Giant Indian supermart won’t post profits soon
Dec 23 2012 , New Delhi
Top 3 domestic brands post Rs 1,200 cr loss in a yr
Between them, three of India’s leading domestic chains, Reliance Retail, Aditya Birla Retail and Bharti Retail, notched up combined losses touching Rs 1,200 crore in 2010-11, according to the latest available figures. Each of them has been in business for almost 10 years now.
Reliance Fresh, an arm of the Mukesh Ambani-led RIL group posted a net loss of Rs 345.82 crore in 2010-11, while Aditya Birla Retail, which runs the ‘more’ chain, posted a net loss of Rs 423.1 crore that year. Bharti Retail, which operates in partnership with Walmart, reported a net loss of 394.32 crore in calendar 2011. The figures were revealed by minister of state for commerce and industry S Jagathrakshakan in Parliament last week, in the wake of the parliamentary nod to 51 per cent foreign direct investment (FDI) in multibrand retail.
While none of the big foreign retail players have revealed their India-specific plans yet, not a single among them is known to have approached the foreign investment promotion board (FIPB) with investment proposals either, even a month after majority foreign ownership in multibrand retail was notified.
The government expects at least $3 billion worth of FDI in retail over the next couple of years. Swedish furniture giant IKEA’s ¤1.5 billion-investment plan in single-brand retail is caught in red tape after the project was cleared by FIPB last month, subject to riders. Officials vetting FDI proposals believe that most global chains are in the wait-and-watch mode right now.
Typically, it may take even up to decade for the foreign retail giants to break even on their investments in India.
This has earlier been the case with global brands Pepsi, Coca Cola, Kellogg’s and McDonalds, which took years before posting positive returns on Indian investments. Most of these companies still do not reveal their India accounts in the public domain.
Multinational chains have deep pockets and initially invest heavily in creating infrastructure for penetrating the remotest corners of the market and in weaning customers to their brands through huge marketing initiatives, running over a decade or more.
This is one reason why Anil Talreja, partner at Deloitte, is optimistic that the losses posted by domestic players will not deter foreign players from setting up shop here. Profitability of each player will depend on the type of organisation, location of the store and supply chain model that each player plans to adopt in India, he said.
“Retail will not be an easy business to be in. Nobody makes profit in a short period, as it is a long-gestation game,” said Mohit Behl partner at KPMG. He said while there could be profits at the operational or store level, it would take at least three to five years to post profits at the business level.
Behl also reasoned that the past couple of years had been difficult for all retailers because of the economic slowdown that hit consumer spending.
“All international players realise that there’s lot of change required for Indian consumers to move away from their neighbourhood kirana stores. All of them need to reinvent their business models to cater to the local market, and this is going to take time,” Bhel said.
While there was little doubt that the government had rolled out the red carpet for investment in single-brand retail, a lot still needed to be done in the multibrand space before foreign players pumped in a minimum of $100 million each in India, Behl said.
The recent parliamentary approval had comforted investors somewhat, but clear signals both from the centre and the states willing to adopt the policy would help prospective investors time their entry. Till then, they would move cautiously, he said.
Jagatrakshakan claimed in Parliament that the government had taken steps to protect small retailers while opening up multibrand retail to foreign investment.
“In formulating the policy, the government was conscious of the livelihood concerns of the millions of small retailers,” he said.
The minister cited unsourced studies to claim that local retailers had found innovative ways to coexist along with organised retail in other developing economies such as China, Brazil, Argentina, Singapore, Indonesia and Thailand, where 100 per cent FDI has been permitted in retail.
He claimed, 99 per cent of the fresh food retail and 70 per cent of food retail continues to be controlled by traditional retailers in Indonesia, several years after the emergence of foreign super markets in that country. In India, the fact that three major retailers did not return profits even 10 years after they opened stores, showed that they had not been able to break into fresh food and food retail spaces dominated by kirana and neighbourhood stores, he said.
Almost 70 per cent of worldwide retail is in fresh and other food items. In India, the share or organised retail in these items was only four per cent. With domestic retail set to double in the next five to six years and touch $1 trillion turnover, analysts believe that kirana stores were not going to be displaced in a hurry. There would be more than enough space for everybody, with India averaging seven per cent to eight per cent economic growth in the next five years.