ET 500 2011: Logistics, retail and telecom sectors have lagged behind since the rebound after 2008 meltdown

The global financial crisis of 2008 severely dented growth in India. But the world’s 9th-largest economy has bounced back well since then. Taking the BSE Sensex companies as benchmark, sales have grown at 41% over the past three years, when compounded annually, while earnings have increased at10%.

However, this growth has not been uniform across sectors. Logistics, retail and telecommunications have underperformed the rest of the market. Data show that while sales growth is encouraging, profits for these sectors have not kept pace with the rest of India Inc. But don’t write them off just yet. The coming years hold much promise as a paradigm shift in these sectors creates new winners.

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LOGISTICS

While logistics is the lifeline of any growing business, the complex set-up ends up increasing logistics costs substantially for its users. The companies have to contend with road and sales tax at every state border in addition to octroi. Several approvals are required from the government to transport cargo, which is above the stated requirement in terms of weight or dimensions.

Unfortunately in India, tax structures and policies vary from state to state. As a result, companies are reluctant to import cargo. “For instance, one has to go through a number of complexities while importing equipment through the Mumbai port... and the port is only used as a medium, after which one has to go through several formalities in addition to customs, to clear one’s consignment,” says Umesh Shetty, director, Allcargo Logistics.

The goods and service tax or GST could come as a major boon for the sector. It will smoothen transportation of cargo, be it through trailers, trucks or railways. The sector is also looking up to the government for improvement in the country’s coastal movement and connectivity between internal waterways. Though the sector is not doing well at present, its longterm outlook is encouraging. This is because the growth in sectors such as power, cement and oil and gas cannot proceed without logistics support.

RETAIL

While the retail market has doubled from 2006-07 till now, the profitability of companies in the sector has been under pressure in recent years. “If retailers or companies have failed, it was because of their own issues which had nothing to do with customers performing or not performing,” says Govind Shrikhande, managing director, Shoppers Stop. Around 2005, there was a whole lot of interest being created in the retail industry. The Birlas, Tatas, Reliance and Bharti entered the sector in a big way and tried to scale up at a pace faster than what was pragmatic. Companies increased inventory expecting an overwhelming response from customers, but then the global crisis hit them.

The three challenges that the retail sector is faced with at present are inflation of operating and manpower costs, margin pressure and rentals. “One has to keep working around all three all the time to see what is right for their particular format, and therefore, how to manage profitability,” Shrikhande says. The game changer according to him could be the model one adopts in terms of managing costs versus profitability.

TELECOM

The dynamics of the telecom sector are rapidly changing in terms of the kind of services being offered as well as consumer behavioural patterns. Consumers are no longer looking for just communications access, but expect a range of services from voice to data on handheld devices.

“Global web giants such as Google, Facebook and Yahoo are making inroads into traditional telecom services. In a world where broadband is ubiquitous, which is likely to be the case in India five years from now, things like voice over IP will disintegrate the traditional minutes model. So you can no longer charge on a minutes basis. It is going to be an ‘all you can eat’ sort of package once you have a broadband connection,” says Arvind Subramanian, partner & director, BCG.

With basic proliferation of mobile phones having reached a healthy level of over 600 million connections, the market is now at a stage where customers are no longer entering just for connectivity. There is a behavioural shift taking place.

Understanding who rules the telecom space has become a key question. For instance, is it Google that dominates the operating system space or is it Airtel, which has the most number of subscribers. And what does that mean in terms of identifying winners and losers? From a telecom operator’s perspective, data services are talked about as being the next growth engine.

So operators will have to shift focus. Fundamentally, however, this is a difficult transformation; just because an operator has dominated the space earlier, it is not a given that the same firm will dominate it in the New Year as well. The next two years will continue to be tricky for the sector depending on who wins amongst the operators, the web giants and the device players.

“Today the sector economics overall are quite poor. The return on capital is not great. So there is a structural shift needed in terms of the economics of mobility in India and that structural shift can only happen if there is a rebalancing in terms of voice and data services and a consolidation in the industry, which allows a more rational pricing behaviour,” Subramanian says.

Though there are challenges, incumbents have many strengths to face them. These include their financial muscle, customer base, experience and ability to generate customer insights to navigate the new era.