Govind Shrikhande, managing director of Shoppers Stop, on the economic slowdown, the impact on the sector and the outlook for the company, in an interview to Ram Prasad Sahu. Edited excerpts:
Is there an impact of the slowdown and is this likely to continue?
In the first half of the current financial year, there was no indication of a slowdown, with overall like-to-like sales growth at 12 per cent, with some volume gains as well. The growth was quite good, despite a price hike. December has been a slow quarter when compared to a year before. There is a clear impact of economic issues on consumer purchase behaviour. So, overall sales are slow due to higher prices and muted sentiment. If delays in government decision-making, as well as the lull in the markets continue, it could impact the economy and, in turn, us in the March and June quarters next year as well.
How are you coping?
The slowdown is not such that you have to cut costs and reduce inventory in a big way. The challenge is the opening of stores (up to 12 in 2011-12, the highest so far. So, however we look at it, our inventory will be higher than the previous years because of new stores being added. Inventory management becomes even more crucial in such circumstances. The model (lower bought-out inventory) is helping us, but the challenge is to manage it properly. Failures in the retail sector are primarily from inventory or debt and we are not impacted by either.
Any signs of price cuts, given that cotton prices have come off?
As of now, prices are holding up and should continue to do so for the next two months. Starting March, when new merchandise starts coming in for summer, we should see a price drop. The government may also look at the excise duty issue and partially reduce rates, which, combined with the product price fall, should lead up to a five to 10 per cent drop in apparel. The problem could arise in the imported category because the weak rupee is hitting us badly. Segments such as beauty, cosmetics and watches will see a challenge if the dollar continues to strengthen.
Is demand elastic in the sector?
Average price increases per year before the current one have been in the range of four to six per cent. Other than the three quarters where there was a fall in like-to-like (LTL) sales growth due to global issues, we have achieved LTL growth of 10-12 per cent, a combination (five per cent each) of volume and price increases. Our experience shows that if price increases were up to 12 per cent, volumes stopped growing. If the price increase exceeds 12 per cent then volume growth falls into negative territory. The point of reference are denims, which retail for Rs 1,800, up from Rs 1,200-1,300 two years ago due to cotton prices and excise duty, among others. Average prices need to drop; else, we will be faced with a drop in volumes.
Which segments are doing well and which are impacted the most?
While trends have not changed over the past three years, what stands out is that women are shopping more for the past seven quarters, irrespective of the economic cycle. The categories that are growing are home improvement and beauty products, largely due to more working women. What is not growing is gold jewellery, which has been hit due to the dollar issue, as well as the rise in retail prices.
What is the expansion plan?
We would be adding 12 Shoppers Stop stores in this financial year and eight each for the next two. Our internal accrual per year would be about Rs 110-120 crore. We don’t need additional debt to fund expansion. We would need about Rs 400 crore over the next four years and internal accrual will be Rs 450-500 crore.
How do you plan to improve the product mix of HyperCity?
Currently, the food mix is 62 per cent and apparel is only eight per cent. Other hypermarts have 30-35 per cent of apparel in their product mix. Apparel has the highest margins, while food is among the lowest margin categories. Our belief is that if we drop the food share of revenues from 62 to 55 and improve apparel to 15 per cent, the margin mix of the business can change. This will improve profitability, helping us make money at the store level and at the corporate level over the next 30 months, say the last quarter of 2013-14.
