Despite staggering losses and a temperamental supply-chain, CEO B.S. Nagesh is pushing ahead with expansion. Is he spreading the retail chain thin?

By Brian Carvalho

In retail, two bad years can seem like twenty. Just ask B.S. Nagesh. Two calendars ago, the CEO of Shoppers' Stop sported jet-black hair, his cheerful face was stretched taut, and eyes shone with the promise of what was to come. Indeed, the retail industry's poster-boy was on a roll. Cut to November 2001. The 40-year-old seems slower, grey and white hairs streak across the sides of his forehead, and believing in his retail dream, despite the eyes that fix on you, is harder than ever. In fact, going by the count of his recent goof ups the question that's begging to be asked is ''Has Nagesh blown it?''

The answer to that will determine not just Shoppers' own future, but that of the nascent, but booming, retail industry. At a time when organised retail in India is projected to touch $300 billion (Rs 14,10,000 crore) by 2010-according to a CII-McKinsey report-and a variety of retail formats (from supermarkets to hypermarkets to speciality stores) are springing up across the country, Shoppers' failure could derail an industry that only now is gathering momentum.

In the 10 years since it first opened shop, Shopper's has built its retail chain across nine locations in 7 cities. It arguably is the best known retail brand in the country today. Unfortunately for Nagesh, it's also the most troubled. It seems to have expanded into far flung cities without consolidating its sourcing and supply-chain efficiencies; its stores in smaller cities are oversized and under-utilised; it invested crores in a top-of-the-line ERP system only to mess up its implementation completely, resulting in a loss of revenues; it flirted with a bricks-n-clicks retail model, only to realise that e-tailing wasn't for this country; and its in-store brands-typically a cash cow for retailers elsewhere-are hard-pressed to rake in the moolah.

The upshot of it all: by the end of March 2001, Shoppers' had racked up losses of Rs 32 crore against total investments of about Rs 100 crore. Its supply-chain, several tweakings notwithstanding, is still a sore point. Worse, investors are fleeing. In September, 2001, fund managers at Alliance Capital and Morgan Stanley made their exit. And a public issue planned for March this year has been put off until sometime in 2003. All that in turn calls into question the future expansion and viability of the chain. Although the man himself denies it (''I am not going anywhere unless they throw me out''), the industry is rife with rumours of Nagesh wanting or being asked to leave.

So, just why is a man who built a retail chain out of a defunct movie theatre in Mumbai, owned by real estate tycoon Chandru Raheja, suddenly a candidate for a case study in how not to grow a retail chain? ''(Shoppers') grew too big too soon, partly because expectations were too great,''says Kishore Biyani, CEO of Pantaloon and a competitor. Agrees a former Shoppers' executive: ''We were trying to live up to the image of being the first and in the process took on more than what the bandwidth allowed.''

That's a critique Nagesh would find hard to refute. And, in fact, he doesn't. But Shoppers' was not always the impatient retailer that Biyani talks of. Until 1998, it was a two-store chain limited to Mumbai and Bangalore. Things were fine (read profitable) even after Shoppers' went to Hyderabad. Trouble started when Nagesh, heady with success, indulged in an expansion binge. Over the next two years, five more stores were opened in Jaipur, Delhi, Chennai, Ghatkopar, and Pune. Says Nagesh: ''We expanded simply because we had to get economies of scale.''

Too Much, Too Soon

But even as Shoppers' expanded, it made a series of strategic blunders. It started out looking at the market potential-organised retail accounts for a bare 2 per cent of the Rs 5,00,000 crore retail universe-and mapped out its own requirements in terms of technology, capital, and people. As it turned out, the ordering of priority so was a mistake.

Take, for instance, the choice of retail model. When Nagesh embarked on his expansion spree, his aim was to make Shoppers' 'the number one global retailer in India'. Ergo, he chose to spread the chain over a bigger geographical universe. That was in stark contrast to the strategy being followed by more successful retailers like FoodWorld, which chose to first expand within south India before stepping out to Pune. Even today, FoodWorld does not have a presence in Delhi. Agreed that food retail by its very nature is best addressed to a smaller market. Still, the essential logic behind a smaller retail universe is the same and simple: Sourcing, shipping, managing stock keeping units (SKUs), and balancing workforce among the stores is easier and, hence, more profitable. Says Sanjiv Goenka, whose RPG group part-owns FoodWorld: ''Once you have a hub, it is easier to expand. FoodWorld has already developed five hubs. We will move into new places only when the expansion in existing cities is completed.''

But for Nagesh, it was only natural that he should pick a retail format that was the 'best' and the biggest, both in terms of size and SKUs. In Hyderabad, for example, Shoppers' took up a 63,000-sq ft property, of which 3,500 sq ft is still lying idle. Even in smaller cities such as Jaipur and Pune, it went in for 18,000 sq ft and 40,500 sq ft stores, respectively, even as competitors like Pantaloon and Ebony settled for stores between 6,000 and 9,500 sq ft. Explains B.S. Narula, Executive Director, Ebony: ''There is a need to come in with a right size and right expectation. In Jalandhar we are only 9,500-sq ft big, but the realisation per sq ft is the best of all our other stores.''

Big stores, of course, cost big money. Shoppers' 42,000 sq ft store at Ansal Plaza in Delhi pays an annual rent of Rs 6 crore, and stocks more than 6 lakh SKUs, ranging from garments to jewellery to perfumes to footwear to home products. But given that nearly three-fourths of its revenues come from garments alone, categories such as footwear and perfumes may just be a drag. Says Neeraj Garg, Manager, at Kearney: ''Improper stocking (in terms of choice of products), or inadequate stocking (non-availability) can severely affect sales.'' That's what caused the first set of losses in 1999-2000. Again, the following year, it was a mix of overplanning and soft demand that bled the bottomline.

If the losses were worse than what they should have been, it's because of another mistake that Shoppers' committed. Assuming that getting the best software to wire up its stores and distribution centres would automatically take care of the supply-chain, it spent a staggering Rs 12 crore on JDA, a sophisticated ERP software used by most big retailers world wide. Indeed, its sister chain Globus (owned by Rajan Raheja) was already using JDA to good effect. But then Nagesh made a disastrous call. In a bid to cut costs, he decided to use an India-based multinational it company for the JDA implementation. Soon after the trials began, the system crashed, throwing sourcing and inventory management out of gear. Crippled, the chain limped along for seven long months before the bug was fixed.

That wasn't all. New retailers like Ajay Piramal's Piramyd in Mumbai drew experienced staffers from Shoppers', which in response brought in new, but less experienced, people to run the show. That was also the time when critical changes in supply-chain were being made. For instance, centralised distribution replaced the earlier practice of discrete distribution. In between, in the belief that a bricks-n-clicks model would help sales and valuations, Shoppers' ramped up plans of investing Rs 2.5 crore in an e-tail venture. But soon afterwards the dotcom bubble started bursting, and almost overnight the plan was axed.

Stretched financials, ill-stocked stores and dissatisfied customers quickly showed up on the company's P&L. By March 31, 2000, it only had sales of Rs 153 crore, but rung up losses of Rs 9 crore. By the next fiscal, the topline had jumped to Rs 210 crore, but losses more than doubled to Rs 23 crore. Admits Nagesh as a matter of fact: ''All our changes were right but the management of change was not.''

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