
Shrikhande says the company does not have problems with funding its expansion, with its robust cash flows and low debt-equity ratio of 0.16. “The cash flows are more than what is required to fund our plans,” he says. The company requires Rs 100 crore a year to fund its expansion while it has generated Rs 95 crore for the nine months ending December 31, 2010.