Cost control, expansion to hasten growth

An early festive season this year has facilitated a faster recovery in the domestic retail sector. And it is not just the higher sales volume, but improved profitability that has prompted the market and analysts to take note. As evident from the September 2009 results, sales of organised retail players have increased 10% on a year-on-year (Y-o-Y) basis, against the 7% Y-o-Y increase in June 2009.

With conscious emphasis on profitability and sustaining the business, the sector is likely to see better results in the coming quarters. Though quarter-on-quarter (Q-o-Q) sales numbers are much better at 17%, customers are still cautious.Unlike the previous quarters where value retail was the growth engine, the recipe for success for retail firms in the quarter to September is the upsurge in lifestyle and premium segment sales.

For instance, department store chain Shoppers Stop���s same store sales (SSS) improved to 2.3% in the current quarter, from a fall of 6.3% in the June quarter. On a Q-o-Q basis, its customer footfall as well as average sales per sq ft also grew by 28% to Rs 2,105, thus offsetting the fall in conversion ratio.

Similarly, for fashion retailer Provogue, though same store sales have been flattish, wider product merchandise has helped boost sales. Private label retailer Trent has also mirrored the sector performance. However, after reporting a decline for three consecutive quarters, Delhi-based Koutons emerged as the leader with a 23% Y-o-Y growth in sales.

Having moved from a growth orientation to profitability, the sector seems to be in a consolidation phase with lower rentals, tight check on employee costs and better inventory management. Employee costs as a proportion of sales for the industry have come down to 4% in September 2009 from 6% in the corresponding quarter a year ago. It is precisely for this reason that all retailers saw a 50-200 basis points improvement in their operation profit margins (OPM) over the September 2008 quarter.

Shoppers Stop���s OPM grew 600 basis points at 6.6% and the largest retailer Pantaloon���s OPM grew by 50 basis points at 10.7%. The only player to see a decline in its margins was Vishal Retail. Reckless expansion through high interest cost borrowings hangs heavy on this Delhi-based mass retailer.

Thus overall net profit margins were flat. Though an improvement from the previous quarters, retailers are still grappling with high cost of funds. Vishal Retail is a case in point having had to close down a lot of outlets. The firm is now undergoing a debt restructuring exercise. Nonetheless, there are some companies such as Shoppers Stop, Koutons and Trent that have reported about 20-100 bps Q-o-Q as well as Y-o-Y progress in their net profit margins.

Going forward, in all likelihood, the sector results would improve, as store expansion resumes and many retailers manage to control their costs. However, availability of low-cost capital would be the key to this growth. Many retailers are also looking for sale of non-core or unprofitable businesses to focus on their key strength of selling products ��� like the way Pantaloon is restructuring its business to be able to provide a pure retail investment model for investors. Shoppers Stop exited the Gourmet city (food) format of its hypermarket format, Hypercity.

For the next stage of scaling up ��� probably, local firms may have to wait for the government to permit foreign direct investment in the sector.