Retail at crossroads: Panelists at the BT roundtable (L to R) Kishore Biyani, Chief Knowledge Officer, Pantaloon Retail; H. Ramanathan, Director, Landmark Goup; Arvind Singhal, Chairman, KSA Technopak; Vikram Bakshi, MD, McDonald's India; Raghu Pillai, President & CEO, RPG Enterprises

More than a dozen years after the first of India's retail chains (Shoppers' Stop) launched itself from out of a defunct movie theatre, organised retail has come a long way. Along the way, the industry has had to negotiate an extraordinarily long list of hurdles, including everything from poor quality of real estate to messy supply chains to even suspicious consumers. Some of the issues still exist, but with an estimated revenue of Rs 22,500 crore, organised retail may have reached an inflexion point. Indeed, that did seem to be the dominant belief at the 6th KSA Retail Summit 2004, held in New Delhi between February 11 and 13. To get a sense of the industry's learnings and future strategies, Business Today brought together four top retailers and a consultant. They were: Kishore Biyani, Chief Knowledge Officer, Pantaloon Retail; Raghu Pillai, President and Chief Executive, RPG Enterprises; H. Ramanathan, Director, Landmark Group (read Life Style); Vikram Bakshi, Managing Director, McDonald's India; and Arvind Singhal, Chairman, KSA Technopak. The roundtable was moderated by BT's R. Sridharan. Excerpts:

BT: It's been a long haul to profitability for Retail India. What have been the key learnings?

H. Ramanathan: Every market is different, and you have to adjust to the needs of the consumer. You don't make money sometimes in the initial years because you are putting your backend in place; you are not operating it very cost effectively because there's a lot of wastage in the system. These things you only figure out once you start operating the stores. India is not a low- cost country. If you want to give it the right service, the right ambience, the right store, the right product and sell it at the right price, you cannot operate cost effectively, unless you keep applying yourself again and again to see how to make it more cost effective. It takes two to four years before we really start looking at reasonable returns.

"After the first three to four stores, lead time reduces dramatically" Raghu Pillai President & CEO, RPG Enterprises

Vikram Bakshi: Even in the developed countries, it has taken McDonald's anywhere between eight and 10 years to break even. So when we say long haul, somehow we seem to be forgetting that profits don't come immediately. Profits come after you have put everything together and reached the consumer, and as you expand, you continue to look at her requirements and continue to match them.

Kishore Biyani: In India, every location and every region is different. It always takes time to understand a particular location or a particular market. I think the biggest mistake we make as a fashion retailer is in forecasting the demand for a new store, and to get that right takes a little while.

BT: Has FoodWorld's experience been any different?

Raghu Pillai: For us, it is all about store profit. Forget about the backend costs, forget about the regional and corporate overheads. To that extent our learning has been that after the first three to four stores, particularly within the same cities, our ability to cut the lead time to store launch, to store profitability, to store level goes up dramatically. I believe we have got the scale today. I would personally be very disappointed if we did not make very reasonable profits at the company level next year.

BT: Arvind, how much would you say the industry has matured over the last five years?

"Profits come after you put everything together and reach the consumer" Vikram Bakshi MD/McDonald's India

Arvind Singhal: India has had so many restrictions and limitations over the last 10 years that some of this lack of profitability issue was more structural to India, not necessarily to the retail business. The (pioneering retailers) had to do almost everything to make the business work. But the good things is that they have already established a certain way of doing business, established some supply chain and back end. For newcomers, the task is relatively easy. Therefore, the real challenge and opportunity for the existing pioneers is how to scale up very rapidly. Otherwise they could lose the advantage that they have created.

BT: If you look at it, we still don't have a truly national chain. Why aren't chains able to ramp up? Is the problem money, supply chain, or real estate?

Pillai: Even today, 60 years after organised retailing emerged in the US, there is no national grocery chain. The fundamental issue in India from the grocery point of view is that organised retailing is still very nascent. It is seven to eight years old. So you need time. The size of the market is huge, extremely complex, there's very little synergy as far as supply chain is concerned and I personally don't see a national chain in grocery with a significant market share even in the next 10 years.

"The real challenge and opportunity for the existing pioneers is how to scale up very rapidly, otherwise they could lose the advantage they have created " Arvind Singhal Chairman/KSA Technopak

Singhal: I would like to make a point here. It is like a sign of your manhood to say 'Look, I am national or at least I am regional'. The good part about India is that the market is big even if you are a local player, not to mention, a regional player. Our data shows that when you look at food and grocery in Delhi alone, including the NCR, we have a market opportunity worth Rs 8,000 crore. Which retailer has captured the potential of Delhi city alone, leave aside the west or north India?

Biyani: I would rather experiment and get into four or five regions where we have the understanding of the market and grow there, and simultaneously look at newer locations where we have to go tomorrow.

BT: Mr. Bakshi, how easy has it been for McDonald's to ramp up in the north of India?

Bakshi: The worst thing that you can do to your brand is to rush head long into new territories without understanding the consumer. Our own belief is that you should have the largest marketshare before you even decide to go to another market. While doing that you can continue to plant a few flags and see how that market reacts and ramp up when the time comes.

BT: Arvind, you've been saying that this year will mark organised retail's move into a higher trajectory of growth. What are the indications of that?

Singhal: I see a couple of enabling conditions. Real estate has always been the single-biggest limiting factor to retail growth in India. Now, a lot of malls are going to come to the market sometime by the end of this year, but mostly starting in 2005. That will make space available at least in some cities. The second big change is that there are now enough success stories-be it Giant, FoodWorld or Pantaloon. So, all of a sudden people who were saying that retailing cannot make money, are now saying that retailing can make a lot of money. Therefore, finance is also likely to become available along with that.

"This year, every one rupee that we invest is giving us Rs 10 of topline" Kishore Biyani Chief Knowledge Officer/Pantaloon Retail

BT: How is Life Style going to fund its expansion? Is it going to raise money from the stockmarket like Shoppers' Stop or will it rely on internal accruals?

Ramanathan: Like Arvind was saying, people have seen what Life Style operations are like. Bankers have seen it, they have understood what it means. Initially, we grew our operations through acquisitions of property, but now we are going to lease property. That has brought down our total capital requirement for expansion. Debt is going to be one of the factors, but we are also generating surpluses now. Those internal accruals are going to fund at least 50 per cent of our expansion in the next three years. And then we will have the other 50 per cent coming from borrowings.

Biyani: When we started our retail business, every one rupee of capex used to give us one rupee of business. But now with that multi-format, every one rupee that we invest is giving us Rs 10 of topline. So we have come to a model wherein we have been able to generate cash flows to expand, besides debt is available, properties are available with developers who are willing to do a lot of capital cost for you. And there is equity that is now available. So to expand, to reach a certain level you don't need much equity capital.

BT: Organised retail is pretty much a metro phenomenon. Are we going to see retailers going to smaller towns?

Singhal: It's wrong to say that organised retail is a metro phenomenon. Actually, a large amount of growth (in smaller towns) is because of (stand-alone) entities.

Biyani: The last store we opened for Big Bazaar was in Nagpur and we are opening a store in Ahmedabad in the next seven days, we are opening stores in Nasik, Durgapur, Bhubaneshwar, Indore, and Ahmedabad. So there are a lot of smaller cities that we are going to.

"Every market is different, and you have to adjust to the consumer's needs" H. Ramanathan Director/Landmark Group

BT: There's a lot of talk about retail not being opened up to FDI. But if that did happen, would a lot of you feel threatened?

Ramanathan: I don't think so. The foreign players coming in and the Indian players already here will have to compete. Wal-Mart, for instance, has not been very successful in some of its ventures outside the US. There has to be a learning curve for them. Indian retailers already have a head start and many of them will do very well along with the international retailers. Some of the foreign retailers will also be successful in India. At the end of the day, it will be all the retailers working together. The market is quite big and the Indian retailers by that time would have gone into smaller metros.

BT: Mr. Biyani, as an Indian promoter would you be worried if, say, Wal-Mart came in or would you welcome that?

Biyani: I am not worried if they come in. Earlier we were worried about money not being available to us. The cost of capital has come down, properties are now available. We have learnt from our mistakes. Our learning on the localisation and Indianisation of India is far superior to that of any other retailer. But we are worried about the predatory pricing that they might resort to. They are huge corporations, they can even buy a country. Secondly, we are 12 million retailers in the country and everybody's interest should be protected.

BT: Arvind, you have been saying that foreign retailers like Wal-Mart aren't exactly tugging at the leash to get into India. Why? Isn't India a big enough market?

Singhal: India is a big market, but it is fragmented into one billion customers. Secondly, for many retailers, the market may not be as big as they would like it to be. When you look at a Tesco, Wal-Mart, Carrefour, they are multi-billion corporations. If you look at India from their perspective, the least the market should offer them is relatively easy opportunity of $4-5 billion. That they don't see happening as of now.