By Deepa Thomas

The retail sales during the festive season have been decent but the global meltdown is for sure pinching the pockets of certain sectors like real estate, aviation, broking houses and business services. Though many retailers persists that they haven’t been affected by the slowdown, they are conscious of the environment and are taking steps to manage their resources effectively. Unreasonable high rentals, highly-paid underperforming staff and unprofitable stores are supposed to be upsetting the balance sheets of many companies.

Due to the ongoing recessionary trend, retailers are revisiting their business plans. Some of the retailers have stopped taking forward their retail expansion plans and are consolidating by closing economically unviable stores, optimising space utilization besides focusing on performance improvements to tide over the situation. Not depending on the market valuation, retailers are now focusing on putting their business fundamentals right. They are now concentrating on having the right product mix rather than playing the volume game. Some are striking a revenue-share agreement with mall developers and others inking the franchise route. This way a lot of saving is achieved on fixed costs like rentals.

Commenting on the current state of affairs, Ashutosh Garg, CMD, Guardian Pharmacy says, “Indian retail will certainly see a slow down but the inherent strength of the domestic economy will ensure that players in the “essentials” space like education and health for instance will not be hit dramatically. Parents will continue to send their children to school in any circumstance because education of children is one of the most important expenditure in India and so is medication. Sumeet Mehta, CEO, Zee Interactive Learning Systems opines, “Industries that rely on discretionary spends like entertainment, will see a slowdown but luxury goods business should be stable.”

Jayant Kochar, MD, Go Fish Retail Solutions says, “Brands belonging to the luxury segment and those addressing the mass will not be affected by slowdown. Nevertheless, any brand belonging to any category that has a successful business plan and anyone who can execute it well will always succeed. Franchise business model is good for franchisees as long as the brand is good.”

Broking houses such as Enam Securities, Motilal Oswal Securities, India Infoline have started focusing on the franchise model rather than opting for their own branches to reduce investment outlay and yet expand their businesses across the country. As investors have put their investments on hold, wealth management companies like Way2wealth are finding it difficult to win new clients. But these companies are finding innovative methods to come out triumphantly from this situation. Sunil Ramrakhiani, COO, Way2Wealth elucidates, “Equity and mutual fund business, the largest contributors to our revenue is the most affected. Considering the uncertainties of the markets, we took the decision to re-align our product strategy and concentrate on developing our other businesses of insurance, commodities and currency futures trading more aggressively. We see these businesses to grow more rapidly than before, for which we have strengthened our team pan-India and have brought in industry stalwarts as Business Heads for each of these verticals”.

Considering the prevalent market conditions, big ticket retailers are finding it hard to raise resources from capital markets. Retail biggies like Kishore Biyani of Future Group which has traditionally issued a mix of equity and debt to fund expansion would now have to take on more debt to fund expansion. While higher leveraging will increase risk, slower expansion would make growth prospects unexciting. So with seven new stores planned this year, Shoppers’ Stop expects to grow at a faster rate of 50 per cent compared to the previous years when it had growth rates between 30 and 35 per cent. According to Shoppers Stop, Managing Director, B S Nagesh, the real estate cost and employee cost are expected to sober down this year, and that would mean a sharp increase in margins.

Future group’s strategy is to diversify into small convenience store formats called Big Bazaar Express Stores, rural retail venture Aadhar, and home solutions venture Home Town and concentrate mainly on value formats and low-cost models such as Big Bazaar and KB's Fair Price Stores. The firm plans to have a total retail space of 15-16 million sq ft by March 2009 from 11 million sq. ft in FY08 and aims to achieve total revenue of Rs 10,000 crore in the current financial year, up from Rs 6,500 crore in the previous financial year.

Vishal Retail is yet another player which has postponed raising Rs 2 billion through equity to expand retail space to 10 million sq ft by 2011. But to turn its dream into reality even in the current market condition, the company is seriously looking at the franchise route for expansion. Ambeek Khemka, Group President, Vishal Retail reiterates, “Footfalls have reduced as the trend is more towards saving than spending. Expansion through company-owned outlets has currently been put on hold but we are growing the number of stores through the franchise route. We are relocating some of our retail outlets to rationalise on the rentals.” This model will help the retailer to have access to franchisees’ properties for housing its retail stores and the franchisee in turn will get the opportunity of getting a share in the retailer’s revenues. Vishal, which began its franchise model from Indore in Madhya Pradesh, has 9 franchise stores. They plan to open 100 franchise stores by March 2009.

Franchise growth
The panic in the stock market coupled with reports of job cuts has pushed banks as well as consumers into saving mode and taken liquidity out of the system. The finance assistance from the banks has become increasingly scant for the real estate sector and the SMEs who need it all the more. The credit to MSMEs declines to all time low of 8% from a peak of 14% in 2002. Stunned businessmen are now thinking hard on how to trim their operational cost.

Milagrow, a venture catalyst recently conducted a study on ‘Sick MSMEs and Their Rehabilitation’. One of the findings was that 75% SMEs turn sick because of lack of finance and lack of managerial expertise and 53% due to government delays. Rajeev Karwal, founder-director of Milagrow, proposes the franchise model for expansion as it helps a business grow faster than a solely owner-driven business, develops good business equity and is a win-win situation for all the stakeholders.

Moreover there tends to be an inclination towards entrepreneurship especially in the wake of lay-offs. Gautam Sahni, Director, US Dollar Store, advises prospective franchisees that this is the time to cash on for known franchise companies as buying a franchise is less risky than starting a new business.

For many companies expanding is important as they wish to increase their market share and dominance. The current slowdown has seen an increase in the demand for franchising. It is evident from the fact that retail brands are expanding and it is happening mainly through franchisees. In the last 3 months, Zee group has signed up four Zee schools and expect to open 40 more Zee schools and 100 more KidZee pre-schools all over India in 2009 from the current count of 650. Hotspot, the mobility player, which has 500 company-owned outlets, embraced the franchise route this year. The company has already opened 100 stores in this format. Assured returns along with a healthy ROI are attracting prospective franchisees towards the brand, says Mahajan. The company is looking forward to opening 600 additional franchise stores next year.

Most of the retailers believe that franchisees give a significant impetus to growth since they are able to manage their environment more effectively. One such believer is Ramrakhiani of Way2Wealth. He says, “The franchise model is the fastest mode of expansion, driven by entrepreneur instincts. Franchisees are result oriented, build stable businesses, are well aware of balancing expenses and put in their best effort, as their investment is at stake. They understand cost cutting best and implement the idea of productivity best. Our immediate plan includes opening 25 new branches via the franchise model in Chennai, Bangalore and Hyderabad, Surat in the west and Kolkata in the east.”

There was a time when companies believed that they should attempt the franchise model only after their company-owned model stabilizes but it is not the case any more. In view of high real estate cost and liquidity crunch in the market, popular home fashion retail brand Roseby’s launched their very first store in India by appointing a franchisee.

Also on the rise is franchisor’s preference for multiple-store owner franchisees. Dheeraj Gupta, Founder-Director, Jumboking Foods is giving out new franchises only to those who can invest in more than five stores as he believes they are better able to weather ups and downs in the business than single-store operators because they have the advantage of economies of scale. Samir Kuckereja, CEO & MD, Nirulas agrees too. He opines, “Multi-unit franchisees are healthier as they have a long-term perspective on returns on investment”.

Times such as these are a boon for franchise business as many experienced professionals look for opportunities to be more in control of their own destiny. As a result of this, there has been a historic increase in qualified professionals who seriously assess owing a successful and proven franchise, feels Charles A. Parsons II, Director of Crestom International, a company that trains and offers strategies to manage companies profitably.

International brands
Since India is still expected to clock a growth rate of 6-7%, most of the international brands are finding our country attractive as compared to their home markets that are seeing a recession. Yet there is a mixed reaction from international brands. On one hand, we have international companies like Crestcom which is expanding the number of its franchises and Armani went ahead to open their maiden store at Trident Hotel in spite of terror strike but on the other companies like Carrefour are postponing their entry in the country.

To begin with, most of the foreign brands who wish to firm up its retail presence in the country are entering through franchise or license agreement, to have shop-in-shop presence within major chain of multi-brand outlets like Lifestyle, Spencers or Shopper’s Stop.

Crestcom International, which has 10 franchises in India, plans to add ten more in 2009 as Parsons II, Director, International Franchise Development of the company sees the current cycle as an opportunity to assist their clients with proven methods for effectively addressing both competitive and operational skills so they may become even better managed organizations.

Carrefour hypermarket which was supposed to open this year by appointing a master franchisee (in all probability Parsvnath) has put on hold its expansion plans in India for another 3-6 months fearing cold response.

As their current markets is shrinking internationally, if any international brand has the guts to expand and come to India, Susil Dungarwal, Retail & Realty Analyst, Squarefeet management signals this is the right time as currently two major costs - manpower and real estate is affordable. “But they need to evaluate whether the underlying demand for their brand will hold steady before deciding to enter,” alerts Mehta of Kidzee.

As far as luxury retail is concerned, Dungarwal is of the opinion that as the profile of consumers for this category is not hit that badly by the slowdown, this sector will be stable. A person who wears a Zegna or Rolex will still want the same brand as it is very difficult for the luxury retail shoppers to cut down on their lifestyle brands.

Retail real estate
Retail biggies announced huge expansion plans taking it as a strategy to reach out to maximum people, to break even and achieve economies of scale as soon as possible. This surge led to sky-rocketing rentals in real estate space in the recent past. But undoubtedly, there is an oversupply of malls today. As most of the shopping centres are more successful as an eating joint or a hangout spot and rentals soaring up to Rs 300-600 sq.ft., retailers with paltry sales are unable to sustain. Deepak Parekh, Chairman, HDFC cautions, “There is a need to guard against over-exuberant development”. He adds, “Today, the top eight cities are witnessing a 20 per cent vacancy across 40 million sq. ft of operational malls and in all probability it may rise”.

It is good news for retailers today as the price of real estate space is undergoing a correction. According to Rajneesh Mahajan, director (retail), Cushman & Wakefield, “Retail rentals fell by up to 20% in several markets in July-September quarter, compared to the previous quarter and may fall further in the coming quarters.” Gurgaon, which has many functional malls, saw rentals dip by 9% in three months. Karol Bagh, South Extension and GK in Delhi saw a decline of 5-18%. The rentals slid 20% in Mumbai’s Linking Road and Kemps Corner while it fell by over 10% in Ghatkopar and Vashi. The rentals declined by 13-18% in almost all major locations in Bangalore.

This decline in rentals has been of immese respite for retailers. Sanjay Mahajan, CEO, Hotspot, attributes the profitability of his stores in the present situation largely to the reduced rentals. Clocking 275% growth this year compared to the previous year, Guardian pharmacy is continuing to build two stores per week but certainly negotiating better rates with property owners.

Sandeep Marwah, a Delhi-based property consultant is cheerful in the so called economic slowdown as he is busy globe trotting doing residential deals in London and America and commercial deals in India. He confirms, “Earlier as the property price was high, I used to do fewer deals but the global tension reduced the number of takers for real estate at such exorbitant prices. This has forced the correction to take place and now I am doing business in volumes. Retailers who could not have afforded to be present in prime high streets like Connaught Place and GK M block are seizing the opportunity as they are now finding the reduced rentals within their reach.” Shailesh Chaturvedi, CEO, Tommy Hilfiger, confirms, “We have opened a store in Khan Market last month, which was priced beyond our reach until early this year.”

Retail real estate developers like Unitech, which owns Metro Walk mall at Rohini in west Delhi does not have full retail occupancy despite higher footfalls because of high rentals. Very soon the developer plans to reduce the rentals by about 15 per cent from the present rate of Rs 100-150/sq.ft. To rationalise the plan, the developer may switch to revenue sharing model with 6 to 12 per cent retailers.

Exuding optimism, Pradeep Jain, Chairman, Parsvnath Developers goes on to say that the retail is bound to bounce back and holds media responsible for the present mayhem. He asserts, “There will be no decline in price in his commercial property as lack of quality land has led to increase in the cost of land and construction.

Another development in the real estate is that, several real estate companies have slowed down the pace of capital-intensive projects like malls and shifting their focus to developing mid-income homes, offices or neighbourhood malls with brands that serves the essential category.

New trends
A trend that the retailers are witnessed this season is an increase in the spend pattern of people in tier II and III cities. Chaturvedi, CEO, Tommy Hilfiger confirms, “In the last few months our stores in metros haven’t performed well but surprisingly our stores in B grade towns like Amritsar and Ahmedabad did exceptionally well. So we are weeding out bad shops and certain product line but opening ten stores in the top fifteen cities like Patiala and Jaipur in the coming year.” Spykar Jeans, which largely operates through the franchise model has seen 35% growth quarter on quarter but is presently in consolidation mode. They too have curtailed their expansion plans in the metros but continue to penetrate in tier II and III cities.

Discount retailing is a franchise format that is believed to be a sure shot success in times such as these as mid-income consumers migrate to discount stores/value-priced retailers and wholesale chains. The Loot Store, a discount retailer has seen 15% growth in the case of same store and 100% growth since last year. They plan to roll out more than 100 stores by March ’09 and 200 stores by March 2010. For US Dollar Store too, this year has proven to be good as the number of their franchise stores has grown from about 20 to 60 plus in this year. Gautam Sahni, Director, US Dollar Store says, “We are concentrating on franchise network as far as front end is concerned and making our backend (warehouses systems & procedures) strong enough to aggressively support the same.” Mahajan of Hotspot is not a supporter of a discount model. As he believes, long term success of any store revolves around value, variety and merchandise it has to offer. He says, “Rather than giving discounts, we offer better value deals to our customers. We prefer giving accessories, airtime, movie cards etc. along with selected models, this allows us to cross-sell our products and increase the store profitability and customers are also happy to receive free gifts. By promoting accessories, we are making profits as it is here that maximum margin lies.”

To beat the slowdown, companies are introducing products which are in the lower price point to generate higher sales. For consumers, buying private label products of a retailer turns out to be one-third cheaper. In fact, many customers who found their spending power squeezed took for great value in private labels.

Further, national brands and retailers enjoy 30% margin on private labels compared to 10% margins on branded products. For this reason, retailers having private labels or in-house brands in apparel, food and electronic categories are benefiting immensely in terms of sales. RPG Group’s Spencer’s Daily has seen its sales from private labels jump by as much as 20 per cent compared to the earlier quarter. Obviously in such a scenario, companies are pushing up the production of private labels. According to Salil Nair, COO, Shopper’s Stop, “Besides the right pricing and quality of in-house brands, the fact that they are created for a specific need of the customers, works in their favour.”

Besides shutting at least 10 per cent of their economically unviable stores as part of their cost restructuring, the company is exploring various sub-verticals to generate revenue and new store openings are being postponed temporarily. Spencer’s Retail has allotted as much as 65 per cent of space for its furniture business as they hope to generate about Rs 35-50 lakh a month from Livin Smart, their new private label in furniture. “We are adding 100 per cent more SKUs to the current range as this is a high sale and margin contributor,” Samar Singh Sheikhawat, Vice-President of Spencer’s Retail agrees.

Going forward
Retail industry feels that the present slowdown is more sentimental than real. The concern is more about operational challenges than slowdown. By taking corrective measures for efficient operation of the retail shops, the retail companies are trying to avoid a period of lower growth. The industry is striving that consumer spending does not come down as this may have a negative impact.

As bailout packages by governments, of such magnitude have never happened before Ramrakhiani of Way2Wealth feels it will take at least 6 to 12 months for things to stabilize, consolidate and industry to get back on track. Jay Gupta, MD, The Loot Store begs to differ as he feels the impact on India is marginal and temporary. “Being a huge market and a growing economy this phase will pass soon”, he adds.

We spoke to many industry stalwarts on the best solution they can offer to tide over the present difficult times. Here are some of their views:

Jain of Parsvnath feels government should pump in capital market stabilizing fund to assist entrepreneurs so that the companies don’t result in non-performing assets to the banks. Corrupt machinery and passing 20+ approvals of various laws, licenses and file various returns before starting a retail store are the environmental challenges retailers face today. Retailers may find respite to this problem as Jairam Ramesh, Minister of State for Power and Industries and Commerce, in his address at a recent event said that by 2010, the government will implement GST, which will be a single integrated goods and services tax.

Gautam Dutta, CEO, PVR Cinemas is of the opinion that this is just a phase and we need to balance it out. He alludes, “Retailers should take this as an opportunity to contemplate on how well they know their customers, do a feasibility study and repackage their products to attract customers by bundling in more value.”

“Persuasive marketing technique, hiring and offering better training to the front line staff and not cutting on advertising can get situation back on track,” suggests Sumit Lal, Director, Ecco Shoes. According to industry experts, in the next two-three years, at least two lakh people would be required by the industry, a major chunk of the jobs being on the shop floor. But retailers will face the real squeeze next year if they are tightfisted on increments.

“To bring back the consumers, retailers need to try out some innovative techniques, take a close look at their product mix, which geographies to play in and what price points to offer or craft a customer-insight driven merchandise strategy and create an efficient retail operating platform,” suggests Rajiv Mathur of Akanksha Management Consultancy.

Companies launching in India afresh through the franchise model, preference for franchisees interested to open multiple stores, demand for franchise partners in tier II and tier III cities are the trends franchise segment is witnessing. Franchisors are seeking franchisees for lack of money, so Kochar of Go Fish Retail Solutions cautions prospective franchisees to choose their franchisors wisely. With prudent rentals and salaries that are forecasted, franchisees can anticipate good times in the New Year!