It was in October 1991, that Shopper’s Stop opened its first store in Andheri, Mumbai, selling only menswear. Four years passed before the second store in Bangalore was rolled out and another three before the franchise moved to Hyderabad. After nearly two decades of being in the business, Shopper’s today has less than 2 million sq feet of space under coverage while one of its peers has nearly five times the area. It’s a pity that after spending so many years in the business, the retailer hasn’t really used the time to build scale and enough of a cushion to support it in a downturn. In the year to March 2009, Shopper’s posted a loss of close to Rs 64 crore.
Some of the losses are the result of misadventures—the F&B outlets, Brio and Desi Café have either been shut or handed over to the Café Coffee Day chain. And the Argos catalogues business—clearly years ahead of its time—has been wound down. But even the core department stores don’t seem to be making too much money. The model which is skewed in favour of big well-known brands—80 per cent of revenues—is looking particularly vulnerable in a downturn. The hypothesis that underpinned the retailer’s strategy—namely that the rich will spend even in bad times—doesn’t seem to be working because this time around, even the well-heeled are not opening their wallets; the ‘I don’t really need that sixteenth shirt’ mindset is hurting retailers. Footfalls are lower and forget growth, same store sales are falling — 3 per cent lower in the March quarter. Same store sales have been under pressure for quite some time now, with the growth tapering off in the past two years which means that even in relatively good times, the top line isn’t growing as fast as it should so as to create a buffer for the bad times. In short, Shopper’s hasn’t created enough scale to be able to absorb the high fixed and running costs — many of the recent stores were set up at a time when rentals were high and are doing badly.
That’s perhaps where Westside has got it right. While here too scale doesn’t exist, the idea of relying more on private labels, which fetch nearly 90 per cent of revenues, has worked well with the brands incorporating both affordability and style. What typically happens with national brands is that the sales cycles tend to be longer and therefore, marked-downs tend to be huge if stocks remain unsold—note the 200 basis point contraction in the gross margin for Shopper’s in the March quarter.
On the contrary, private labels can be made in smaller batches and the need to discount too is less; since the retailer has complete control over the inventory, it can respond far more quickly to a higher demand for a particular item. That’s the secret of Zara’s model—it is said that Zara needs just two weeks to come up with a new product and display it in the shop window compared with a six-month industry average; the retailer launches around 10,000 new designs every year and it has managed because it has resisted the industry-wide trend of transferring fast-fashion production to low-cost countries. Private labels fetch better margins simply because production costs are lower—Trent’s (the owner of Westside) gross margins are higher than those for Shopper’s. But it’s obviously doing something wrong because Shopper’s operating profit per sq ft is 1.5 times higher than Trent’s. Nevertheless, at the end of the day retailing is a 3 per cent margin game and so, more than in any other business, a penny saved is a penny earned.
The value proposition seems to be working well in the West too. A study by the Boston Consulting Group shows that within department stores in the US, traditional stores are being squeezed while luxury and value are growing. Of course, the $216 billion department store market itself is shrinking in a growing retail market and it’s the category specialty players and the mass channels that are growing at the expense of department stores. The BCG study found that between 2003 and 2007, department stores actually de-grew by just over 1 per cent compounded, while clothing and accessories stores grew 7 per cent compounded—the overall market grew 6 per cent compounded.
Of course, a comparison with the US may not really be too relevant since organised retailing is relatively new to India. But industry watchers back home already notice that more shoppers are flocking to malls. It’s not that department stores don’t have their fair share of customers, it’s just that their USP, namely that customers can get everything they’re looking for under one roof, seems to losing some of its edge. Since almost all big brands have exclusive branded outlets in malls, department stores need to have a strong enough value proposition to attract buyers; the merchandise needs to be sold. Shopper’s may want to think about this.