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4Ps
IN SEARCH OF SALVATION...
The current slowdown is taking a toll on organised retail, as players fight back to survive. Haunted by rising debt and interest cost, Vishal Retail too is ready with its quiver to drive away the slowdown monster. But will arrows hit the bull’s-eye? Wonders Savreen Gadhoke…
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 “The growth in India’s organised retailing will be hit due to weak consumer sentiments and the slowdown in fresh investment…,” avers Kumar Rajagopalan, CEO, Retailers Association of India (RAI). RAI, who had once forecasted a 30% annual growth rate of this burgeoning sector, has slashed its outlook to a 12-15% growth. Raison d’être: After the nerve-wrecking Subhiksha default case, the consumer as well as the market sentiments attached with this once most sought after sector is rather incredulous. Experts even claim that the retail sector is mostly riding on the back of huge debts. All major retail chains including Pantaloons, Shoppers Stop, et al, are not only facing the heat of slowdown and low consumer spendings, but are also under the scanner for their high debt obligations. In fact, under the eagle eye this time is yet another giant retailer – Vishal Retail Limited (parent company of Vishal Mega Mart).
With Rs.10 billion turnover in 2008, and growing at 100% (y-o-y), it was little expected that Vishal Retail could also fall into the deadly debt trap. But it did! The company’s un-audited financial results for the quarter ended December 2008 reveal that the retailer’s expenditure on interest has increased by a whopping 137.26% as compared to the same quarter last year. What’s more? The profit for the December quarter too plunged by a pathetic 86% and stood at a miniscule Rs.21.5 million (as against Rs.155.6 million last year). So, with liquidity crisis, reduced cash flow, mounting debt obligations and a huge fall in profits, the daunting question arises – is Vishal Retail heading toward becoming another Subhiksha?
“Vishal Retail’s total debt obligation is about Rs.7.5 billion, of which Rs.1.4 billion is high-cost short-term debt,” avers Raghav Sehgal, Retail Analyst, Angel Broking. Considering this, the road ahead certainly offers a bumpy ride to Vishal Retail. Even the rate of interest, which the company is liable to pay on this debt, is between 14-16%. So, with an interest coverage ratio of about 1.5 and estimated debt-to-equity of about 2.66, the company certainly faces an uphill task in its effort to sustain growth and profitability.
However, in order to improve profitability and bring the conditions back to normal, the honchos at Vishal Retail have already started wasting a lot of chalk on the drawing board and are making efforts to re-organise and revive their retail venture. But will the efforts really pay-off amid slowdown is the question that’s doing rounds in many minds!
In fact, the company has already started consolidating its back-end and front-end operations. The first step in this direction has been the centralisation of its warehouses. From 22-23 warehouses across the country, the number has been drastically reduced to 4-5 warehouses and that too concentrated in north India. Avers Ambeek Khemka, Group President, Vishal Retail, “Huge warehouses in south & west India have been shut down and a centralised hub has been opened in Gurgaon.” Although Khemka agrees that this will lead to job losses, the move will certainly help in improving operational efficiency by reverse logistics. Moreover, transportation vehicles can not only be used to deliver stock & inventory to stores in far-flung areas, but on their way back to the centralised hub, can be used to collect deliveries from vendors’ en-route, thereby saving on transportation fee payable to vendors.
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As far as front-end is concerned, Vishal Retail is either resorting to re-sizing, re-locating or shutting a couple of stores on account of non-performance. “If Vishal Retail is not getting adequate return on investment from certain stores, then shutting them down is a viable option,” reasons a Delhi-based analyst. In fact, out of the total 187 stores (including hypermarts and small format stores) across India covering 300 million sq. ft. of retail space; Vishal Retail has already shut down close to 7-8 stores. Few stores, where RoI (return on investments) is not up to the expectations, it has resorted to pruning of its retail space (which is averaged at 30,000 sq. ft.). “Bringing down the retail space helps us to save on SKUs, manpower, electricity and per square feet return increases,” avers Khemka. In other cases too, Vishal Retail has either relocated its stores or renegotiated land rentals with the landlord (to the extent of 50% in some cases).
But then, just consolidating its operations alone may not be enough for Vishal Retail to make its way through the high tide. The retailer has recently seen its key personnel resigning from the company. Even its expansion plans have come to a halt for the time being, with over 20% inventory pile-up. Moreover, the winter sales were also not impressive enough to write back home. Therefore, the main area of concern for the retailer right now is to improve sales and get rid off the high debt lingering over it.
In fact, Vishal Retail has already started playing aggressively with its pricing and promoting its private labels to beat the slowdown heat. “Of the total apparel inventory we stock in our stores, 85% is our own private label,” proclaims Khemka. A right move as the company gets huge margins from its private labels. For instance, while on branded FMCG products the company gets a margin of 16-17%, on its own FMCG products the margin is as high as 25%. Sources close to the company also confirm that the retailer has plans to tie-up with the local kirana stores to promote their private labels. In return, Vishal Retail will look after the kirana store’s supply chain and work on a revenue sharing model. However, Khemka has refuted any such tie-up in the near future and says there are no such plans.
Be that as it may, cornering Vishal Retail as an odd retailer with huge debt liabilities may not be correct. Consider this: Pantaloon Retail (India) Ltd. and Shoppers Stop Ltd. have increased their expenditure on interest by 77.50% and 311.07% (!!!) respectively for the quarter ended December 2008. It was debt of Rs.6 billion, severe liquidity crunch and inability to make payments to vendors that led to the closure of 1,600 Subhiksha stores. While the risk of Vishal Retail may be limited to 180-odd stores, but it is certainly a worrisome situation for the retailer as maximum profitability must be extracted out of these stores to overcome the liability. Although efforts are in progress, but Vishal Retail really needs a hard-hitting turnaround strategy to live up to its name, literally!
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