Cover Story: Can India's Largest Retailer Bounce Back? [Pg.2]

The setbacks, Nagesh says, the retailer has helped the chain move up the learning curve. Sure, it does plan to continue adding stores-it aims to have 7 more by March 2004-but the focus is on consolidating presence in existing locations. In Delhi, for example, two stores are planned: One in Gurgaon and the other somewhere in West Delhi. In Mumbai, three more (at Mulund, Kandivili, and South Mumbai) will commence business by next Diwali, and will complement the ones in Andheri, Ghatkopar, and Bandra. Bangalore may also get its second Shoppers' sometime soon, and Kolkata its first by 2004. Currently negotations are underway at both the locations. Says Ajay Kelkar, Senior Manager (Marketing Services) at Shoppers': ''Increasing penetration in existing areas is one of our biggest opportunities.''

True. But what about money to finance the expansion? With institutional investors shying away and the market for public issue drying up, the existing shareholders (not including the Rahejas, though) have had to increase their stake. And while Ravi Raheja, Chandru Raheja's older son, says he has long-term confidence in Shoppers' business model (See "We Are Confident In The Long-term"), the family would rather have Nagesh consolidate the gains than get into a loop of investing more and more without any returns in sight. And given that the average investment in a store ranges between Rs 8 crore and Rs 12 crore, and there are seven stores due for launch, Shoppers' would need to pump in at least another Rs 56 crore. What's worth noting is the fact that while Raheja Jr. wants a national store brand, he wants it to be ''a chain (that) spreads all through the country in a profitable way''. He's already said that he thinks most of Shoppers' current problems are internal.

On his part, Nagesh is clear that asking the Rahejas to cough up more money may not be easy or wise. Therefore, he's trying to leverage Shoppers' clout to strike ''win-win'' deals with mall owners. For example, the Ghatkopar store pays no rental at all. Instead, there is a revenue-sharing arrangement, where Shoppers' pays approximately 3 per cent of its monthly net revenues. (Surprisingly, though, there is no upper limit to revenue sharing.)

All the new stores are expected to follow this format. Says Shashi Kumar, Senior Manager (Business Development & Concessions): ''Today, mall developers want us as their anchor store, and they are willing to help us lower our cash outflow.'' Agrees Pranay Sinha of Jones Lang LaSalle, a real estate consultancy: ''Shoppers' can today get one of the best property deals in the Indian retail industry simply on the strength of its brand.''

But it's a new tack that Shoppers' is switching to, and it will have to pull in crowd to justify its role as the anchor store. And to do that it will need to rework its positioning. Since day one, the chain has stuck to its promise of ''international shopping experience'' and looked at customers in the sec a and b (the top-most affluent class) segments. Retail analysts feel that's too large a segment to straddle, besides which the proposition of international shopping experience does not hold anymore, especially in the metros, where there are several stand-alone imitator stores. Says Narula of Ebony: ''When we started out, we also looked at the top of the consumer pyramid, but we quickly changed the focus because the idea is not to put up a museum where people come and see, but don't buy.''

Nagesh, however, is reluctant to touch Shoppers' aspirational positioning saying ''you can't change everything''. And he is at pains to point out that there is nothing fundamentally wrong with the positioning or the business model. ''I accept that things went wrong in the last two years, and it has cost me a lot of strain and stress. But we'll be back in the black in another 12 months,'' he promises. Apparently, the losses are already shrinking and in the first half of this fiscal, they shrunk by 95 per cent compared to the same period the previous year. If the trend continues, Nagesh claims, Shoppers' will register a break-even (post interest, but depreciation included) by the end of fiscal 2002, and deliver a net profit by March 2003.

Whether that actually happens or not will depend on Nagesh pulling off some of his new plans. The most significant of them is the one aimed at ramping up product range without owning the SKUs. For instance, it has tied up with MusicWorld (a sister chain of FoodWorld) and Planet M to stock CDs and cassettes. It has another arrangement with Modern Silk House and Nalli for sarees. Already, such agreement account for 10 per cent of the topline and it is expected to go up to 25 per cent in another three years. The advantage of having a shop in shop is that the concessionaire is responsible for the SKUs and staff, but pays a percentage on his sales, since he does not have to invest in real estate. For Shoppers' the pay off is higher realisation per square foot and more traffic to the store. Most analysts expect the trend to grow.

There's a catch, though. For the shop-in-shop concept to succeed, Shoppers' will have to establish itself as the undisputed destination store. That's going to be increasingly difficult given that retail's catchment areas are shrinking. In Mumbai, for example, consumers were willing to travel to go to Shoppers', simply because there were no comparable alternatives. Today, there's a Westside, Pantaloon, Piramyd in South Mumbai, or Globus in Bandra all luring customers with the Shoppers' kind of promise.

Worse, the entry of global retailers such as Lifestyle in Chennai is throwing up Shoppers' shortcomings. A glaring example is the way Lifestyle has managed its in-store brands in comparison to Shoppers'. The Gulf-headquartered chain has used its own brands to get margins, differentiate the store and fill up gaps in merchandise. In fact, elsewhere in the world retailers such as Walmart and Selfridges use in-store brands to draw in low-cost consumer and boost profit margins, which can be as much as 45 to 50 per cent, compared to the 20 per cent or so that outside brands offer.

Asking manufacturers to part with more margins is never easy. In September 2000, Madura Garments was so peeved with Shoppers' demand for more mark-ups that it actually pulled out all its brands from the chain, saying that Shoppers' needed Madura more, and not the other way round. At present, Shoppers' in-store brands fetch 20 per cent of the revenues, but Govind Shrikhande, Shoppers' chief of buying and merchandising, says that their contribution will go up to 35 per cent in the next two years. ''Retail is not just a game of margins, but sales and margins,'' he says.

Just the same, it's crucial that Shoppers' plays it right. For one, it has come to embody India's great retail hope. Despite the problems it has run into recently, it has without doubt created a market for organised retail. Equally surely, it has helped position India as a retail destination for foreign investors. While the prevailing regulations do not allow unrestricted foreign investment in retail, sweeping changes could soon be made. Specifically, the system of case-by-case approval of foreign investment in the industry could be replaced with something that's not only faster, but generous, on approvals. Notes Arvind Singhal, Managing Director of KSA-Technopak, a retail consultancy: ''It would be wrong to say that experimentation with a national format has failed. Retail is still evolving in India, and there will be success stories.''

Singhal has a point. The industry is full of examples of retailers experimenting, failing, but returning again with a new format, more suited to the Indian environment. And to no mean extent has Shoppers', given its pioneering role, helped the industry learn from its own mistakes. But, Nagesh would agree, it's time it stopped making so many disastrous of them. For, when the big guns of retail come booming from across the seas, Shoppers' may be the first brand they seek to snap up. If that happens Nagesh would have created more than just a national retail brand. He would have made mini-Waltons of the Rahejas.

"WE ARE CONFIDENT IN THE LONG-TERM"

RAVI RAHEJA, Director, SSL: mincing no words

Low-profile, almost to the point of being elusive, the Rahejas rarely talk to the media about Shoppers'. BT managed to get Ravi Raheja, although he was in London vacationing. The man, a London Business School grad, oversees Shoppers' along with his younger brother Neel. In a faxed interview, the 32-year-old Raheja, who has been involved with the group's business for a dozen years now, speaks his mind. Excerpts:

Are you happy with the progress of Shoppers' Stop?

A. Yes and no. Happy because SSL has emerged as a leading retailer in the country and has created a great retail brand in a short span. It has also created global best practices for itself and the country.

I am unhappy because SSL slipped in the last two years due to various technology and management of change issues. Well, I feel these are pangs of growth. SSL will catch on and become a stronger player.

To what do you attribute the low performance and losses of the chain?

Rapid expansion, high depreciation, climbing up the learning curve, poor projections and, therefore, high buying, experimentation with the model, and adverse market conditions.

Are Shoppers' problems related to the macro environment or internal and unique to it?

Three-fourths of the (problems) are internal and only the rest macro.

By when do you expect things to look up?

We expect the year 2001-02 to be a major turnaround year where SSL will see cash break-even and after that it should be only looking northwards.

How do you see the chain growing from here?

Our expansion plan continues as per plan. In fact, we have already signed up seven stores and are evaluating more.

Does the family plan to dilute its stake any further?

No, we do not have any such plans.

Recently we saw two major institutional investors withdraw from Shoppers'. Do you see this as a lack of confidence in the model?

No. In fact, since the existing shareholders have increased their stake we believe there is confidence in the long-term future of this model.

What is your vision for Shoppers'?

We would like to see SSL as the global retailer in India with best international practices and a chain that spreads all through the country in a profitable way, giving fair returns to its shareholders and happiness to its employees and business associates.

How hands-on are you and Neel with the chain?

We are involved with the chain at the board level. We also help the chain in all its property acquisition. Due to a robust information system we are fully aware of the performance on a week-to-week basis. The MD & CEO B.S. Nagesh works closely with us, and is responsible for the deliverables along with his management team.