Vishal Retail has a slew of plans to weather the current storm. Will they be good enough?
Rangpuri on the fringes of South Delhi is an unlikely address for the country’s largest chain of retail stores. Off the sleek highway that connects the capital to Gurgaon, it does not by any stretch of imagination look like a commercial area. In fact, the look and feel is distinctly rural, calm and dusty. Here, in a nondescript building next to a motor workshop can be found the office of Vishal Retail. From here, the company’s chairman and managing director, Ramchandra Agarwal, runs 182 retail stores across India spread over 3 million square feet.
The air of extreme cost-consciousness is unmistakable. The rent for the 10,000 square feet office is just Rs 1,20,000 per month — Rs 12 per square foot. Inside, 400 men work in offices that also double as stores, with merchandise strewn all over the place. In fact, it is said that Agarwal, whenever he travels to Mumbai, tells his business associates that he is putting up with relatives. Actually, he is known to stay in inexpensive hotels and take the cheapest air ticket available.
Call it a fetish if you like but the fact is that Agarwal needs to look at every penny that goes out. Vishal Retail made a profit of Rs 2.15 crore for the quarter ended December 31, 2008, but some analysts expect it to make a loss in the current quarter. Thanks to the economic slowdown, the revenue has slumped from Rs 600 per square foot per month till about a year ago to Rs 400 now. With operational expenses adding up to Rs 120 per square foot per month, Agarwal needs a gross margin of at least 30 per cent to keep the show going. “There will be very few retailers left after one year. We hope to be one of them,” says Agarwal.
He says that till a few months ago, his operational expenses were Rs 150 per square foot per month. But he has in the last few months brought it down 20 per cent to Rs 120 per square foot per month. His first target was real estate, which accounts for almost 30 per cent of the operational expenditure of any retailer. The company had plans to have retail space of 5 million square feet by the end of the year; he has cut it down to 3 million square feet.
Taking full advantage of the slump in the property market, the company has renegotiated rent at around 50 stores where it felt the landlord had asked for too much. All zonal and regional offices have been shut and Rangpuri made the nerve centre. All warehousing is concentrated at a single place — Pataudi in Haryana. Instead of 1.1 million square feet spread across the length and breadth of the country, the company now has 4,00,000 square feet at Pataudi. And the rent? Just Rs 7 per square feet per month!
All told, Agarwal says he has been able to cut his real estate costs by a quarter. Investment analysts say that almost 70 per cent of Vishal Retail’s stores are in tier three towns and cities. This has helped it keep the rent it pays under check. “It has followed the Hero Honda path. A Hero Honda customer would also be a Vishal Retail customer,” says a source close to the company. (Hero Honda has grown its sales in the slowdown because of its strong brand equity in small towns and villages.)
Agarwal keeps his human resources costs low by not hiring from fancy campuses. And though he has added up to 9,00,000 square feet of retail space in the last one year, he has kept his headcount constant at around 13,000. The monthly wage bill is Rs 8 crore. The average employee cost thus works out to as little as Rs 6,150 per month! But his detractors say that this could also work against him — talented people would not like to work for such a tightfisted organisation. In fact, it is learnt that CEO (corporate affairs) Manmohan Agarwal and the head of finance and accounts (Amit Chaturvedi) have resigned from the company, though Agarwal is trying to hold them back.
Private labels
In order to improve his gross margins, Agarwal is moving rapidly towards his own private labels. Though such products sell at a discount of 25-30 per cent to popular brands, their profit margins are substantially higher. About half of Vishal Retail’s turnover comes from readymade garments. And almost 90 per cent of its apparel sale is now under private labels like Zapplein, Chlorine, Wooble and Feminine. The gross margin here is 35-40 per cent, as against 30 per cent in branded apparel.
Another 25 per cent of the turnover is contributed by fast-moving consumer goods. There are about a dozen large FMCG companies in the market which give to retailers, small as well as big, margins of 12-15 per cent. “There is no way any retailer can make money with such small margins,” says CEO Manmohan Agarwal.
Some three years ago, Vishal Retail decided to put its own private FMCG labels in the stores (Vfresh, Vneeds, Vclean and so on). The margins, of course, are healthier — in the range of 25-30 per cent. These brands account for about 20 per cent of all FMCG sales of the retailer. Agarwal says he wants to grow it to 40-50 per cent soon. “This is a good mix. The ratio is similar to Wal-Mart and Carrefour,” adds he.
The company has contacted the vendors of large FMCG companies directly to produce its private labels. This has given it huge cost savings. The product range includes packaged water (just Rs 7 per litre), instant noodles (Rs 10 per pack), tomato ketchup, talcum powder and so on.
Agarwal has introduced private labels in the third category — general merchandise — as well which gives Vishal Retail the remaining 25 per cent of its turnover. This includes footwear and luggage, home furnishing, toys, games, stationery and consumer durables. About 20 per cent sales come from private labels. The margin is as high as 40-50 per cent, as against 15-20 per cent on the other brands it sells.
New revenue streams
Agarwal also has plans to open new revenue streams which will add small bits to his margins. These include selling advertising space inside the stores, on trolleys and even the carry bags. He also has plans to rent out space within the stores to mobile phone vendors and green grocers. “Shop-in-shop in these categories works better. Otherwise, the margins on mobiles and greens are just 1-2 per cent. It’s a volume-driven business,” says a sector analyst.
While all this, Agarwal hopes, will fatten his margins, he is readying for a big initiative to improve his revenue from Rs 400 per square foot per month. He plans to drop prices across the board by 20-30 per cent. “We want to break the perception of the slowdown so that consumers don’t get scared,” says Manmohan Agarwal. His team brandishes denim trousers for Rs 199, formal shirts for Rs 149 and women’s T-shirts for as little as Rs 49. “The one for children is even cheaper,” says the CEO. To achieve these prices, Agarwal has shut his three garment factories and is outsourcing everything.
But will this be good enough for Vishal Retail to cross the current storm? Caught between low consumer spending and high rentals, most retailers are finding the going tough. Subhiksha, the most ambitious of them all, has gone belly up and the main shareholders are involved in a public spat. Vishal Retail’s Achilles’ heel could be finances, say analysts. Agarwal, who owns 65 per cent in the company, out of which around 5 per cent has been pledged to lenders, is a first-generation entrepreneur and has no family riches to fall back on.
He was, in fact, banking on the stock markets to raise money. Vishal Retail had gone public in mid-2007. Rules laid down by the Securities and Exchange Board of India say that a company cannot raise money from the public for one year after the initial public offer. By the time the cooling-off period got over by September 2008, the markets had gone into a tailspin.
Some analysts say the company may even shut some stores which aren’t making enough money. Manmohan Agarwal admits money is a problem. “The interest cost at Rs 7 crore a month is killing us,” says he. The company has responded by keeping as few SKUs (stock-keeping units) at its stores as possible so that cash does not get stuck in inventories. Clearly, the two Agarwals will need to do more.
