Big retailers exit loss-making markets

06 Dec,2012

By Rasul Bailay

 

Spencer’s Retail shuttered all its nine stores in Pune, a city with one of the highest densities of modern retail presence in the country, last month; Aditya Birla Retail left financial capital Mumbai, Jaipur and Coimbatore earlier this year; and Future Group’s eZone electronic chain closed operations in several cities including Delhi, Indore, Surat and Ahmedabad last year.

 

Big retailers are now exiting loss-making regions altogether and focussing on their strongholds and potential growth markets to improve their efficiency and profitability to cope with a slowdown in consumer spending and squeeze in margins due to increasing competition and rising costs.

 

“Every retailer has to see what works for them and what not and if things don’t work out in any city, it is better to exit,” Rajan Malhotra, president of retail strategy at Future Group, said.

 

eZone, the electronics chain of the country’s largest retailer, exited about a dozen cities last year and is now focused on six cities including Mumbai, Pune, Kolkata, Bangalore, Chennai and parts of the National Capital Region.

 

Mr Malhotra said eZone has improved efficiencies after the restructuring and is doing better business than before in the cities where it is present. “Instead of 20 cities, if you are doing well in ten cities, then why not,” he says.

 

By exiting Pune, Spencer’s Retail has almost packed off from western India, having just two hypermarkets in the region – in Mumbai and Baroda. A spokesperson for the Kolkata-based retailer said the company currently focuses on West Bengal, Andhra Pradesh, Tamil Nadu, eastern Uttar Pradesh and NCR and will mostly open newer stores in these states in the next two years.

 

Focusing on growth potential markets means efficient supply chain, especially when many Indian retailers are still trying to concoct a winning business model.

Managing costs is another big reason driving retailers to exit certain regions. Aditya Birla Retail, for example, left Mumbai bag and baggage because of high rentals.

“The food and grocery retail is a thin margin business. The right rent-to-revenue ratio is critical for the success of the store and the business,” Pranab Barua, business director for retail and apparels at Aditya Birla Group, said.

 

Over the last several months, Aditya Birla Retail has closed 25 stores in Mumbai, 10 in Jaipur and about 20 outlets in Coimbatore and left those cities to focus on its growth areas.

 

Mr Barua cited unduly high rentals for exiting Mumbai and “strategic reasons” for closing stores in Jaipur and Coimbatore.

 

Retailers say rentals in Indian cities, particularly metros, are much higher than in cities elsewhere. KS Raman, director at Videocon’s electronic chain Next Retail, said rentals as percentage of revenue in India is anywhere between 7-18% compared to global average of 3%. “The cost of operations in the metros is very huge,” he said. Retail executives say closing of stores is as cumbersome and expensive as opening stores.

 

A senior executive at Aditya Birla Retail executive said the company on an average spends Rs 25 lakh while closing any store in employees, infrastructure and other liquidation costs.  The person said the company has closed all those stores which were not profitable or where there was no hope of making profit. Aditya Birla Retail now operates only one store in Mumbai, at Navi Mumbai.

 

Source: The Economic Times

Copyright © 2012, Bennett, Coleman & Co. Ltd. All Rights Reserved

 

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