Here is a case study on different retail sectors of India.

Standing on the threshold of a retail revolution and witnessing a fast changing retail landscape, India is all set to experience the phenomenon of a global village. India presents a grand opportunity to the world at large, to use it as a business hub. A ‘vibrant economy’, India tops A T Kearney’s list of emerging markets for global retailers for the third consecutive year.

The second fastest growing economy in the world, the third largest economy in terms of GDP in the next five years and the fourth largest economy in PPP terms after USA, China and Japan, India is rated among the top 10 FDI destinations.

India is the fastest-growing market in Asia Pacific for international tourist spending, according to latest Visa Asia Pacific release. The economy is growing by over eight per cent a year and India’s growth rate can actually exceed that of China by 2015. The Indian economy is expected to grow larger than Britain’s by 2022 and Japan’s by 2032 to become the third largest economy in the world after China and the US to finally become the second largest economy after China by 2050.

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In calendar year 2007, the retail sector ended up with a growth rate of 25-28% as against 35-38%. Organized and unorganized retail size in calendar year 2007 was estimated at US$ 300 billion which is likely to grow up to US$ 365 billion in calendar 2008 and further reach the size of US$440 billion by 2010.

Plans of Some of the Large Retailers:

1. Pantaloon:

Expansion into, all possible formats of retail across categories and segments, 30 mn sq. ft. by FY10, foray in insurance, real estate and consumer finance. The turnover is expected to touch Rs.30,000 cr ($ 6.67 bn) in FY10-11.

2. Reliance:

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Rs.30, 000 cr ($ 6.67 bn) investment to setup multiple retail formats with expected sales of Rs. 90,000 + cr ($ 20 bn) by 2009-10.

3. RPG:

450 + Music World’s, 50 + Spencer’s Hyper, covering 4 mn sq. ft. by 2010

4. Lifestyle:

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Rs.450 + cr ($ 90 mn) investment in the next five years to expand on Max Hypermarkets and value retail stores and Home and Lifestyle Centres.

5. Rahejas:

Shoppers Stop, Crossword, Inorbit Mall, ‘Home Stop’ and recently launched hypermarket named ‘Hypercity’. Hypercity aim to set up, few more hypermarkets across India by 2015.

6. Piramyd:

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1.75 mn sq. ft. of retail space and 150 stores in the next five years.

7. Trent:

To open 27 more stores across its retail formats adding one mn sq. ft. of space in the next 12 DLF malls.

8. Trinethra:

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Recently acquired by the AV Birla group, Trinethra (currently with two formats — Trinethra and Fabmall) plans 220 stores with a turnover of over Rs. 300 cr ($667 mn) this fiscal year.

9. Vishal Group:

Plans to include an IPO and investment close to Rs. 1,250 cr ($278 mn) by 2010, targeting 220 outlets, taking its cumulative retail space to five mn sq. ft. and sales turnover of Rs. 5,000 cr ($1 bn+). With 50 + new stores getting ready in the current fiscal, the chain is investing Rs. 300 cr ($66.67 mn) with sales target of over Rs.700 cr ($155.6 mn).

10. Bharati Group:

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Plans Rs.31,500 cr (US $7bn) investment to create retail network in the country including 100 hypermalls and several hundred small stores.

FDI and Global Retailers:

Following are the different ways in which Foreign Direct Investment (FDI) is allowed in India and the manner in which different companies operate in India:

1. 51% FDI allowed in single brand retailing.

2. FDI is laws relatively liberal in wholesale trade.

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3. Metro AG and Shoprite are already operating.

4. More foreign retailers eyeing possibilities in wholesale.

5. Tesco and Carrefour expected to operate soon.

6. Wal-Mart has already signed a JV with the Bharti Group.

7. Woolworths (Dick Smith Electronics-durable retail arm) recently started their operations through a JV with Tatas with plans to open 60 Croma stores by 2009.

8. French retailer Geant is also expected to begin operations in India soon.

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Government of India is considering opening up of certain retail sectors for FDI. The four sectors are electronic goods, office equipment and stationery, sports goods, and building equipment.

Shoppers Stop is one of India’s prominent retailers and a part of the K Raheja Corp Group (Chandru L Raheja Group), which is among the prominent real estate developers and hoteliers in the country.

They are pioneers in setting up of nationwide chain of large format department stores in India with professional management. They are a systems driven organization. They believe their strong focus on customers, supported by systems and processes and a committed workforce are the key factors that have contributed to their success and will help them scale up as they embark on their strategic growth plan.

Their focus is centered on developing Shoppers Stop and its various associate brands as leading retail brands and capitalizing on the emotional connect that they have created with the customers. Every employee in the organization is called a Customer Care Associate (CCA), including the MD, Executive Director and CEO who are designated as ‘Customer Care Associate and Managing Director’ and ‘Customer Care Associate, Executive Director and CEO’ respectively to reflect the belief in customer care and service.

Their service mission statement is:

‘It’s Magical, It’s Comfortable, It’s My Store.’

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They began by operating a chain of department stores under the name “Shoppers Stop” in India. Currently they have 24 such stores across the country and three stores tinder the name “Home Stop”.

Over the years, they have also begun operating a number of speciality stores, namely Crossword, Mother care, Brio, Desi Cafe, Arcelia, Stop & Go and MAC. They are also experimenting with other formats of retailing through various ventures.

1. Shoppers Stop:

Shoppers Stop is their flagship business of departmental stores having 25 stores across India. They retail a range of branded apparel, footwear, perfumes, cosmetics, jewelry, leather products, accessories, home products, electronics, books, music and toys in their stores.

They also retail their own private label apparel, footwear, fashion jewelry, leather products, accessories and home products. These in-house brands contribute to around 30% of their revenue. These are complemented by cafe, food, entertainment, personal care and various beauty related services. Promotions and events are an integral part of their services that all offer to their customer, which helps to create a unique shopping experience.

They retail products of domestic and international brands such as Louis Philippe, Pepe, Arrow, BIBA, Gini & Jony, Carbon, Corelle, Magppie, Nike, Reebok, LEGO, and Mattel among others, through their stores. They also retail merchandise under their own labels, such as STOP, Kashish, LIFE and Vettorio Fratini, Elliza Donatein, Haute Curry, I Jeanswear, Insense, Mario Zegnoti, Acropolis and Indi-Visual.

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Their designer section showcases some of India’s prominent fashion designers (Ritu Kumar, Satya Paul and LABEL), retailing affordable designer wears. They are also licensees for Austin Reed (London), an international brand, who’s men’s and women’s outerwear are retailed in India exclusively through their chain.

Their loyalty program, called First Citizen, had 7, 81,951 and 9, 71,537 members as on March 31, 2007 and December 31, 2007 respectively. It is one of the largest loyalty programs in the country. First Citizens accounted for over 62% and 61% of their retail sales for the year ending on March 31, 2007 and nine months ending on December 31, 2007. They offer their First Citizens reward points on the purchases, special offers and discounts. They also offer invitations to them for exclusive events and promotions.

2. Crossword:

Crossword is a speciality store in the leisure bookstore category. The store focuses on methodical classification, clear signages, and dedicated enquiry/order desks. There are cafes, reading tables and stores within the store to enhance the customer experience. The product mix consists of books, magazines, CDROMs, music, stationery and toys.

Forty eight Crossword stores are currently being operated, out of which 26 stores (including 10 shop in shops) are run by their company and 22 are run by external franchisees. The company has changed the format of these stores. Now these stores run on franchisee basis and they have been making profits since 2007.

3. HomeStop:

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Home-Stop is a format which retails hard and soft furnishing and home accessories. Their offerings through HomeStop ranges from hard furnishings such as home furniture, modular kitchens, health equipment and recliners, and soft furnishings such as mattresses, draperies, carpets and home accessories such as decorative accessories, kitchen accessories and appliances. They currently operate three HomeStop stores, one each in Mumbai, Bangalore and New Delhi.

4. Brio and Desi Cafe (F & B):

Their foray into Food and Beverages (“F & B”) began with Brio. Brio has been designed with the intention of providing a warm and friendly place to relax, revive and reflect. They currently operate 20 Brio stores.

They have also started an Indian cuisine concept under the name of Desi Cafe as another concept to add to their food and beverages offerings. They currently operate three Desi Cafe stores. This format isn’t working well for the company. They are running into losses.

5. Hypercity:

They have a 19% stake in Hypercity Retail (India) Limited, which operates the store named “Hypercity”. The store, having an area of approximately 1,24,500 sq. ft. offers food and grocery, general merchandise and apparel. Currently, there is one Hypercity store in operation.

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Hypercity Retail (India) Limited has also opened three stores called ‘Express-City’ in Jaipur and one store in Thane, to experiment with smaller versions of the format. Express-City is a retail format, which is similar to a convenience store format, primarily retailing food, grocery and household needs.

Shoppers Stop’s business has grown from one store in Mumbai in 1991 occupying an area of approximately 0.05 million sq. ft. to approximately 1.50 million sq. ft. across 27 (including HomeStop) stores located in the cities of Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Pune, Jaipur, Lucknow, Gurgaon, Ghaziabad and Noida.

They are also investing in other formats by way of joint ventures, licenses and franchisee arrangements.

The following are their initiatives under such arrangements:

i. M.A.C.:

They have opened M.A.C. stores under a Supply and License Agreement with the cosmetics major Estee Lauder. Currently they are operating four M.A.C. stores in Mumbai, Bangalore and Delhi.

ii. Arcelia:

Arcelia is a new retail concept aiming from bridge to luxury segment, with a strong emphasis on experience and indulgence and primarily caters to discerning women shoppers. It primarily retails cosmetics, fragrances, fine jewelry, footwear, handbags etc. They currently have two stores operational in Delhi and Pune.

iii. Mothercare:

Under an exclusive franchisee arrangement by virtue of a Development Agreement with Mothercare UK Limited, they have opened Mothercare stores, which market a variety of products for expecting mothers, babies, toddlers and children, the focus being on style, function and safety. They currently operate 18 Mothercare stores, out of which 10 are shop-in-shop and eight are standalone stores.

iv. Nuance Group:

They have forayed into airport retailing through their joint venture with the Nuance Group AG, Switzerland. They will handle the retail operations in the domestic terminals while the joint venture company will handle the operations at the duty free zones in the international terminals. The joint venture company, called Nuance Group (India) Private Limited, has already bagged contracts to operate outlets at the international airports at Bangalore and Hyderabad.

v. Time-Zone:

Time-zone marks their foray into entertainment retail. They have acquired a 45% stake in Time-zone Entertainment Private Limited, which is in the business of providing family entertainment centres. It currently operates through six outlets which include cities like Mumbai, Ahmedabad, Kolkata and Hyderabad.

Investment Argument of Shoppers Stop:

Shoppers Stop has shown a growth of 31 % on the top line and all format like to like growth by 20%. However the company has not been able to capitalize the growth in terms of revenue to its bottom line which has come down by almost 73 % over the previous year. This is seen on account of increasing operating expenses in FY08.

Also the new initiatives taken by the company have not been delivering as expected and have still not turned positive. The operating expense in these segments is as high as 45% in FY08 and has incurred a before tax loss of around Rs. 210 million. Also seen in the departmental stores of the company, for old stores EBITDA margin is around 13%, but however, because of the new stores which take around 4-6 quarters to break even to the margins have come down.

And with the expansion plans of the company, it seems that the overall EBITDA margin will remain in a range of 5-5.5%, which is very low. Shoppers Stop when compared to its peers seems to be highly valued and way above its intrinsic value. The company currently quoted at 118.46 × FY09 E EPS of 2.49 and 46.20 × FY10 E EPS of 6.39. The book value of the share lies at Rs. 175 in FY09.

Although the revenues on a year-on-year basis increased, the EBITDA for FY 08 has fallen by 16% to Rs. 568.6. million. This was because of increased pressure of operating expenses, which increased on a year-on-year basis by around 50 % because of a few reasons. One is major inflation in employee cost, secondly in the power cost and thirdly on the service tax on rental.

Again financial charges which have changed from being a finance income to finance expense and depreciation which has grown by Rs. 146 million after the change of useful life the profit before tax is Rs. 72 million, at 0.6% of the turnover and after-tax and minority interest, the profit after tax is Rs. 26.5 million. Thus overall on the bottom-line the company has come down by 73%.

Looking at the overall company performance, the departmental stores of Shoppers Stop have a profit before tax of 3.4% to sales from such stores, whereas the profit before tax for other new initiatives by Shoppers Stop as a percentage of their sales is 14.7%. This is mainly on account of high operating expenses of these initiatives which are as high as 45% to sales.

Rights Issue of Shoppers Stop:

The company has a massive expansion plan for the year 2009 and 2010 and for that the company has filed the Draft Letter of Offer for Rights Issue with SEBI on 26th March, 2008. The company intends to raise capital up to Rs. 5,000 million through this issue of which up to Rs. 3,000 million from the rights issue and Rs. 2,000 from warrants issue.

However with the falling stock markets, subscription of the issue looks to be quite difficult and if the money is not being raised from the public then the borrowings would be at a high cost. This can further lead to a hindrance in the expansion plan.

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