Another New store Opening?!?

Retailers in India seem to be continuing their efforts to open new stores, despite a slowing economy, higher import values, a falling rupee, increasing inflation and a weak consumer sentiment. This has been evident in the Retail Sales over the last two Quarters of this calendar year especially in high-value items such as A/Cs, Refrigerators, LCD TVs, automobiles including two-wheelers and four-wheelers. On one side, Retailers are offering huge discounts to lure customers – in India, Q1 & Q4 (for Financial Year starting April onwards) are essentially the most difficult times for clearing inventories and it is relatively easier in Q2 & Q3 due to the impending Festival and Marriage seasons. The above mentioned macro-economic factors haven’t helped them either. And Product ECommerce (excluding Ticketing services which account for over USD 8.5 Billion) which is estimated at over USD 2 Billion (approx. Rs. 11,500 Crores) is the biggest competition today for many Brick & Mortar Retailers, at least in the metros and mini-metros where Consumers have a reasonably quick and safe internet connectivity. And on the other side, large stores are being inaugurated in the hope that consumers would still like to visit and shop. We truly live in two contrasting worlds, to say the least. India's largest retailer, Future Group, which runs Central Malls, Pantaloon Fashions – a Department store chain, Big Bazaar Hypermarkets and FoodBazaar supermarkets among various other formats and models has scaled back its expansion from 2.5 million to 2 million square feet this fiscal year due to an economy growing at its weakest in nine years. The growth rate was 5.3 percent on an annual basis in the March quarter.

To drive footfalls to the store, continuously and consistently is one of the key challenges for Retailers anywhere in the world. That the population in India is huge is a bonus factor. However, conversions are miniscule. In the apparel and lifestyle formats, conversions range from 8-15% (those who buy as against those who enter the stores) while in consumer durables and brown goods, it is even lower. For Malls, which are destinations and are expected to attract significant footfalls, the conversions range from 3-5% and maybe lower in some cases (on a lower base of footfalls, usually). Given this fact, Retailers are in a frenzy opening newer stores within existing cities as well as in newer cities. One such example is Viveks, one of the oldest Consumer Durable Retailers in South India which was also the first one to start an EMI option in the early 90s when the Indian Economy was just opening up. It is rather surprising that the Retailer chose to remain a regional player, unlike its later counterparts such as EZone (part of Future Group) and Croma (from the house of Tatas) who quickly increased scale and went national with their presence. EZone is having operational challenges but that is not because of expansion but rather due to internal issues. To add to the woes of Consumer Durable Retailers, Hypermarket Chains such as Hypercity, Big Bazaar, Star Bazaar, etc. also stock Electronic Goods.

Challenges for Consumer Durable Retailers

Footfalls

To expect continuous footfalls all through the week is rather not practical. Instead, Retailers focus on weekend shopping festivals, usually for short durations. This is the time when Shoppers visit Retail stores and chances of conversion are higher!

Service

Superior Customer Service is something everyone talks about but is not generally followed all the time. And Customer Service is not just a gentle staff doing some smooth-talking and smart selling. It includes all the moments of truth – from hygiene factors such as lighting, A/c, Parking, etc. as well as product knowledge and friendly staff.

Differentiation

Multiple Retailers sell the same Brands and products. So why should a customer actually shop with one Retailer and not with another? Honestly, there is no clear answer. Consumers do not buy products, they buy Brands. And this includes the Retailer’s Brand Value as well, on which they should be focusing on.

Ecommerce

Showrooming – a prevalent concept in the West where shoppers visit Retail stores to check out products and prices but ended up ordering on Amazon.com or other ECommerce portals is brewing in India too. So, the difficulty of touch-and feel is negated. Another challenge is paying by Cash which is also something that ECommerce players have started over the recent months. Lastly, the convenience of getting the product on hand immediately – something that ECommerce players are finding it difficult to deliver but are successfully meeting customers’ requirements within 2-3 days in general.

With so many challenges, I wonder at times whether Retailing is worth the effort at all. For some, it’s a question of growth, for many it’s a matter of survival. With the opening of FDI in Retail sooner than later, the Big boys with boat loads of cash are going to lap up market share easily and faster. Interesting times ahead.

Franchising–The first step towards Entrepreneurship

 

Franchising has been around for long. Many global brands such as Adidas, Benetton, Levis, Subway and a lot more have grown globally due to their extensive franchisee network. Even in India, Madura Garments (which owns brands such as Peter England, Louis Philippe, Van Heusen), Arvind Mills (Lee, Wrangler and Arrow), Nilgiris (a chain of Supermarkets), Gitanjali Limited (which retails brands such as Asmi, Gili, D’Damas, Lucera, etc.) Crossword Book stores, Barista (Café chain) and many other Retailers have grown their businesses through successful Franchisee Partnerships. Franchising offers a quick scope of expansion for the Retailer while the investment is incurred by the Franchisee. Many first timers and wannabe Entrepreneurs choose the path of Franchising because it is an easier model to crack – the brand (is usually) established and has equity in the market, which pulls footfalls in to the stores. In case the brand is relatively new, then the Franchise fee (usually a one-time fee paid by the Franchisor to the Franchisee) is low, keeping his / her investments within reach. Kaatizone, an Indian QSR chain with a presence largely in South India is on an expansion spree through Franchising. Mr. Kiran Nadkarni, CEO, Kaatizone told in an interview recently. “Franchising has helped us in two major ways: We have been able to generate momentum in expansion quickly. Secondly, the local entrepreneurial talent has helped manage the store operations and brand experience better. Since we are planning to set up a large number of stores, franchising is the best strategy for growth.” Kaatizone has 19 franchises in six cities now and is planning to expand across the country.

The gestation period for recovery of investment can vary from 6 months to 3 years, depending on the location of the store (Malls, High Streets, Corporate locations,etc.) product category, and Brand identity and recognition. Investments could vary from Rs. 5 lakhs to Rs. 2 Crores, depending on the Brand. Some Retailers charge a one-time Franchise Fee and others charge monthly/annual commission on Sales in addition.

Advantages of Franchising

Scalability of Business

The Franchisor would be able to scale up instantly by going through the Franchise model. The prospective Franchisees could be spread across the country and hence the business could be expanded quite fast. This is one of the most important reasons that Retailers choose to go the Franchising way.

Immediate availability of capital

The Franchisee brings in the additional capital that is required to invest and operate the business which is a very important factor for the Franchisor.

Day to-day Operations

Usually, the set-up costs, which are substantial are borne by the Franchisee. He also bears running costs such as daily operational expenses (manpower, electricity, housekeeping, interest on capital, depreciation, etc.)

Drawbacks of Franchising

Customer Touch-points

One of the biggest drawbacks in Franchising is that the Retailer usually loses touch with the customers. The front-end is managed by the Franchisee and hence the Brand doesn’t have much role to play in the Customer Engagement as such.

Loss of Operational Control

The daily operations are managed by the Franchisee. Although there are parameters which need to be followed, there are occasions when the Franchisee takes things under his control which could be potential threats in terms of running the business.

Loss of Focus

Once a Franchisee believes in the model, he / she expand their business across various brands and categories. Therefore, the required focus on the business may dwindle over a period of time. It is quite unlikely that the Franchisee would spend the same amount of time and effort on businesses that don’t yield similar returns.

FDI in Retail has already opened up for Single Brand Retail and the country is eagerly watching the Government’s steps towards their decision on allowing FDI in Multi-Brand Retailing. This is indeed a good time for individuals and entrepreneurs in the making to take their first steps towards Organized Retail through a Franchise Opportunity.

Best of Luck.

The Dangerous Minimum Guarantee Model in Retail Expansion

Aggressive store expansion means two things – heavy capital expenditure and lots of people to manage the stores. Every brand worth its salt wants to boast an extensive Retail store network across the length and breadth of the country no matter what the store level EBITDA is. While there are various ways to expand its network, some of the commonly used ones by Retailers are Franchising (more on that in my next column) and CoCo – Company Owned Company Operated model. While Franchising could mean faster expansion, there are chances that the Retailer may lose control on the quality of customer experience among other things. The CoCo model is very expensive to scale-up unless backed by a solid VC / PE Firm. One of the other means to raise funds for expansion is through the Capital Market – recently Specialty Restaurants that runs the Mainland China, Oh! Calcutta, Sigree and other restaurants debuted their IPO, the first of its kind in the F&B Industry in India (while Jubilant Foods which runs Dominos Pizza in India is also listed, it is not in the Restaurant business but into Casual Dining). Retailers like Café Coffee Day, Dominos, Foodworld, Spencers, Zara, Tommy Hilfiger and many others have invested heavily on their own in terms of store expansion across the country, while others like McDonalds, Pizza Hut, Madura Garments, Reebok, Adidas, Benetton, Nilgiris, etc. have taken the Franchisee model.

There is another alternate model – One of the easiest ways that a few Retail Brands have taken to, which is known as the “Minimum Guarantee” model where in a Second Party is appointed to manage the store(s) on behalf of the company while the Retailer itself invests on the business. Let me explain this in detail. Assume that the store fit-out costs for a 1,000 sft store is Rs. 40 Lakhs plus stocks to the tune of Rs. 50 Lakhs, then the Retailer invests Rs. 90 Lakhs to set up the store and also bears the Security Deposit to the landlord (6 – 10 months’ monthly rent).  Once the project work is completed, the store is handed over to a second party, also known as a Managing Partner or a Managing Franchisee who is responsible for the day-today upkeep of the store. All direct and operating costs such as manpower, electricity, rent and incidental costs are taken up by the Retailer and the Partner is also paid a lump-sum ranging from a few thousands to a couple of lakhs – just to operate the store everyday. The logic is, if there were to be an Area Manager to micro-manage the store (and a cluster of them in each city / region), then the costs would be substantially high. And hence the Managing Franchisee model. The partner also has sales based incentives, that is if the store achieves a set target, then he receives a further commission, usually as a percentage to sales. In many cases, the Partner leases his own property to the Retailer, which means the Rental income comes back to him! In a few cases, either the same partner operates through kith and kin or through friends and relatives who become partners! And then, there are incentives for introducing new partners and locations in other cities. This is indeed a vicious cycle.

In the name of faster expansion and quick growth, many Retail Brands have resorted to this practice. While there is nothing wrong in this approach, the Managing Partner usually gets the cake and eats it too. Without any investment, he has a full time job, a respectable retail profession and a handsome income too. While it is not clear whether the practice has been globally prevalent and if yes, from when – it is quite popular in the Indian Retail scenario over the past decade. While Retailers like Madura Garments have stuck to the tested Franchise model of “Buy and Sell” merchandise (that is the Franchise has to purchase all the merchandise with a small percentage of returns back to the company), others like Reebok, according to press and media releases in the recent past have opted the Management Partner model.

There is no correct or wrong way to expansion. As long as the means are ethical and law-abiding, there is no problem. But concerns arise when there is maniacal expansion with sometime, ulterior motives of helping / supporting some known people to become Management Partners. At the end of it, the Customer decides on the success or otherwise of the brand. And that’s what matters.