Indiabulls banks on realty skills to run Trumart

Barely four months after it acquired an 84 per cent stake in Piramyd Retail, Indiabulls is going in for a major restructuring of the Trumart business model.

Indiabulls Director Gagan Banga said the company is applying its real estate skills to tighten the retail business.

"Retail is hardcore real estate business. You need real estate and good supply chain management; it is two businesses (combined) into one. It's a zero-intellect business," said Banga. "The largest real estate player in the world is Wal-Mart, that's why it is the largest retailer."

So Indiabulls has closed five retail stores of Trumart, now known as Indiabulls Mart, one each in Thane, Jaipur and Pune and two in Ahmedabad.

Rates high
"This is business as usual. We have closed five stores and opened five new stores (two each in Ahmedabad and Pune and one in Jaipur). Two stores will open this Monday in Bhopal and Dewas. The closed stores will be reopened in the same, or nearby areas, with better rental deals," said Banga.

In most stores that are being closed down, the lease has expired. The company is either unwilling to accept a big hike in rentals or it has identified alternative sites, which offer a better real estate deal (lower rental and lower deposit).

Typically, these leases have a lock-in period of two years, where the rentals are hiked by five per cent every year, and 15 per cent every three years. The rentals have shot up in many metros, and in one such case the landlord was seeking a 40 per cent hike in rentals, which would have made the stores more unviable.

Neighbourhood focus
"We will expand the number of neighbourhood stores from 35 to 55 by June. We had acquired 35 stores, and 10 more old deals were scheduled to be signed in six months," said Banga.

"Some were bad real estate deals. We were paying rents of Rs 10 lakh a store where net margins are just 2 per cent."

The retail business is a subsidiary of Indiabulls Real Estate, and it is now using its real estate skills to secure better deals by lowering the deposits one needs to pay for such leases, or looking for alternate locations with lower rentals. It has started selling groceries in a couple of Megastores, where there's demand.

Indiabulls says it will add six neighbourhood stores by the end of April, and 14 more by June. In all, it plans to have 55 Indiabulls Marts by the end of the next fiscal.

Similarly, it had seven Megastores and has added two stores. It plans to open two Megastores by April and four by June, taking the total number of Megastores to 15.

Scaling back
In all, the group has set a target of 70 Indiabulls Mart and Megastore outlets by June and 100 by December. When acquiring Piramyd, Indiabulls said it planned to scale up the number of Piramyd stores from 42 to over 150 stores by the end of next year. It has scaled back its plans even as it gears up to launch its first hypermarket, under Indiabulls Wholesale, in April.

"Food retail is not viable beyond certain rates (rentals of Rs 55-70), with a few exceptions where footfalls can be high," said the CEO of a food retailer, who requested anonymity. Observers said Trumart was paying high rentals, had issues of locations, merchandise, stock management, and was poorly managed.

Difficult times
"In the days to come, 3-5 per cent of all retail stores across the industry would close for reasons of viability, bad locations or error of judgement," said the CEO of a food retailer.

"In food retail, nobody is making money. Scale is crucial in business as gross margins are only 10-15 per cent. If you include general merchandise, the gross margins can be 18-20 per cent as compared to 32-35 per cent in the West,'' said a former CEO of food and grocery retail chain in India.

"In the West, the costs are also low. In India, the rentals as a percentage of sales can be as high as 14 per cent, as compared with 2-3 per cent in the US," he pointed out.