After a tough year, the retail sector is slowly getting back on its feet on the back of increasing consumption. The turnaround should benefit retailers such as Shopper’s Stop, which have a presence in tier-1 and tier-2 cities and cater to the mid-market to luxury goods segments. In an interview to Ram Prasad Sahu, the company’s CEO Govind Shrikhande talks about the impact of the Budget, the company’s performance in the recent quarters and expansion plans.
Do you expect Budget provisions to help boost demand? Would service tax on rentals have an impact?
From the psychological viewpoint, there is money to spend for the middle class. Although on the other hand you see prices of petroleum and other products move up between 2-10 per cent. On service tax provisions for rentals we believe that there are three issues. The first is a legal one (the case is in the High Court), the second pertains to jurisdiction (rentals are a state subject) and finally, the future of the service tax when GST is rolled out. Companies will get a set off against service tax which will do away with the need for this provision. The unique problem for retailers is that unlike others (say a BPO) that are able to recover the tax by charging it to their customers, our products are on MRP and we cannot charge it to the customer.
What kind of growth rates do you see the organised retail sector achieve going ahead?
Organised retail might not match all the promise and projections that many consultants made in the past. Some said that by the end of this year (2010), organised retail should have a 12 per cent share of the overall retail market and in another five years this figure will reach 15 per cent. I don’t think this will happen. India shops differently from the rest of the world. From the current 6 per cent share, I would be surprised if it hit a 10 per cent by 2015. The key reason for this is the poor penetration levels of food and groceries category, which is 59 per cent of the total spend. Unorganised segment is better equipped (in terms of reach and convenience for customer) than organised retail in this category. Since customer habits will take time to change, it may be a couple of decades before you can expect organised retail market share to move up to the 20 per cent mark. While the organised retail sector will grow by 20-25 per cent, its share of the overall market (which is also growing) will continue to be small.
How did the sector perform vis-a-vis other sectors during and before the slowdown?
One of the things we noticed during the first half of last year was that hypermarkets continued to grow. This is because they retail daily use items such as tea, coffee, sugar, etc. However, apparel clearly saw a downward trend with menswear running negative till December. A challenge in men’s wear is that this category is highly penetrated within the mall as well in the form of independent single brand stores. So the spend is getting spread out unlike, say, cosmetics. What worked for us was non-apparel such as cosmetics, personal accessories and jewellery. Though apparel was down overall, in the women’s western wear we saw a big jump.
What are the reasons for the divergence in same store sales of older stores in the December quarter?
Same store sales (SSS) have been on a declining trend moving from a peak of 21 per cent a few years ago to about 1 per cent last year. In the first half of this fiscal, our SSS declined by one per cent. What has been happening is that our newly opened stores, say in Delhi and Hyderabad have taken some business away from our older stores. So, in cities where we are trying to put up a lot of stores in addition to the existing ones we are not looking at like to like store growth but gains in market share. Going ahead we would be able to see an SSS growth of 5-8 per cent, primarily driven by the newer stores with older stores continuing to face a lower or dip in growth. The new stores that we are opening now, will in two years time, help SSS growth go up to double digits. At the basic level we ensure that stores are profitable on a standalone level and then whether they can contribute at the company level.
While billing size and conversion have improved, why have footfalls fallen?
Footfalls have been flat quarter-on-quarter as there have been some changes based on events. Durga Puja was in September in 2009 while the previous year (2008) it was in October. So September had a double digit growth while growth for December quarter was lower. While these cannot be controlled, we like to maintain conversion ratios as well as transaction size, which has gone up by 12 per cent. This came about not only due to the fact that average prices are up, but the number of products per customer has gone up from 2.1 to 2.2.
What was the reason behind the drop in private label sales?
At the beginning of last year, we realised that the economic climate would become tougher and money was hard to come by and our rights issue was delayed. We decided to go slow on private label because this requires the maximum amount of cash as it is an in-house brand and you have to invest in it. We moved more and more into consignment concession which can be done with a brand as it takes away a lot of pressure off cash. The benefit is that you pay only when the sale is through so you get a credit period. But once you bought merchandise under your private label, you don’t have the option of returning it back.
Where do you see OPMs move from 11 per cent recorded in the December quarter?
The December quarter is usually the best quarter and has been a phenomenal one. On a cumulative basis we are at 7.6 per cent margins, which is sustainable. The only question remains the service tax which would shave off about 1.2 per cent. For a growing company like ours an 8-10 per cent Ebdita (earnings before depreciation, interest, tax and amortisation) margin is acceptable. If we don’t open stores, we don’t get any unexpected hits, slowdown etc, my Ebdita will keep on rising but I will lose on market share.
Are there any policy changes which can help the company?
The fall in import tariffs as and when they happen will also benefit us as we believe our strengths are in the non-apparel space. While beauty products have a duty rate of over 100 per cent, luxury watches are between 50-65 per cent and should fall to 40 per cent and the benefits from this will come to the retailer, the distributor and the customer. Volumes and margins will move up on account of this. So two years down the line when things settle down on GST and import duty levels, volumes will go up. Being among the biggest retailers in beauty products, we would be a major beneficiary.
Could you outline the expansion plan for the group and the funding requirement?
We are opening three stores in 2009-10 by March. This will be followed by 10 stores in 2010-11 taking our total store count to 41 in a year from now. The company requires about Rs 1,800 per square feet for a 50,000 square feet store. Considering that our stores are of the 50-55,000 square feet size, we need Rs 10 crore a store or Rs 130 crore till the end of 2010-11. Internal accruals are expected to meet this fund requirement. The fund raising through the QIP route will help us acquire the Hypercity stake (from 19 per cent to 51 per cent) which is pegged at about Rs 125 crore.
