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Picking Up Pace

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B.S. Nagesh is not the first name you would come up with in a discussion about the retail business in India these days. Kishore Biyani is perhaps the most familiar face for budding entrepreneurs. Like Biyani, these entrepreneurs want their business fortunes to be made in India. But before Biyani became the inspiration for many, Nagesh was the man aspiring managers looked to as a role model.

Biyani may have weaved an original tale as entrepreneur, but in terms of cash generated from the retail business, vendors and analysts give Shoppers Stop (SSL) — the retail business of the K. Raheja Group — a big thumbs-up (see ‘Cash Quotient'). "I believe positive cash flows from operations to be the real judge of quality of the retail business," says Nagesh, vice-chairman of SSL. "We have achieved this consistently and it is the only way that a retail business can be built."

Legend has it that when the cash-cow mall, Phoenix Mills in Mumbai offered SSL space in 2002, Nagesh refused because a floor of the mall had collapsed during negotiations with the builder. Nagesh walked out on the property, but Biyani walked in and turned his business fortunes around. The rest is history. To some, that episode marks the difference between a manager and a leader.

Govind ShrikhandeProgress at SSL may appear slow, even though its revenues stood at a respectable Rs 1,300 crore in 2008-09. Yet, there may be some advantages when growing slowly — SSL has been able to focus on a premium customer segment. But is it enough "to make the property work" as Nagesh says? Times are changing fast and a new set of challenges have emerged that could put SSL in a pinch if response time is slow, say analysts.

Raising The Roof
The first of these challenges will be to get investors on board to fund expansion. The company has, in the past two years, dabbled in experiments such as running catalogue retailing, coffee shops and supermarkets. These businesses never reached full throttle. So, SSL chose to shut them down before they impacted the company's health. The Argos catalogue retailing tie-up, which has since been severed, was written off with a loss of Rs 35 crore. Four Express City supermarkets were shut in Jaipur as the larger format HyperCity — that was intended to support smaller stores — was not set up. Builders of the properties delayed the projects.

B. S. NageshBut these experiments are just a whisk of froth; SSL still needs to find the coffee. The company desperately needs a pan-India foot print, especially in tier-II cities. Last year, a weak market and quarterly losses delayed the company's plan to raise Rs 500 crore through qualified institutional placements (QIPs) and warrants. The company does not intend to raise funds through these routes for now.

Over the past three years, SSL has invested Rs 200 crore — Rs 150 crore was raised as debt and the rest through internal accruals. The company plans to invest in 36 new stores, which may cost around Rs 10-12 crore each to build. Sources say that Nagesh's successor Govind Shrikhande, president and CEO, was spotted in New York recently talking to investors. "We want to raise more funds through equity," says Shrikhande, adding that for the next three years Rs 250 crore would be raised from internal accruals. The firm intends to reduce the debt component too. SSL also holds a 19 per cent stake in HyperCity, the food-retailing store. The rest is held by the Raheja Group. SSL could increase its stake to 51 per cent in the entity if it can raise the money, or will put in an additional Rs 60 crore, but without increasing its stake.

Leadership Issue
A second problem compounds the first. Nagesh's departure from the day-to-day operations of the business could be tough on SSL. Currently, he is the interim CEO of HyperCity — till March 2010 — and SSL is already entering a phase where leadership is crucial for expansion, especially since the Raheja family wants no direct part in the retail business. "The retail business will always be run by management, and succession planning is in place at different levels," says Neel Raheja, group president of K. Raheja Group. "Our internal processes identify leaders, but we do not want it to be run by the family." Retail is only 7 per cent of the group's revenues, but it is their cash cow nevertheless.

Nagesh, who is now becoming more of a mentor for SSL's senior management, believes that Indian retail's second innings has just ended. "We have learnt our lessons," he says. "Many of us misjudged the market and had expanded only to face extreme peril. But we now know the potential of each of our businesses." He believes the real challenge will emerge from 2013 when global firms such as Tesco and Carrefour become part of the Indian retail industry — provided policy changes allow these global majors into the country. "There will be parity in property prices by then and retail will be the best business to be in," says Nagesh.

Shrikhande — who was instrumental in giving SSL a much-needed brand identity, changing its logo and positioning it as a "bridge to luxury" in 2008 — has a daunting task on his hands. His new management has the task of opening 15 Shoppers Stop stores, 15 Crossword book stores and 6 HyperCity stores, adding a total of 1.3 million sq. ft on top of the existing 1.8 million sq. ft by 2011.

Getting Down To It
Instead of increasing the number of Shoppers Stop stores to 49, the company hopes to increase the store area from 55,000 sq. ft to 75,000-80,000 sq. ft, and keep the number of stores at 43. Currently, the Raheja Group owns 28 Shoppers Stop, 52 Crossword and four HyperCity stores. At least for now, SSL's target of achieving a total of 3.5 million sq. ft by 2011 seems to be on track.

However, it is not going to be easy with Biyani always breathing down the neck of his competition. His Future Group is expanding its brand portfolio in the 80 odd Pantaloons stores and 10 Central mall formats. Considering the competition, SSL needs to realign itself quickly. But Nagesh believes SSL is in a unique position and that it need not compare itself to competition whose market is the mass aspirant and not the premium segment. "We will only expand when we understand the supply chain that is necessary for expansion. For the moment we are already working on a robust database that predicts trends in shopping," says Nagesh. SSL has created a database of 2 million customers — including Shoppers Stop, HyperCity and Crossword — to forecast trends, manage inventory and gauge working capital needs (see ‘How To Know Your Customer'). 

Financial Scenario
"Retailers that sell brands work on very thin margins. They need to work with their vendors to plan the demand and supply in the store," says Ajay D'souza, head of Crisil Research. In FY09, SSL reported a net loss of Rs 81 crore. The company attributes that to the economic slowdown, the Indian Premier League's first season, the terrorist attacks in Mumbai and finally to the failed experiments that hit the profit and loss account last year.

Click here to view enlarged imageThe interest payment doubled to Rs 28 crore in FY09 compared with the last year and borrowing increased by 30 per cent to Rs 265 crore. The return on capital employed is in negative region and the debt-service coverage ratio is below the ideal figure of one — it is close to 0.20 ( after taking into account lease rentals), which denotes a highly volatile situation. SSL will not be able to meet its interest dues and raise equity — from outside — to fund its business. To address this, the company has been cutting its operational expenses and negotiating lease rentals. SSL is among the highest lease rentals payers in the industry, closely followed by Pantaloon Retail and Trent (see ‘Costly Floor').

It seems that most of the cash generated from operations, Rs 89 crore as of end-March 2009, is being used in its working capital cycle. Analysts say retailers used cash to manage inventory last year and were now on a drive to improve operational efficiencies. "Apart from growth inventory, retailers invested in new  businesses that performed below expectations which impacted their cash flow," says Devangshu Dutta, CEO of retail consultancy firm Third Eyesight in Delhi.
Also, even though SSL's gross margins per sq. ft — around Rs 2,870 — is very high compared with its peers, its earnings before interest, taxes, depreciation, and amortisation (EBITDA) is only Rs 405 per sq. ft (see ‘Net Result').
Fiscal 2009-10 is turning out to be good for SSL, though. The company reported a net profit of Rs 80 lakh in the first quarter compared with a net loss of Rs 24 crore in the same period last year. The second quarter was even better; it posted Rs 8.7 crore net profit against a net loss of Rs 22 crore in the previous year. SSL has also cut its operational expenses by 8 per cent in the first quarter — the top management took a pay cut of 15 per cent for the financial year 2009-10.

With such moves SSL hopes to maintain a growth rate of 8 per cent in the current fiscal. Its debtors' cycle has been maintained at a steady four days, and it pays off its creditors or vendors in 65 days. The creditors' cycle may have gone up by 10 days. SSL officials say that the firm's limit has only been increased, as they are sharing valuable behavioural data with vendors.

Betting Big On Data
"We have a database that covers 1.4 million customers and we can use it to target the customer better, and also understand their shopping habits," says Vinay Bhatia, vice-president of marketing at SSL. He says, with data mining, vendors can manage their inventory better. SSL works on a buyout model, where apparel is bought from brand owners at factory price, and here the inventory is solely managed by SSL. Sixty per cent of its business comes from this model. But the consignment model is picking up, where the the vendors manage inventory. Though the data mining exercise is just six months old, SSL is betting big on it. It has spent over Rs 5 crore on data, to help the company absorb external shocks like the recession of 2008.

Click here to view enlarged imageShrikhande knows that SSL has been very methodical in its accounting and has been happy at the measure of growth. But he also knows that for growth expansion is necessary. So he is now carving out plans to ramp up the number of stores. "Retail is about increasing toplines and expansion is clearly possible if we manage rent and power costs," says Shrikhande. For the first time the company is moving into tier-III cities such as Vijaywada next year. Analysts consider this as SSL's crucial attempt to capture new markets. And this is happening because SSL has realised that 18 years of playing the turtle has curtailed its reach to customers.

In his 2006 book, The Wisdom of the Flying Pig, Jack Hayhow says that the gift of leaders is that they use their optimism, believability and lifelong learning to inspire widespread, shared commitment to a new reality. As Nagesh moves fully into being a mentor and visionary for SSL, the challenge for him is making the transition from manager to leader. And therein perhaps lies the future of SSL.

vishal dot krishna at abp dot in