Foreign partners don`t really add value in retail

No business house wants to be left out of the retail party; the potential to make money even at wafer-thin margins is huge given the low penetration of organised retailing at just 3 per cent. The Aditya Birla group wants its share of the pie and has started off by buying Trinethra, a southern chain of stores covering about half a million square feet. Sumant Sinha, CEO, Aditya Birla Retail, tells Shobhana Subramanian that Trinethra’s doing well, but he’s worried about high real estate prices. Excerpts:
What have you learnt from the Trinethra experience? Does it make sense to acquire or build from scratch?
I think there are merits to both. In our case, since we were starting without such a humongous background in retail, it was sensible for us to make an acquisition to get started.
Having said that, an acquisition also comes with its own cost which is that you have to integrate and over time you have to potentially change the stores that you acquire to what you want them to be. That has its own costs and more than even costs, it’s the time and effort of doing that. So I think it’s good to make one or two acquisitions to get the initial expertise but after that you have to be careful about making acquisitions.
Why do you believe it’s not necessary to team up with a foreign player?
Because retail is mostly a local business. If you look at the elements of success you have sourcing, supply chain, the stores, running the stores, the merchandising (which means an understanding of the customer), people and real estate. You need to hire people mostly locally; wherever you need to augment, you can hire from outside.
Real estate sourcing is entirely a local business, you need relationships with Indian developers and have to understand the dynamics here. So you can’t get much help from a foreigner. A lot of sourcing has to be done within India and you have to develop your own Indian supply chain and vendor base. Foreign companies can’t really help too much here.
Where they can add value to some extent is in the operation of stores but even there it’s not a benefit that you can’t avail by hiring people from other parts of the world. Ultimately the consumer you are selling to is an Indian consumer and we as an Indian group have a much better intuitive feel and understanding of this consumer than anyone sitting in America or Europe.
What about economies of scale?
If you look at economies of scale as a potential benefit, those economies of scale typically tend to work within the country. Global economies of scale are not that critical for success in the retail business and various studies have shown that. So you need to be large within the country rather than globally to get the benefits of scale.
What will be More’s USP? Why will I walk into a More store and not into a Fresh or a Walmart?
Well you might walk into another store as well depending on whether it’s close to your house or not because convenience is an important factor. So our intention is to be fairly close to our consumers and to the extent that we are closer to them than others, they will walk into our stores.
But the intention is to be very competitive in price. There can be different strategies; for instance, an everyday low-price strategy without promotions or one can have low prices on some days. What we’re going to be offering is very competitive prices on all key items with lots of promotions and excitement around the store.
The second is to give people the right merchandise: people don’t necessarily want a huge variety, what they want are the right products. But the idea is also to have multiple price points to cater to people across socio-economic classes. This would call for a good understanding of what people really want. We will also have innovative products that we will design in-house.
What kind of mix are you looking at between in-store brands and established brands?
This will evolve over time but our intention will be to get as much of the store labels as possible even in categories like apparel.
Do you feel that a model which builds in a higher proportion of store labels will fetch better margins? What kind of margins have you built in?
Typically a higher share of store brands do bring in better margins, but then margins are not the only thing. We need to get sales too. I’m afraid I can’t disclose what kind of margins we’re looking at because it is very sensitive information.
What kind of lease rentals are you paying for your properties?
That too is competitive information which I cannot share. But rates for real estate have gone up quite a bit and they’re getting to levels where it’s really not possible to make too much money. We’re getting affordable real estate in some parts of some towns, in other parts we’re not. Pune’s reasonably expensive; Chennai, Bangalore and Hyderabad are also getting to a point where they’re fairly expensive.
We feel it’s worth going into some of these towns at these prices. That’s our assumption right now but time will tell whether we’re right. To me that’s the big variable for all retail companies.
At the rates that people are having to pay right now, will people make money? That’s why you need people who have the staying power to go through the real estate cycle. Our feel is that real estate prices are high and at these levels it’s going to be hard to make money.
Will you be buying any real estate or will you opt only for leases?
We don’t have a fixed model. I think we’ll be a little flexible about life. We haven’t bought any properties so far.
Would you say the consumption story is intact? Is the environment friendly enough for a retail business?
I think at this point there hasn’t been that much of an impact on spending but if the government continues to raise interest rates, at some point there will be an impact.
I would say there are some things working in favour of the industry like consumer demand, while there are others that are not, such as infrastructure bottlenecks and good-quality people.
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